You Never Give Me Your Money – Funding the Energy Transition in the Global South

1.    Introduction

There’s a line in the Beatles song ‘You Never Give Me Your Money’ which goes, Oh, that magic feeling, nowhere to go.Paul McCartney probably wasn’t thinking about an Indian renewable energy developer when he wrote the lyric about frustrated opportunities, but he might have been. India is blessed with excellent solar resources, villages remote from the grid that need decentralised energy, a policy goal of delivering a massive 40 GW of rooftop solar by 2022 (which it missed by a mile), and (at least in some states) a supportive environment. What it lacks is affordable finance. A solar installer in India has to borrow at a higher interest rate, for a shorter-duration loan than an identical firm in the UK. Loans from the West in US dollars or euros have a low headline rate but the repayment has to be in the hard currency, and the installer has to insure against an adverse movement in exchange rates, cancelling the advantage of lower rates. Financiers call local currency borrowing melodramatically, but not inaccurately, the ‘original sin[2]’ because the punishment, in the form of high interest rates, is far worse than having to repeat Hail Mary a few times.

Such investment in low-carbon technology is set up to fail. This is despite the fact that hundreds of trillions of US dollars of funds slosh around in the Global North (hereafter called advanced economies – AEs), institutional investors (pension funds and insurers) and banks’ balance sheets, rarely earning a return of more than 8 per cent[3].

This report focusses on the challenge of attracting private capital to fund climate mitigation in the 160 emerging market and developing economies (EMDEs).[4] This focus is deliberately narrower than ‘climate finance’ and excludes funding for adaptation, loss and damages and funding for other sustainable development goals (SDGs). These are also grossly underfunded but will always struggle to woo private capital because benefits are either non-market, risky or payments for previous wrongs rather than investments. This report focuses on private funding sources, supplementing the renewable developers’ own balance sheet. These include local and international financial institutions (FI). There is also discussion about blended finance – where concessionary finance from development banks and philanthropies is used to leverage private finance.[i]

Spoiler alert: this report argues that financing levels are too low and that current ideas won’t bridge the gap. Creating a fair and sustainable world means a vast, fast redeployment of resources from overconsumption in AEs to fund low-carbon development in the Global South. Section 2 looks at the scale of investment needed, particularly by the energy sector. Section 3 assesses the adequacy of these sources. Section 4 critically reviews current plans for expanding funding. Section 5 looks at what’s really stopping private finance flows. Section 6 sets out some tentative and radical policies needed to bridge the investment gaps so EMDEs can achieve SDG goals. Section 7 has some end thoughts.

2.    The gap between need and availability

EMDEs need additional investment of $4 trillion annually to meet SDG. UNCTAD estimate an additional investment of $4 trillion annually (UNCTAD, 2023[ii]) needs to be invested in EMDES to achieve SDG, up from the $2.5 trillion annual estimate it made in 2015. This adds up to $28 trillion between now and 2030.

Of this, an additional $2.2 trillion must be invested annually in clean energy, representing 60 per cent of the funding gap. UNCTAD’s estimate is in line with the IEA–IFC’s (IEA/IFC, 2023) estimate of an additional $2 trillion investment in energy by the 2030s[iii]. These figures are necessarily broad-brush, and it would be a mistake to assume all of this spending on SDGS is in line with the ecological management of the planet. Some projects – e.g. new road transport infrastructure – might have unwanted consequences. But for the sake of this article, let’s assume that it improves people’s lives.[iv]

Current investment is too little and is unequally allocated across EMDE. Exhibit 1 shows the vast differences in spending. China, with a population of 1.4 billion, spent $551 billion on clean energy in 2022. Africa, with a population of 1.15 billion, spent just $32 billion at a fifth of the rate of spending needed, despite dismally low per capita power generating capacity. By way of contrast, forty per cent of climate funding is spent by AE countries with 10 per cent of the global population (Climate Policy Initiative – CPI, 2023).

Ecologically sensitive development needs a vast increase in the quantum of money deployed and a switch away from fast-growing developing economies beloved by AE investors to low-income countries in Africa and parts of Asia. China is the only EMDE country where this transition is happening at pace. Current financial flows maintain the status quo of shuttling resources into already growing emerging markets, denying the poorest people the resources to improve their lives.

