The Dubai Climate Summit (COP28), held from November 30 to December 12, 2023, highlighted a global trend towards scaling up green technology, transitioning to clean energy, increasing green hydrogen, and moving away from fossil fuels, all in efforts to tackle the climate change crisis. However, the success of these efforts requires trillions of dollars over the next few decades, which does not align with the limited financial capacity of developing countries.
In this context, Jayant Sinha, in his research paper “The Green Bank for Climate Finance in the Global South,” published by the Observer Research Foundation in 2023, proposes several innovative financing solutions to address the climate finance crisis in developing countries and bring net greenhouse gas emissions as close to zero as possible, while absorbing the remaining emissions from the atmosphere.
Developing countries face a capital shortage, and as a result, most of their companies rely on capital from the Global North to finance their investments. Therefore, the paper suggests launching a “Global Green Bank” to overcome market gaps that hinder capital flows from the Global North.
Decarbonization Finance:
Decarbonization policies are linked to several sectors, including energy, transportation, chemicals, and food industries. Investing in low-carbon technologies in developing countries can boost GDP while also addressing air pollution and chronic climate issues. However, developing country institutions, including large corporations, small and medium-sized enterprises, and startups, need trillions of dollars to achieve the required net-zero emissions.
Therefore, it is crucial to increase capital flows from the Global North, including direct foreign investment from companies, venture capital/private equity funds, commercial banks, development finance, and public market investors, into developing countries for climate issues.
Currently, funding amounts to about $300 billion annually, considered low-risk debt financing with limited risk capital. Nevertheless, the research paper indicates that developing countries (excluding China) will need at least $300 to $400 billion in additional private sector investments each year to achieve “net-zero emissions” by the mid-century.
Evaluation of Development Banks:
Multilateral Development Banks (MDBs), such as the World Bank Group and the African Development Bank, play a crucial role in mobilizing private sector financing to fund climate activities aimed at reducing harmful emissions and slowing global warming in the Global South. However, there are several challenges in this area, including:
Economic stability and currency depreciation: Most emerging markets face fluctuations in the exchange rates of their local currencies against the currencies of the Group of Seven (G7) industrialized nations. This raises concerns among investors about potential currency depreciation due to differences in inflation rates and overall macroeconomic stability. As a result, investors demand high returns and large premiums to protect themselves from these losses.
Emerging entrepreneurial ecosystem: The venture capital ecosystem is still emerging in most countries of the Global South. Consequently, entrepreneurs struggle to raise sufficient capital or access debt financing at reasonable rates. The limited capital available often comes with punitive terms, leading entrepreneurs to either abandon or not scale their businesses, thus hindering market growth.
Affordable debt financing: Green companies in the Global South find it difficult to secure adequate debt financing at affordable rates. Given the limited collateral, commercial banks charge high financing rates. This makes it challenging to raise sufficient debt capital to fund green assets and grow quickly. For instance, rooftop solar energy companies in India and Africa typically finance their solar equipment with local currency rates ranging from 15% to 18%, making these companies vulnerable to failure.
Payment timing and security: Many small green companies struggle to receive timely payments, even after delivering services. This issue is not only with governments that delay payments but also with larger companies that use their purchasing power to pressure smaller firms.
Extreme weather events: The Global South is prone to extreme weather events, including floods, droughts, extreme heat, and hurricanes, causing significant losses for the private sector. Insurance for such events is often unavailable, leading to higher costs for all types of green investments.
The capacity of MDBs to address these challenges appears limited for three main reasons. First, most greenhouse gas emissions come from a handful of countries in the Global South, such as India, Brazil, Nigeria, Indonesia, and South Africa. However, since MDBs are mandated to serve all countries, it’s difficult for them to focus their efforts on a select few. Second, MDBs primarily focus on public financing (central governments) rather than private sector financing worldwide. As a result, they lack the experience in deal-making, risk assessment, or monitoring investments in the private sector. Third, MDBs are hampered by complex governance structures and entrenched operating procedures, making it challenging to respond swiftly to rapidly evolving market needs.
Global Green Bank:
The paper proposes the establishment of a new financial institution called the “Global Green Bank” (GGB), which would focus on providing innovative, market-based financing solutions for green enterprises in a select number of Global South countries to push toward net-zero emissions.
As green businesses in these selected countries grow, the model could be replicated in other Global South nations. For example, startups in Indonesia and Nigeria could replicate business models used by startups expanding rural distributed solar power installations in India.
The GGB’s funding would come from sponsoring countries, sovereign wealth funds, and philanthropic institutions. Its financial capacity could increase over time as its success is demonstrated. The paper suggests that the bank should be headquartered in a major Global South country, such as India, Indonesia, Brazil, or South Africa. The GGB would need to recruit private sector executives with global and local financial expertise and operate as a global investment company capable of mediating financial products and investments through externally pooled investment funds.
The paper suggests the GGB should focus on the following areas:
Green accounting and reporting standards: The GGB will work with financial regulators in both the Global North and South to agree on green standards for classification, tracking, disclosure, and analysis.
Long-term currency hedging: The GGB would help lower the cost of currency hedging in the Global South. This would reduce capital costs for companies in the Global South by hundreds of basis points while protecting investors in the Global North from currency availability and depreciation risks.
Debt financing solutions: The GGB could provide large-scale debt financing solutions for green capital assets such as electric buses, swappable batteries, or solar-powered rooftops.
Climate change insurance: The GGB would need to assist in developing innovative private sector insurance solutions against climate disasters, such as the recent destruction of a hydropower plant in Sikkim, India, which killed over 40 people, swept away a dam, bankrupted the power generation company, and resulted in significant financial losses for banks.
Creating Green Markets:
The Global Green Bank can collaborate with national development finance institutions in key countries of the Global South, such as the National Investment and Infrastructure Fund in India, BNDES in Brazil, and the Indonesia Investment Authority. This bank can work alongside existing development finance institutions, multilateral development banks, commercial banks, and venture capital/private equity firms to help stimulate their activities in green finance.
The proposed Green Bank will consist of a green finance network for the Global South, which should be capable of taking on some key functions in shaping green markets: developing ecosystems, engaging stakeholders to enable ecosystem development, mobilizing domestic finance by leveraging a wide network of local financial partners, and sharing best practices, business models, and financing methods globally.
The report concludes by reviewing the experience of Gavi, “the Global Vaccine Alliance,” as the most successful example of creating global institutions to shape Southern markets to meet urgent development needs. Gavi operates across 73 low- and middle-income countries and has helped vaccinate over a billion children by using advanced market commitments as an innovative financial solution. Gavi is supported by developed Northern countries and philanthropic organizations. Similarly, the global climate crisis cannot be solved by markets alone; policy interventions are needed to shape markets. The Global Green Bank is called upon to engage the private sector to overcome market gaps that prevent capital from flowing to the Global South. This bank can also absorb certain types of risks and deploy financial tools that protect investors and Northern companies.
Source: Jayant Sinha, A Green Bank for Global South Climate Finance, Observer Research Foundation, 2023.
