Cashing in on climate change? Assessing whether private funds can be leveraged to help the poorest countries respond to climate challenges

Added 18 Apr 2012

The effects of climate change on developing countries have created a huge financial burden. Policymakers aim to limit global warming to a rise of 2°C in this century. In this scenario, the cost of adapting to and mitigating the impact of climate change would be in the range of USD 110-275 billion (€79-198 billion) per year for developing countries. Given their historical responsibility, accumulated climate debt and the principle of common but differentiated responsibility, developed countries will have to shoulder most of the cost.

Rich countries have pledged to make available USD 100 billion (€72 billion) per year by 2020, most of which will presumably be channelled through the Green Climate Fund. Although originally this money was expected to come from public sources, developed countries have begun to rely on mobilising large amounts of private money.

As the discussion about mobilising private resources is mainstreamed, financial intermediaries (FIs) are placing themselves at the forefront of the debate. They are receiving a great deal of attention due to their perceived ability to use public money to overcome the barriers to private investment in developing countries. Estimates suggest that through the use of FIs, it may be possible to raise in the range of USD 100-200 billion (€72-144 billion) per year of private flows from developed to developing countries.

While climate finance is vital for both mitigation and adaptation, this report focuses on the latter. It looks at some of the main instruments that can be used to leverage private climate finance through financial intermediaries and analyses data from some major development finance institutions (DFIs). It specifically assesses the role of financial intermediaries in low-income countries (LICs) and in supporting small and medium sized enterprises (SMEs) and looks into the main monitoring and accountability constraints when using financial intermediaries.

Eurodad's report finds that:

  • Important gaps exist in the knowledge of how money is leveraged through financial intermediaries. These gaps should be filled before channelling any significant amounts of climate finance through FIs.
  • Financial intermediaries and existing investment instruments are very limited when it comes to targeting LICs and SMEs in sectors which are particularly vulnerable to climate change.
  • Developed countries are looking at financial intermediaries as isolated actors without paying attention to the policy and institutional environments in which they operate.
  • Monitoring financial intermediaries is extremely difficult and there are no mechanisms to ensure private climate finance is aligned with developing countries’ priorities.

These shortcomings underscore the importance of direct public finance. Leveraging money through financial intermediaries cannot be used as a substitute for directing sufficient public resources directly to the poorest. Given the gaps, a strong reliance on FIs and the private sector could spell disaster for many citizens in developing countries.

Read the full Eurodad report: “Cashing in on Climate Change?”