Climate of denial: Mobilising private capital will be challenging

Climate finance and how to mobilise it will be the key theme occupying negotiators at the 29th Conference of the Parties of the United Nations Framework Convention on Climate Change, or COP29, which will convene in the Azerbaijani capital of Baku between November 11 and 22. With countries, particularly in the Asia-Pacific, facing a shortfall of about $800 billion in climate financing and public funding depleted by the pandemic, policymakers and climate activists are urgently seeking ways to mobilise the vast potential of private-sector financing. This imperative has acquired greater urgency, given the recognition that developing countries, which need to be the principal recipients because their growth remains dependent on fossil fuel, will require climate finance in the region of $5.9 trillion up to 2030.

 

It is unclear, however, whether private finance can play a lead role in meeting a significant proportion of this humongous sum. So far, in fact, private-sector climate finance has been conspicuous by its paucity and there is nothing to suggest that this will change despite growth in green and ESG (environment, social and governance) funds. Private-sector climate finance accounted for 20 per cent of the funds mobilised till 2022. Accelerating this source of funding will require addressing challenges on multiple fronts. The pattern of private-sector funding for climate change thus far suggests that risk perceptions and the efficiency of economic and investment policies of developing economies will remain the overwhelming determinants in private investors’ decision-making.

 

The bulk of the private climate-finance capital — about 81 per cent — targeted only climate-change mitigation; adaptation accounted for 11 per cent, most of which ironically flowed to developed countries. Significantly, 85 per cent of mobilised private finance capital focused on developing countries with lower risk profiles; low-income countries, where the need for financing is greater, accounted for just 15 per cent. The crux of the issue, according to some analysts, lies in the lack of bankable, investment-ready projects. But the key to creating this project pipeline is the quality of support from governments and multilateral institutions in addressing risk and offering visibility on returns and exit. In countries such as India, for instance, this exercise becomes problematic because of long-standing structural deficiencies embedded in power-pricing models and technical problems associated with the transmission and distribution of green power. Politically motivated subsidies in power pricing make it complicated for green-energy generation projects linked to the national grid to recoup returns in a timely manner. A lack of data and underdeveloped financial markets also play a role in deterring private climate-finance investment.

 

If mitigation projects such as the transition to green energy face such challenges, mobilising private capital for adaptation strategies is likely to be tougher. It is difficult to envisage private capital crowding into such critically needed non-commercial projects as reforestation, water harvesting, or early warning systems for cyclones and hurricanes. The bottom line, then, is that whatever the attractions of mobilising private finance for climate change, public-sector and multilateral finance will have to continue to take the lead and shoulder the burden of adaptation and mitigation projects, with private finance offering supplemental rather than core funding solutions. But even attracting these dollars demands strengthening state capacity by recipient countries — including greater transparency and accountability in project execution. Without these basic enabling conditions, the climate of denial from private capital is likely to persist.