Exhibit 1: Annual Clean Energy Investment in EMDEs to Align with SDGs (USD billion)

Source: International Energy Agency/IFC, 2023

3.    Current sources of renewable energy finance

Most climate investment is raised locally from private sector banks and domestic public finance institutions. Only a tenth is capital flows to EMDEs from AEs. Exhibit 2 shows climate finance is almost equally from private sources ($625 billion) and public sources ($640 billion) (CPI, 2023). Private banks, national development finance institutions (like the UK’s National Wealth Fund), and corporations contribute about a quarter. Less than 10 per cent of total climate funding flows from AEs to EMDEs. Though $100 billion was promised under the Paris Agreement in 2016, despite efforts to grow flow AEs are still only able to report $83.3 billion of annual deals. Oxfam calculates that two-thirds of this is in the form of lending at commercial interest rates[v]. Only $21–$24 billion is real support through grants or interest rate subsidies, (Oxfam, 2023). This is far short of what was promised and worsens EMDES already unaffordable debts to the AE and China (nowadays the largest creditor nation to EMDE).

Of the $1.27 trillion of climate finance, $1.15 billion is for mitigation. Very little is spent on investments to prepare countries for inevitable climate change (adaptation and resilience) or compensate them for damages they already suffer (loss and damage).

 Exhibit 2: Landscape of climate finance in 2021/22

Source: Climate Policy Initiative, 2023[vi] 

Richer EMDEs spend far more on SDGs than poorer EMDEs relying on their own government and the private sector. Low-income EMDEs countries’ domestic financial base is small and international flows are insufficient to redress the shortfall. Exhibit 3 shows the level of investment in SDGs (wider than renewable energy) for different income levels of EMDE. Least developed countries (LDC) neither raise money domestically from taxes nor from private sources. How about overseas aid? In 2022, Overseas Development Assistance from AEs to EMDEs amounted to $210 billion, around 0.37% of donor countries’ gross national income and far short of the 0.7% target. Already, aid budgets face overwhelming pressure from conflicts in Ukraine and Gaza. Can this be significantly expanded? Governments in high-income countries are already wrestling with large current account deficits and have eye-watering stocks of existing debt. Indeed, increasing flows from $50 to $1,500 per LDC’s inhabitant would cost $1 trillion per year, an unimaginable five-fold increase in aid flows. Increasing government transfers from AEs to the EMDEs to this extent would require a massive restructuring of resources within the Global North. The AE’s governments are poor and heavily indebted; wealth in AE is held by rich and middle-class people.

Exhibit 3: Financing of SDG investment by income level of investee country ($/capita)

UMIC – upper middle-income country; LMIC – lower middle-income country; LDC – least developed country

Source: Bill & Melinda Gates Foundation[vii]

Poorer countries’ economies are too small to raise funds locally and judged too uncreditworthy to borrow internationally. Exhibit 4 shows key economic and demographic differences between countries grouped by income band. 1. LDCs and 2. LMICs account for half the world’s population but just 8% of global GDP. If a tenth of their GDPs were somehow invested in SDG, this would raise just $250 per capita in LMICs and a paltry $70 per capita in LDCs. The domestic economies do not generate large enough surpluses to finance their development. The last column gives the credit rating agency (CRA) Moody’s assessment of each government’s ability to pay back debts to bondholders. Countries in groups 1 and 2 are deemed poor credit risks. Projects in these countries would find borrowing money from commercial banks difficult no matter how spectacular the returns. Institutional investors would regard the country as ‘below investment grade’ as the country’s credit rating puts a ceiling on the creditworthiness of local companies. Most LDCs do not even have a credit rating since there is little possibility of borrowing commercially. Grants and concessionary finance are their only option for funding the transition.

