How the West can mobilize billions of dollars to help save the Earth

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LONDON, Oct 10 (Reuters Breakingviews) – War, inflation, debt, hunger, energy security and fear of recession will dominate discussions at the annual meetings of the World Bank and International Monetary Fund this week. But policymakers gathered in Washington also have good reason to keep in mind the existential priority of keeping the planet from frying.

This is evident for countries like Pakistan which are already suffering from extreme weather conditions. But the rich countries that are major shareholders in international lenders should also ensure that tackling climate change remains a priority.

It is therefore good that US Treasury Secretary Janet Yellen last week called on the World Bank and other Multilateral Development Banks (MDBs) to focus more on global needs such as climate change, in part by raising private capital. America and a group of other countries have given the World Bank until December to come up with a plan.

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The West has self-interested reasons for mobilizing trillions of dollars to help the poorest nations of the so-called Global South transition from fossil fuels. For starters, wealthier countries need to protect themselves from the direct impacts of global warming and side effects such as mass migration caused by people fleeing unbearable conditions.

Freeing up investment also has geopolitical advantages. Russia’s invasion of Ukraine and China’s slashing of Taiwan have highlighted the need for the West to strengthen its allies in the rest of the world. Investing in green growth is one way to achieve this.

WHERE ARE THE TRILLIONS?

That’s why the industrialized nations of the Group of Seven announced a $600 billion infrastructure partnership at their summit earlier this year — a move I helped promote. Western countries have already concluded an agreement with South Africa and are negotiating partnerships with Vietnam, Indonesia and India.

The G7 wants to offer a green alternative to China’s multi-trillion-dollar Belt and Road Initiative, which expanded Beijing’s sphere of influence by funding infrastructure in the developing world, but which has recently lost momentum.

US President Joe Biden said countries around the world would be able to “see the concrete benefits of partnering with democracies”. Even British Prime Minister Liz Truss, who is no climate change warrior, is enthusiastic about the initiative.

The G7 partnership is a good start. But $600 billion over five years is only a fraction of what is needed. Excluding China, countries in the Global South will need $1 trillion a year from all sources — six times what they currently receive — to decarbonize their economies, according to BlackRock.

The debt problems of rich countries make it difficult to find cash. This is why they asked themselves about the need to draw in funds from private investors.

In principle, this is a great idea. A group of financial institutions with more than $130 trillion at their disposal last year have pledged to put the fight against climate change at the center of their work. But it is difficult to move this money to the countries of the South, because investors do not believe that the returns offered justify the risks.

MOBILIZE MDBs

One way to address this problem is for MDBs to do more to reduce risk in developing countries. These institutions are well placed to work with poorer countries to secure green investments by creating markets, setting standards and creating regulatory frameworks, says Chris Humphrey of the Overseas Development Institute think tank. MDBs can also invest directly in critical infrastructure such as power grids that are needed to unlock further investment in renewable electricity generation.

The catch is that the MDBs have not in the past used their financial firepower imaginatively or worked extensively with private investors. Moreover, last month World Bank President David Malpass declined to say whether he accepted the scientific consensus on global warming, although he later changed his tone. It is therefore encouraging that America and other leading shareholders have given the World Bank its marching orders and that Malpass has responded positively.

Yellen’s call to action builds on a recent report commissioned by the Group of Twenty Major Economies which concluded that MDBs could increase investment by hundreds of billions of dollars without raising additional capital. This is due to their preferred creditor status, which means they rarely lose much money even if borrowers default, and because they have $1.2 trillion in committed capital from their shareholders that they haven’t called yet.

MDBs could also attract more private investment. For example, they could sell securities backed by their pooled loans, freeing up their own capital for new projects. The African Development Bank pioneered the approach with a $1 billion synthetic securitization in 2018. If G7 countries provided these pools with a credit guarantee, pension funds and insurance companies could invest in them, says Julian Havers of E3G, the climate think tank. .

The G7 can use guarantees in several other ways to make green investments in the Global South attractive to private investors, both through MDBs and other vehicles. If they do so generously, they might even be able to raise billions of dollars.

But rich countries should also be prepared to invest more in the MDBs that have the most ambitious and credible plans to save the planet – an idea backed by a group of heavyweight economists like former US Treasury Secretary Lawrence Summers. Indeed, such a promise might be just the carrot needed to motivate institutions to redouble their efforts.

The US decision last week to lend $1 billion to the Clean Technology Fund, a multilateral trust fund with advanced plans to help developing countries accelerate their transition away from coal, is a good example. US money can be used to decommission old coal-fired power plants and support employment in communities impacted by the energy transition.

Some governments may say that increasing climate investment through guarantees, MDB innovation and bringing in new capital brings new financial risks. While this is true, governments can manage risk. Compared to the cost of creeping climate change, they are worth taking.

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Editing by Peter Thal Larsen and Oliver Taslic

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The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and freedom from bias by principles of trust.

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