Towards ethical climate finance

CLIMATE finance has again taken prominence on the global agenda as leaders seek to reach agreement on the who, how and what of financing climate change mitigation and adaptation.

South Africa needs an estimated R8.9 trillion, or R596 billion in annual investment over a 15-year time frame (from 2015 to 2030), to meet its nationally determined contribution. Given the scale of the transition required in South Africa and current financing problems, securing climate finance is an important and urgent policy debate.

In this context, it is concerning that the National Treasury’s draft technical paper on sustainable finance focuses on private finance while excluding the public sector and international public finance. This reduces climate finance to a vehicle for the private sector to mobilise new forms of value creation for profit maximisation at the expense of sustainable and inclusive development.

Climate finance is defined as international public and private finance consisting of new financial resources targeted towards climate mitigation and adaptation efforts. This includes bilateral aid, export credits, multilateral concessional loans and grants.

Private finance can include carbon market finance and foreign direct investment. In South Africa, between 2017 and 2018, public finance towards climate-related sectors totalled R22bn against the R35.5bn financed by the private sector.

There are ethical and instrumental grounds for demanding a rapid and substantial increase in climate finance.

Those most responsible for climate change, the developed and industrialised countries, have climate debt obligations.

They industrialised at the expense of the environment and must be held responsible for the harmful effects of climate change, and provide finance for mitigation and adaptation.

Developed countries should be obliged to transfer funds to developing countries in order to reduce greenhouse gas emissions and cushion the climate impact, which will be disproportionately felt by the impoverished.

Unfortunately, a recent report by the Organisation for Economic Cooperation and Development shows that developed countries are not yet able to meet their meagre obligation of providing $100bn (about R1.44 trillion) to developing countries.

The financial risk from climate change because of extreme weather events and climate action failure will escalate significantly and can compromise the development gains made in the last few decades.

What has become increasingly apparent in South Africa and abroad is the push for private sources as the dominant approach to climate finance. As global financial actors have realised that global financial stability depends

on addressing the climate emergency, climate finance has been co-opted into what academic Daniela Gabor terms the “Wall Street Consensus”, allowing private finance to exploit the climate crisis for profitable opportunities that benefit financial market actors. This poses particular risks for developing countries that are integrated into a financialised global system on subordinate terms.

Consequently, the Wall Street Consensus aims to diminish the state’s role in a just transition and to reconstitute it in a manner that serves private finance. Institutional reforms aimed at de-risking private financing through state-backed guarantees, public-private partnerships in infrastructure financing that saddles states with commercial risks, and central banking that reduces liquidity and currency risks for private capital are all part of the Wall Street Consensus supported by an inequitable global financial architecture.

The effects of these financial instruments on developing countries have proven disastrous.

The capture and co-modification of public goods have created inequalities of access, which hurt women and girls the most, as they are left to carry the burden of care when there is an inadequate basic social infrastructure to meet water, energy and health-care needs.

In addition, states have been left in deepened fiscal crises because of increased liabilities associated with these instruments, precisely undermining much-needed just, green recovery efforts.

A report by Oxfam International found that around 20% of reported public climate finance globally was estimated to be grants, compared to 80% reported as loans and other nongrant instruments. This leaves many low-to middle-income countries at risk of further increasing their unsustainable debt burdens.

The dominance of the private sector in this approach is seen in how the treasury defines “sustainable finance”, relying heavily on the terminology of private finance to the exclusion of the public sector. It notes: “Sustainable finance encompasses financial models, services, products, markets and ethical practices to deliver resilience and long-term value in each of the economic, environmental and social aspects, and thereby, contributing to the delivery of the sustainable development goals and climate resilience.

“This is achieved when the financial sector evaluates portfolio as well as transaction-level environmental and social risk exposure and opportunities, using science-based methodologies and best-practice norms, links these to products, activities and capital allocations; maximises opportunities to mitigate risk and achieve benefits in each of the social and environmental and economic aspects; and contributes to the delivery of the sustainable development goals.”

It is also notable how “value creation” is prioritised – without delving into value for whom and to what end. The conclusion to the working group on sustainable finance notes: “The (National Business Initiative) and the working group on sustainable finance, co-ordinated by (the) treasury, concluded that a clear sustainable finance strategy, consistent definitions and understanding of environmental and social risks linked to value creation is needed.