 Exhibit 4: Macro-differences between countries by World Bank development class

Source: authors’ calculations

This has nothing to do with the merits of the underlying projects or the borrowing company. CLP (a Hong Kong-based power company) sought funding for its Indian subsidiary to refinance its wind farms. It accomplished this by issuing a ₹9 billion (USD60 million) bond with a coupon of 9.15%. This local currency issuance was still cheaper than raising an international currency bond, such was the adverse sentiment of global investors about lending to India at the time. When CLP raised a bond in Hong Kong (for investment in a gas-fired power station), it paid a coupon of just 2.15% since the Hong Kong dollar is pegged to the US dollar and trusted by international capital markets not to depreciate.

Projects are not judged on their own merits but tarred by national stereotypes. The returns for solar photovoltaic projects in Africa are spectacular because the alternative of diesel-generated power is expensive, and the continent enjoys excellent sunlight. However, international finance is reluctant to invest in African countries, worried the currency might depreciate, fearful the courts will not honour contracts, and whose governments are little understood or trusted by AE banks.

None of the above arguments are binding constraints. Companies, when it suits them, will disregard credit ratings or any anxiety about good governance or political tampering. Congo has a terrible credit rating and a history of poor governance. Yet, it can attract foreign direct investment to exploit its rich mineral resources for strategic control of the raw materials used by EV batteries. The rare investor demands high returns on their investments, shorter tenors for the loan and expensive currency hedging costs.

4.    Mainstream consensus for funding SDGS in the Global South

There is little appetite for increasing aid budgets from advanced economies, and so private finance has been cast to plug the gap. The development community is well aware of the need to massively scale up funding in the poorer half of the world, and countless reports have been written about the challenges. The broad parameters of the debate are that:

a)     There is a reluctance for AE governments to greatly increase how much they contribute to SDG investment directly as grants or soft loans.

b)     Political effort is being expended on redirecting the vast pool of savings managed by institutional investors (pension funds and insurers) and banks from OECD countries, through efforts like the Glasgow Financial Alliance for Net Zero (GFANZ) formed during COP26.

c)     Multilateral development banks (MDBs) are being tasked to use their resources and expertise to help make private sector investments less risky through due diligence work and by using their balance sheets to bear some of the risks. This combination of public–private financing is termed blended finance.

 Blended finance is being promoted as the mechanism for converting “billions” to “trillions”. A plethora of consultants and think tanks have written reports on the topic (Better Finance Taskforce, Convergence, OECD-DAC).Blended finance consists of several mechanisms which use public funds to de-risk projects and loans to EMDEs. MDBs are presented as important catalysts and conduits because of their experience in lending to EMDEs, assessing and managing projects, and their financial credibility. They also have the option of funding on their own balance sheet and borrowing money cheaply on capital markets to refinance the deal. Discussions about blended finance are often spoken in the same breath as overhauling the international financial architecture, shifting MDBs’ goal from pure lending to facilitating lending by others.

India, during its G20 presidency in 2023, commissioned an expert report to advise on how to plug the gaps in SDG funding. It argued an annual increase of $260 billion in MDBs’ budgets could leverage in $500 billion extra private finance. Domestic capital markets would unlock $2 trillion of within-country funding.

The climate COP process has convened a high-level expert group on climate finance to help deliver the Paris Agreement.^vi This group makes similar arguments, arguing for a five-fold increase in concessional finance, loosening MDBs’ conservative approach to using their balance sheets to increase their lending, better use of domestic tax revenue by the Global South, and removal of harmful subsidies (many developing economies continue to subsidise fossil fuel production and consumption), receiving countries better organising a pipeline of investment projects with country level investment plans. Actions are also proposed to remedy some of the acute budget issues caused by the pandemic.

Many high-level reports repeat mantras exhorting development banks to up their game and use their balance sheets more creatively. One senior MDB official lamented to the author at a conference that he and his colleagues are under pressure to increase the amount of private finance they leverage. Interestingly, the delegates at the conference comprised NGOs and local and national officials. Conspicuous by their absence was private finance – few bankers, no asset managers nor asset owners.

