COP26: Climate blah, blah, blah is all about the money, money, money

Kate Mackenzie, who writes with Bloomberg Green, published a fascinating long-read article on Phenomenal World the other day. I wanted to publish the whole thing, but instead took some key paragraphs to share here. Maybe this is why, as Greta Thunberg said it, most leaders talking about climate change is just blah, blah, blah:

The UK ambition to center the City of London as a hub for a growing green finance industry dates back to at least 2010, when the “Capital Markets Climate Initiative” launched at the London Stock Exchange. Brexit has likely intensified this ambition: fear of a post-Brexit abandonment by the financial sector has spurred the government to position the City as a premier center for sustainable finance. The City of London Corporation’s 2021 pamphlet contains an extensive discussion of climate-related and sustainability metrics as part of its “competitive offering” to financial and professional services firms …

The emphasis on capital flows, particularly from the private sector, leaves the structural features of the global financial system largely unaddressed. The vast difference in financial terms available to peripheral versus core countries, and the rising proportion of debt owed to global capital markets in many developing countries, has been neglected by a framework which is primarily concerned with attracting private investment.

Sustainable finance is a booming business in the global north, where allocations to “environmental, social and governance” themed funds are on track to become the default, and instruments like green bonds routinely break new issuance records. But in the global south, the availability, cost, and terms of finance to develop sustainably remain extraordinarily restrictive. While there are variations between individual countries, the weighted average costs of capital for low carbon technologies can be more than twice as high for African countries as for Australia or Canada, and almost three times that of the western EU countries. The divergence between core and periphery countries in the monetary and financial system curtails the ability of developing countries to decarbonize.

The divergence is worsened by climate change itself. Climate-vulnerable countries pay an average of 117 basis points more to borrow, according to a 2018 analysis …

Just as the structure of the global financial system shapes the realities of financial flows, so the global structure of power mediates the realities of climate diplomacy. There is little space for diplomatic manoeuvring in the interactions of developing countries with international capital markets, where negotiations are mostly concealed from the public view that enables and incentivizes orchestration. Debtors must persuade creditors to participate in restructuring discussions and hope that they will not take advantage of contracts that allow for a minority to hold out. Sub-Saharan African countries rely on US dollar-denominated sovereign debt markets for about a third of their external finance …

There is some hope for reform. In the wake of the COVID outbreak, powerful G7 members voted in favour of an allocation of Special Drawing Rights, the reserve asset issued by the IMF. Although the SDR distribution quotas means the poorest countries receive the least, it’s a progress of sorts, and the proposed new IMF facility that would provide finance to countries hit by pandemics or climate change could represent a further small advancement. And some wealthy countries have indicated they will donate a portion of their SDRs to developing countries.

Finally, debt-for-nature swaps, which can be structured in a variety of ways, have delivered variable results in terms of both debt relief and environmental impact …

But these and all other unconventional reforms inevitably come up against one of the oldest tensions between development and climate action: conditionality. What are the policy strings attached to money that’s provided? Who decides what is good development, or good climate policy? As they design paths forward, policymakers must negotiate these considerations; or at least win support of enough of the more powerful voting member countries to put them on the table. Days before COP26, the finance ministers of forty-eight climate-vulnerable countries signed a statement calling for large scale green debt swaps that would support a self-determined climate policy agenda.