The Crucial Role of private Finance

Authors 

Dr. Ginelle Greene-Dewasmes
Hon. Edwin Laurent, Founder
Dr. Sindra Sharma-Khusal

Key Takeaways:

• Role of Private Finance: Private finance can amplify public investments to support climate action in developing countries, especially SIDS, but lacks coordination and isn't a COP26 priority.
• Standardization and Reporting: Global standards, consistent monitoring, and best practice sharing are crucial for mobilizing private finance, ensuring transparency, and identifying climate investment opportunities.
• Policies and Initiatives: Stable government policies reduce investment risks, while international efforts like the G7’s B3W aim to attract private investment and address financing gaps in developing countries.

In the lead up to COP26, the role of private finance and the private sector has received considerable attention from global leaders. Private finance can turn billions committed to climate investment through public channels into trillions (Carney and Topping, 2021).

​The observed number of financial institutions setting net-zero targets has increased fivefold within less than a year, however, a mechanism remains lacking for coordinating efforts between individual private finance institutions (Carney and Topping, 2021). Despite its significance towards boosting global available climate financing, especially in developing countries like Small Island Developing States (SIDS), private finance is not a Blue Zone or main agenda item at the upcoming COP26 negotiations. However, it has been included on the COP Green Zone agenda.
 
Public sector flows are not expected to sufficiently provide the required funding needed to meet developing countries’ climate finance needs. There have been a number of shortfalls towards achieving the $100 billion commitment by developed countries. Hence, Achievement of net zero ambitions will include a role for not only the $100 billion commitment in public funds by developed countries, but also for the large and untapped pools of private finance.
 
Global Net Zero and COP 26 Priorities for Private Finance
 
Private finance is by far the biggest and is also a largely untapped pool of capital available for advancing global net zero ambitions (Averchenkova et al., 2020). The prevailing global private finance priorities for climate change can be thematically summed up under seven (7) below main synthesised areas:

1. Globally aligned standard setting- under a private finance framework (UNEP FI, 2021; Reuters, 2021; Sharma-khushal et al., 2021; SMI, 2021). 
2. Monitoring and reporting- financial commitments should adhere to clear definitions, metrics, and reporting (Guterres, 2021; UNEP FI, 2021; UNFCCC, 2021; Bank of England, 2021; Kerry, 2021; Quinn, 2021; Carney, 2020).
3. Enhanced mobilisation into developing countries- scaling up of green financial instruments (Guterres, 2021). For example, for sustainable infrastructure projects around the world (SMI, 2021; IPCC, 2018) and into developing countries (Carney, 2020).
4. Knowledge and best practice sharing-  to promote best practices, compare their different initiatives and identify barriers and opportunities of sustainable finance, while respecting national and regional contexts (UNFCCC, 2021; SMI, 2021).
5. Returns- measures that help investors to identify viable climate investment opportunities and to transparently report on their investment portfolios (Carney, 2020; Reuters, 2021).
6. A deep and liquid global market for carbon credits- encouraging the development of the infrastructure for scaling up high-quality voluntary carbon markets (Guterres, 2021; SMI, 2021).
7. Enabling government policy and regulations- government policy that is more predictable (UNFCCC, 2021) across sectors, that helps to lower the risk of low-emission and adaptation investments (IPCC, 2018) and that sets clear market signals for the direction of private financial flows.

Global Policy Trends in ESG & Sustainability relevant to SIDS
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The IPCC (2018) highlights that alongside the provision of public funds, government policies will play an important facilitatory role in the mobilisation of private funds thus enhancing the effectiveness of other public policies.

Increasing Net Zero Standards & A Growing Private Sector ResponseGovernments of developed countries have increasingly begun to introduce net zero standards for reporting climate risks and opportunities. For example, in June 2021, the G7 announced their backing to make climate risk disclosure mandatory according to the existing recommendations made by the Task Force on Climate-related Financial Disclosures (TCFD). Private sector companies in these countries are in turn expected to and have begun setting their own net zero targets and private finance companies are coming together to set industry standards via global networks such as GFANZ (Carney, 2020). Overall, improved reporting, risk management and measures in developed countries are expected to benefit developing countries, but it is not yet clearly indicated how (Carney, 2020).

Geopolitical Developments & Climate finance de-risking platformsThe COP 26 Finance Hub recognised international private financial flows as critical to supporting the financing gap in developing countries. However, it also acknowledged that the necessary private financial flows to developing countries were still limited (Carney, 2020).

In response to China’s Belt and Road Initiative (BRI- which in recent years has shown significantly declining investment trends), the G7 in June 2021 announced its ‘Build Back Better World (B3W)’ initiative as an alternative to the BRI to help narrow the $40+ trillion infrastructure need in developing countries, including in SIDS (The White House, 2021). The initiative involves catalysing private capital to invest in global infrastructure. Climate forms one of the B3W’s four core focus areas (CSIS, 2021).
Climate finance de-risking platforms offer another potential source of much needed resources for supporting developing countries’ transition. These blend private and public finance and have the potential to offer the scale of investments at the pace needed in SIDS when coupled with an enabling policy and regulatory environment (UNDP, 2017). For example, the SDG Investor Platform launched in April 2021 (UNDP, 2021).

Photo source: Melissa Joskow/ Media Matters
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​The Implications for SIDS?
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The above developments raise the key question: what implications will trends in global green policy, ESG and Sustainability have on SIDS’ trade and private sector green transition?
In this regard, future research and discussion is strongly recommended which: 

1. Explores ways to ensure that the private sector in SIDS is not left behind or made worse off, whether inadvertently or otherwise, and that
2. Explores in greater detail how the measures, incentives and platforms that encourage green investment by private finance entities and the private sector will lead to the required investment flows in SIDS’ decarbonisation.

 
 
Sources:

• Greene-Dewasmes et al., 2021. The Crucial Role of Private Finance and the Private Sector in SIDS’ Green Transition: The COP26 Agenda and Beyond. iDERA.​
• Sindra-Khushal et al., 2021. Survival of Small Islands: Will COP26 Deliver? iDERA.