The leveraging mobilises the necessary $3 trillion per year of finance, $500 billion per year of this would be from the Global North’s private finance and the same amount through the MDBs. But how much appetite is there for Western banks and insurers to invest in emerging markets? In the climate finance events the author attends, private investors are conspicuous by their absence. In the same report only $17 billion in private finance is leveraged through the MDBs’ $80.6 billion for climate action in 2022 (COP IHLEG, 2023). Private finance needs to scale up twenty-five-fold if it is to play the starring role being asked of it. 

But private financial institutions have not shown much enthusiasm. Blended finance is difficult and time-consuming to negotiate. Public authorities and private banks have different objectives, and private finance is impatient with MDBs’ glacial internal processes. Most institutional investors are ignorant about developing economies[5] and the few with practical experience have entrenched (mis)perceptions about country risks, see a lack of bankable project pipelines (because they seek projects that have obtained clearance, are profitable and not too risky)[viii].

There has been little increase in the volume of blended finance over the last five years. Convergence’s database on blended finance transactions contains details of 1,100 deals worth $216 billion over the past ten years. Its most recent climate finance report records 45 deals worth $5 billion in 2022, lower than recent years because global interest rate hikes have reduced investors’ already-small appetites to take a punt on EMDE. Deal numbers rose in 2023 but still not to pre-pandemic levels. Worryingly, only $3.7 billion of the $10 billion was genuine private sector funds, the rest was MDBS charging commercial interest rates and using their balance sheets to lend to projects. Exhibit 5 is not a story of billions to trillions, but of billions to hundreds of millions.

Exhibit 5: Sources of financing to climate blended finance (excl. guarantees and insurance)

Source: Convergence database of blended finance deals 

As post-pandemic inflation worries have caused interest rates to rise, the private sector’s willingness to lend has waned, as has the capacity of EMDEs to repay their mushrooming debt burdens.

There are few examples of blending efficiently leveraging in institutional finance and many indications that private sector banks do not see their job as financing SDGs or energy transitions. In closed meetings private sector bankers are critical of MDBs, finding the institutions slow to undertake transactions, bureaucratic and lost in a cacophony of political demands imposed by their shareholders. A development financier puts it well: “They talk about mobilization, but they don’t walk the talk,” the investor said. “Incentives have not changed at the deal-structure level.”           

At the aggregate level concessional lending and development banks are the predominant provider of finance, not private finance, within blended finance deals. In 2023, only $3.72 billion of the $11.6 billion blended finance transactions were genuine private sector finance, a far cry from the trillions that need to be mobilised. The aggregate leverage rate was much less than 1. 

5.    What’s stopping private capital from funding the energy transition in EMDEs?

Why aren’t AEs’ institutional investors interested in funding EMDEs energy transition? No magic bullet will suddenly shift developed economy savings to EMDE. However, some specific blockages need to be dealt with. They can be summarised as a) financial regulations, b) currency hedging costs and c) debt distress. Also investing in the US stock market, especially the Big Five tech companies, is too attractive an option.

Financial regulations: since the financial crisis, regulators have tightened regulations around banks (Basel IV) and insurance companies (EU’s Solvency II) to reduce their exposure to risky assets. Banks must set aside far more scarce capital if they lend to sectors or countries with poor credit ratings. Conversely, investing in government bonds or home loans with a low loan-to-value ratio is treated leniently. Thus, banks lend to the haves rather than the have-nots, perpetuating inequality within and between countries. Basel IV, will impose the regulators’ risk weights on different financial products, preventing banks from using their own judgements. Banks must argue with their central bank exceptions for blended finance deals. Life’s too short, and lending to pre-approved borrowers is easier! UK insurers, despite Brexit, are still following the EU’s Solvency II rules, which takes a dim view of investing in EMDEs.

Currency hedging costs: though the US’s global power might be waning, there has been no scaling back of the dominance of the US dollar in development finance. To access global capital markets, EMDES and their banks and companies issue debt in dollars; borrowers must pay back in dollars. Take it or leave it. Most borrowers leave it – since renewable electricity projects create revenue in local currency not dollars. Any depreciation in the local currency can swallow up the savings from lower interest rates borrowers in the West enjoy. In theory, banks offer products for borrowers to hedge their exposure to depreciation, but the fees are too high to be cost-effective.

