How Finance Could Transform the Climate Fight after COP27

This is not the first United Nations climate summit that has been dominated by the issue of how to transfer vast sums of money from the developed world to developing countries to address climate change, but it has become the most intriguing issue being discussed at COP27. 

If the meeting in Sharm El Sheikh is to be remembered for anything, it may be as the place where the idea of thorough reform of international financial institutions really took deep root.  

There are now growing calls to reorganize those institutions, in particular the World Bank and the International Monetary Fund (IMF), to make them fit for purpose in the 21st century, and ready to tackle the climate crisis.  

Supporters of the plan believe it could be a moment of transformation, finally unlocking funds on a sufficient scale and at sufficient speed to give poorer countries a fighting chance to survive.  

What Green Finance Reforms are Being Proposed? 

There are different proposals for different institutions, but the general idea of green finance is to make it much easier for developing countries to borrow money cheaply for green projects that will cut greenhouse gas emissions and mitigate the effects of climate change.  

There are a number of topics up for discussion regarding climate finance, including making far larger sums of money available; encouraging trillions of dollars of private sector investment; and making it much cheaper for loans to be paid back over the long term.  

The widening gap between the amount of money that has been pledged and the amount of money that is actually needed is accelerating this debate.  

One proposal gaining traction is for the IMF to deposit $500 billion of what are known as Special Drawing Rights (SDRs) into a new Global Climate Mitigation Trust. It is normally much easier for rich countries to access SDRs, the international reserves held by the IMF, because their economies are bigger. Poorer countries, who need the money far more, can only get hold of small amounts. Faced with the climate crisis, and the need to build a new clean energy infrastructure right across the developing world, this system no longer makes any sense.  

The plan is that the initial $500 billion deposit could be used as security to raise a similar amount from the private sector, and then the new trust would lend money at low interest rates for major infrastructure projects. If companies can generate revenue from these projects, they would then be prepared to lend far more. Suddenly trillions of dollars could become available.  

Why Are the World Bank and the IMF so Important for the Climate? 

The World Bank and the IMF emerged from the ashes of the Second World War, set up at an international conference in Bretton Woods in the United States in 1944. Their mission was to help rebuild countries devastated by global conflict, and try to introduce a sense of stability in the post war financial system.  

Much of their focus gradually switched to the developing world, and to the provision of loans and grants to poorer countries, or regions experiencing economic turmoil. Now, they often loan money provided by rich countries to poorer ones.  

But they were not really set up to deal with the scale of the global challenges we face with climate change, nor with the speed at which an economic transformation needs to be achieved. One of the problems is that rich countries can borrow money far more cheaply than poor ones. Hence the new ideas being proposed, and the emergence of the Prime Minister of Barbados as a global climate champion.  

What is the Barbados Plan? 

The Bridgetown Agenda, named after the capital city of Barbados, emerged from meetings convened by Prime Minister Mia Mottley in July. It contains a series of proposals for reform, including the Global Climate Mitigation Trust, which would give developing countries much greater access to money to help them make the effects of climate change less severe. Loans would be cheaper, and there would be opportunities to delay debt repayments when major disaster strikes.  

The argument put forward by the architects of the plan has obvious merit. The global financial system is not currently designed to deliver on the necessary scale to cope with the climate crisis. It puts far too much pressure on the poorest countries, which are suffering the worst consequences of climate change and are the least equipped to act.  

Mottley told the COP27 summit that “it was time to revisit Bretton Woods.” She reminded her audience that many countries in the room did not exist when the Bretton Woods institutions were established, and therefore “we have not been heard sufficiently.” 

The poorest countries are trapped in a vicious circle, says Professor Avinash Persaud, who has been working on the plan with Mottley as her special advisor on climate finance. Climate disasters and debt, he explains, feed off each other. The more countries have to pay to recover from the natural disasters which have been made worse by global warming, the more debt they amass. And the more debt they amass, the less money they have to spend on protecting themselves from climate shocks in the first place.  

How Have Wealthy Nations Responded? 

Much of the reform agenda which is being discussed has received high profile support during the Sharm El Sheikh summit, from leaders such as President Macron of France and the IMF’s managing director Kristalina Georgieva. US climate envoy John Kerry has spoken in favor of parts of the plan, and US Treasury Secretary Janet Yellen wants the World Bank to draft a roadmap for reform by the end of the year.   

Complicating the issue is the controversy surrounding the World Bank president, David Malpass–nominated by President Trump–who has been under pressure since September, when he declined to say whether he accepted the scientific consensus on climate change. He later clarified his comments, but the damage had been done.  

Now he says he welcomes the recommendations being made for financial institutions, including the World Bank, to significantly increase their contributions to climate finance. A key moment will be the annual meeting of the World Bank and the IMF next spring.   

So, there is no doubt that support for a serious rethink of international finance is gaining momentum, and that has genuinely exciting possibilities. Root and branch reform of the way financial institutions operate can lead to transformative change. The mood in Sharm El Sheikh suggests that this could, fairly quickly, become one such moment.  

What is the $100 Billion Goal? 

Another of the main drivers behind calls for reform is that rich countries have failed to live up to the promises they have made in the past. That debate has become sharper after stimulus packages associated with the COVID-19 pandemic showed that vast amounts of money can be found very quickly if the political will exists.  

As long ago as 2009, developed countries made a collective pledge to provide $100 billion a year to the developing world by 2020, to help it cope with climate change. But that pledge has yet to be achieved. The $100 billion target may well be met next year, three years behind schedule, but the climate crisis is moving so rapidly that the numbers are already insufficient.  

Experts dealing with climate finance have long argued that the $100 billion figure should be seen as a floor not a ceiling. And that’s why the discussion has already moved on to more ambitious figures, and far greater involvement from the private sector. Trillions of dollars will be needed to pay for the global economic transition to a world of net-zero carbon emissions, and investment needs to be scaled up rapidly. 

This transition will be expensive, but it will also produce enormous economic opportunities. And it will be a lot cheaper than doing nothing–trying to protect a world in which global temperatures have risen sharply would be far more expensive than paying for the transition to net zero.