Debt distress: the amount Africa spends on debt service is more than twice the amount of Overseas Development Assistance the continent receives. The situation worsened after the pandemic when inflation and interest rates rose. The pandemic was destabilising; many small, well-run countries that depended on tourism suddenly saw their foreign income earnings collapse when international flights stopped. They borrowed from the IMF and now find themselves with unsustainable debt-to-GDP ratios. Sri Lanka’s debt soared from 80% to 120% of GDP between 2020 and 2022. While countries like the US and UK can get away with such behaviour lightly, lenders turned the screws on developing countries, and funding dried up.

Private finance does not have much experience with lending to most EMDEs. Even if these issues are somehow removed, it doesn’t mean private finance will supply EMDEs affordable finance. ODI surveyed 35 of Europe’s largest pension funds and insurers and found that rules, risk appetites and habits meant they could double their investment in EMDES to $120 billion in five years out of the $6.9 trillion assets under management[ix].

Private finance relies on CRAs to assess sovereign risk which banks use to mark up the cost of finance when lending to EMDE. The process is a Milton Friedmen-esque beauty contest where CRAs judge countries by the fiscal-anorexia of their public spending. Exhibit 6 debt shows servicing costs for African, Asian and European countries with the same credit rating – i.e. judged to have the same likelihood of defaulting. Costs for countries with the same credit rating are ruinously expensive if they have the misfortune to be located in Asia or Africa rather than Europe.

Australian pension fund managers, interviewed for a report by a green finance NGO, say they are interested in investing in EMDES but insist their funds should be fully compensated for the perceived risk. There is no inquiry as to why EMDES are automatically charged more.[x]

Exhibit 6: Yields for investors in bonds from different countries with the same Moody’s credit rating

Source: UNDP, 2023[xi]

The AEs’ institutional investors do manage trillions. Where are these trillions invested? The current value of shares traded in global stock markets is around $109 trillion. The vast majority is in AEs, (with the $22 trillion Chinese and India stock markets mainly used by domestic investors). The global bond market is $127 trillion, again mainly in the AEs. Perhaps the largest pool of assets is the real estate market. The US’s real estate market is valued at $120 trillion, which includes $47 trillion value of residential properties.

Yes, the assets owned in slow-growing OECD countries are vast, but their returns are modest. At the time of writing, investors in UK gilts get a yield of 4.5% on UK gilts, 2% above inflation. Before the recent interest rate hikes, they yielded less than 1%.

Institutional investors continue to buy AE assets rather than take a punt on investing in (higher-yielding) EMDEs through financial regulations, habit, and ignorance. A pension fund that has to provide teachers or doctors with a defined income in ten years looks for assets with the same payout profile that won’t go bust in the meantime or fall in value. Accountancy rules[6], mark-to-market rules and regulations[7] compel them into buying gilts and low-risk bonds that provide a guaranteed but low income and value at redemption. However, as a consequence, money flows into existing assets like mortgages or backstops government deficits rather than real-world investments. This is bad for young people who cannot afford homes inflated in value by cheap money, and it is bad for global equality as the Western countries’ reluctance to raise taxes stimulates overconsumption by the current generation, at the expense of future generations saddled with debts – financial and ecological. It is also bad for the pensioners since the low-risk investments being incentivised provide lower returns over the long term and have contributed to the closure of defined benefit schemes!

6.    Suggestions for massively scaling up funding for the energy transition to EMDE

Many problems afflict EMDE: corrupt governments, poor education and health systems, massive wealth inequality, and religious and ethnic conflicts. But these have to be fixed domestically, and the AE’s interference will be ineffective or cosmetic. The energy transition is different. The international community can make a difference since the energy transition, with the exception of larger countries like India and Brazil, relies on imported gear: panels, wind turbines, and Li-ion batteries. EMDES need finance, especially foreign exchange. At present, China is the largest supplier of goods for this transition and through its Belt and Road Initiative and policy banks one of the largest financiers. The Export–Import Bank of China alone has lent out £0.7 trillion^[xii], but these are at commercial interest rates, have opaque and onerous financing terms and it refuses to countenance debt forgiveness.^[8]

What is needed is a totally different approach to financing the EMDEs’ energy transition while also reforming AEs’ finance sectors so they focus on productive investments. The ideas presented below are unapologetically controversial and the intention is to think the unthinkable. This means addressing the fact the rich extract more from the global commons than the poor, that AEs profit from this inequality at the expense of EMDEs. Redress means redirecting cheap finance away from the already rich to the poor, sharing responsibility for macroeconomic risks with the lending countries (who likely as not caused them) and lastly removing the dollar’s unholy privilege as the global currency.

a)     Increase and institutionalise transfers from the North to the South. This suggestion is to have a redistributive mechanism to transfer tax revenue from AEs to EMDEs just as regions within a country equalise per capita resources. This will institutionalise the rebalancing of income/wealth between countries rather than leaving it to the whim of donor countries to define their overseas development assistance rate. The exact mechanism is not important for the purposes of this paper. Some that have been proposed include a 1.5% tax on wealth assets (inspired by Piketty[xiii]), excessive national per capita carbon emissions (Raghuram Rajan[xiv]), individual carbon inequality (Kenner[xv]), or financial transactions (Tobin Tax, or France’s financial transaction tax[xvi]), obliging banks to lend a share of their portfolio to EMDEs like India’s Priority Sector lending regulations which provides finance for traditionally unbanked sectors[xvii].

b)     Provide grants and interest rate subsidies only to investments in compliance with the EU green taxonomy. These transfers to EMDEs should have strings attached. They need to be invested only in projects that address climate mitigation and adaptation and have effective mechanisms to ensure funds reach their target use. Green or transition loan/bond standards issued by the International Capital Markets Association and similar bodies.

c)     Tough capital control on illicit capital flows from South to North. A number of politicians and businesses in EMDEs loot their countries, transferring their wealth to AEs. This drains their country of foreign exchange and provides downward pressure on the exchange rate. UNCTAD have calculated that $88.6 billion are extracted from Africa through tax and commercial practices, Illegal markets, theft and terrorism financing and corruption[xviii]. This figure is half the gap in funding for SDGs. Regulations on banks in some AEs have done much to counter money laundering. But there are still too many loopholes and non-cooperating jurisdictions. But many advanced countries like Singapore and Luxembourg or territories like Delaware, Guernsey and Hong Kong continue to have banking secrecy laws aiding these movements.

d)     More financial regulations on systemic risks, less on individual FIs or transactions. Financial regulation historically focussed on safeguarding individual depositors and has since been extended to systemically important banks but in doing so made banking too risk-averse, too reliant on backward-looking default rates. This tars individuals and entire countries as risky, denying credit to those who need it. Insurance funds operate under similar rules. Regulations need to be loosened to allow banks and MDBs lending to EMDEs to develop their own risk models. Private sector CRAs’ and accountants’ behaviours have a chilling effect on lending to new markets or new products.

e)     Lenders should bear at least half of the currency risk. The use of hard currencies for most international capital market transactions is a major source of global inequity and just one facet of the outrageous privilege enjoyed by the dollar (also the currency for commodity markets, national currency reserves). It transfers the risk of devaluation wholly on the borrower, greatly increasing the cost of finance. This privilege is despite China’s (a major international creditor nation) and India’s (with foreign reserves equivalent to its GDP) formidable economic size. Currency hedging can add 2–3% to the cost of debt and make long-dated loans impossible. To remedy this, international investors should purchase local currency bonds, and global North governments should bear half the costs of any unfavourable depreciation.

7.    Some end thoughts

Government and financial institutions immediate response to the suggestions above might be “Thanks, but no thanks. We like things as they are now.” How can winners from the current situation be persuaded to take action that hurts their (short-term) interests?

 This is a challenging question to answer, as is evident in the recent climate COPs. At the time of writing, the COP in Baku is collapsing through the fundamental disagreements between countries with fossil fuel reserves who are trying to row back from restrictions on their drilling, rich countries who are finessing mealy-mouthed text that avoids commitments to offer climate grants and developing countries, especially the Alliance of Small Island States who face existential risks from the current state of affairs.

But the chain of reasoning would first need to recognise the current situation is not in the interests of the AEs nor EMDEs. Asset managers in AEs need to invest in higher-yielding assets to pay for ageing populations’ pensions. Growth is fastest in middle-income countries. The world needs this growth to leapfrog fossil fuels straight into renewables (and a circular materials flow, maintenance of biodiversity). Instead, well-meaning financial regulations’ risk-weightings and capital adequacy rules funnel AE savings into housing bubbles, financial assets and funding government deficits instead of productive uses of savings.

 Secondly, we need to recognise that EMDEs are not going to cut their emissions unless AEs deliver on the climate finance that was promised to them in the Copenhagen summit and repeated in the Paris Agreement, and struggled to even make it onto the agenda in the Baku climate change COP. Many of the NDCs signed by EMDEs state bluntly their cooperation is contingent on financial assistance from the richer northern countries. For instance, Philippines offers to reduce its projected emissions by 75% but only 2.71% of this is unconditional, the rest requires ‘enhanced access to climate finance, technology development and transfer’. Indonesia has similar conditional and unconditional reduction targets. India’s NDC target has the proviso “…with the help of transfer of technology and low-cost international finance…”

Starved of external funding, fast-growing EMDEs will reduce capital-hungry investment in renewables and continue to build less capital-intensive coal and gas generation that will persist for decades and cost their consumers more in the long term. South Africa has issued a comprehensive plan of how it could close its coal plant and switch to renewables and help bail out its near-bankrupt power utility Eskom (Iyer and Vaze, forthcoming) with a cash injection of USD 100 billion. Indonesia and Vietnam have similar Just Energy Transition plans.

The second point is that stopping emissions is in advanced economies’ interests since they are experiencing climate change already. In October 2024, a second hurricane (Milton) is barrelling through Florida destroying property and infrastructure and leaving millions without power. Central Europe experienced abnormally heavy rainfall in September (Storm Boris) and its second warmest recorded September. Towards the end of October 2024, over 200 were killed in floods in Valencia, Spain in an unprecedented tragedy in a modern European country.

The third point is that the current ideas being discussed are rubbish. Scores of reports have set out the need for trillions of dollars of investment in the Global South. The Washington Consensus tells itself aid, development loans and private finance can somehow work synergistically and provide a market-led solution to SDG financing. Such a delusion repeated over and over, does not become true, but it can forestall genuine reforms.

 The Global North’s efforts to supply climate finance is premised on a deceit. It pretends that instead of government-to-government transfers, profit seeking financial institutions will spontaneously seek out higher yields in EMDEs. This belief that without changing the fundamental rules of global financial flows, Western capital can aid development, make acceptable rates of return to private capital and make bankers feel warm inside has been proven false. See it, say it, sorted is not just an annoying meme. It is patently untrue. The less palatable truth is that the West needs to reign in profligate use of capital and be more generous in helping poor countries enhance their global competitiveness by transferring technologies and providing markets for goods like vehicles which India can now produce at a fraction of the cost of Western producers. It means a reduction in wealth and consumption in the North so the global commons can be shared more equally.

It is hard to remember how readily Western banks lent to developing countries in the 1970s when they were flush with petrodollars. Ever since the GFC, the tide has reversed, and ‘prudential’ banking practices starve risky projects of finance, instead lending to those with security in their homes and businesses. This conceptualisation of ‘prudential’ is mean and myopic. The world operates as a system, and there will be consequences of denying poor countries their opportunity to enhance their lives. Starved of development opportunities, LICs and LMICs migration from Africa and Latin America will only increase, especially as climate change makes the tropical latitudes less habitable.

The Beatles song “Mean Mr Mustard” has the lines Keeps a ten-bob note up his nose, Such a mean old man. John Lennon probably didn’t have the global North in mind when he wrote those lyrics, but he might have.

[1] Prashant Vaze is an India-based British economist who works on climate finance. Thanks for comments from Emma Dawnay, Jonathan Essex, Peter Newell and Pritam Singh. 

[2]https://en.wikipedia.org/wiki/Original_sin_(economics)#:~:text=Original%20sin%20is%20a%20term,of%20original%20sin%20in%20Christianity

[3] 8%–9% by Nest Pensions (the UK’s largest pension provider by customer numbers) https://www.nestpensions.org.uk/schemeweb/nest/investing-your-pension/fund-choices/compare-fund-performance.html

[4] https://www.imf.org/en/Publications/WEO/weo-database/2023/April/groups-and-aggregates

[5] https://www.cgdev.org/blog/more-blended-finance-not-so-much-results-cgds-survey-aid-agencies-and-blended-finance

[6] https://www.plsa.co.uk/portals/0/Documents/0190_%20Accounting_for_PensionsL.pdf

[7] https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/supervisory-statement/2016/ss515-update

[8] https://www.orfonline.org/research/chinas-belt-and-road-initiative-in-the-energy-sector

[i] Definitions of blended finance can be found in Convergence’s latest report https://www.convergence.finance/resource/state-of-blended-finance-2024/view

[ii] UNCTAD (July 2023) “World Investment Report 2023” https://unctad.org/publication/world-investment-report-2023

[iii] IEA & IFC (2023) “Scaling up Private Finance for Clean Energy in Emerging and Developing Economies” https://iea.blob.core.windows.net/assets/a48fd497-d479-4d21-8d76-10619ce0a982/ScalingupPrivateFinanceforCleanEnergyinEmergingandDevelopingEconomies.pdf

[iv] Sims, Eastoe and Essex (2021) “Global Public Investment requirements for Zero Carbon” https://www.greenhousethinktank.org/global-public-investment-requirements-for-zero-carbon/

[v] Oxfam (2023) “Climate Finance Shadow Report 2023” https://policy-practice.oxfam.org/resources/climate-finance-shadow-report-2023-621500/

[vi] Climate Policy Initiative (2023) “Global Landscape of Climate Finance 2023” https://www.climatepolicyinitiative.org/publication/global-landscape-of-climate-finance-2023/

[vii] Bill & Melinda Gates Foundation, June 2023 “Climate and Development Finance: A transition framework for all” https://www.gatesfoundation.org/ideas/articles/melinda-foreword-climate-and-development-finance-framework

[viii] PWC “Scaling up Blended Finance” - https://www.strategyand.pwc.com/lu/en/insights/scaling-up-blended-finance.html

[ix] Attridge, S., Getzel, B. and Gregory, N. (2024) “Trillions or billions? Reassessing the potential for European institutional investment in emerging markets and developing economies.” ODI Working Paper. London: ODI (https://odi.org/en/publications/trillions-or-billions-reassessing-the-potential-for-european-institutional-investment-in-emerging-markets-and-developing-economies/)

[x] IGCC (2023) “Mobilising climate investment in emerging markets – opportunities for Australian pension funds” https://igcc.org.au/wp-content/uploads/2023/05/Mobilising-Climate-Investment-in-Emerging-Markets_FINAL.pdf

[xi] UNDP (2023) “Reducing the Cost of Finance for Africa” https://www.undp.org/sites/g/files/zskgke326/files/2023-04/Full%20report%20-%20Reducing%20Cost%20Finance%20Africa%20Report%20-%20April%202023.pdf

[xii] Financial Highlight on page 7. Total assets of RMB 6.3 tr http://english.eximbank.gov.cn/News/AnnualR/2023/202404/P020240429559437153023.pdf

[xiii] https://wid.world/news-article/climate-inequality-report-2023-fair-taxes-for-a-sustainable-future-in-the-global-south/

[xiv] https://www.project-syndicate.org/commentary/global-carbon-incentive-for-reducing-emissions-by-raghuram-rajan-2021-05

[xv] https://www.routledge.com/Carbon-Inequality-The-Role-of-the-Richest-in-Climate-Change/Kenner/p/book/9780367727666

[xvi] https://en.wikipedia.org/wiki/Financial_transaction_tax

[xvii] Priority Sector Lending regulation in India https://rbi.org.in/commonman/english/scripts/Notification.aspx?Id=2321

[xviii] https://unctad.org/system/files/official-document/aldcafrica2020_en.pdf