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Commentary

Catalytic Action Needed to Deliver New Global Financial Pact

Political will and specific solutions, especially in blended finance, are required to build on recent momentum, says Jeroen Huisman, Programme Director, Blended Finance Taskforce.

The Paris Summit for a ‘New Global Financial Pact’ set high expectations. Responding to the Bridgetown Initiative’s call for urgent and decisive action to reform the climate and development finance system, leaders gathered in the Palais Brongniart to talk about how to find money to address the most urgent crises for people and planet. Leaders from developing countries showed up in force in Paris, with a consistent message: this discussion cannot just be about aid. It has to drive real actions to unlock private capital for climate-positive growth.

The increasing support for the Bridgetown Initiative is driving a shift in leadership and agency. The Bridgetown Initiative is led by Prime Minister Mia Mottley from Barbados and offers a framework to reform the financial system, focusing on (i) transforming the financial system architecture through restoring debt sustainability, creating an equitable governance of international financial institutions and ensuring a multilateral trade system that supports green and just transformation; (ii) increasing public capital for liquidity support and official sector development lending; and (iii) using public money more catalytically to mobilise private capital by addressing risk and project pipeline barriers. The climate-positive growth narrative is also becoming a powerful driver to shift agency in climate finance design and decision-making. Leadership from Kenya President William Ruto and Colombia President Gustavo Petro was definitive – emerging economies are investment destinations with large-scale opportunities.

Essential momentum

Substantial progress was made in Paris – especially in creating momentum for change. In line with the Bridgetown Initiative, rich countries announced the reallocation of US$100 billion of International Monetary Fund (IMF) special reserve assets to provide liquidity support to emerging economies. Although some part of this is still to be ratified by the US Congress, it can be seen as an important success for the Bridgetown Initiative. The World Bank committed to adopt debt disaster clauses that suspend payment in the case of (climate) emergencies, another important part of the Initiative. Progress was also made on debt sustainability with US$6.3 billion of restructuring agreed with Ghana and Zambia. The strongly increased momentum to mobilise capital for climate and nature-positive growth among Global South leaders and donor countries is essential to pave a way forward for more concrete commitments.

However, with limited systematic reforms agreed and no real new capital made available, the Summit did not decrease the trust gap between North and South. As global leaders gathered in Paris, trust between North and South was at an all-time low. One major obstacle in scaling up climate finance is the limited commitment and political will to commit new, additional public capital. Despite endless roundtables, panel discussions and analytical reports, tangible systematic commitments were not made. Political will is missing in donor countries to substantially scale up available capital for multilateral development banks, such as the World Bank. Initiatives that address the systematic failure of the global economic system to mobilise capital for climate action, such as a global carbon price, are far away from agreement. Existing roadmaps to reform international financial institutions (such as the World Bank and IMF) are unlikely to result in a shift in agency from donor countries to emerging economies and major changes in the operating models.

Concrete actions

Momentum on private capital mobilisation has to be followed by concrete actions to scale and improve blended finance instruments. The Summit created substantive momentum around private capital mobilisation for climate and nature-positive growth. More than US$1 trillion out of the US$2.4 trillion need per year for climate action can come from the private sector into projects that have an inherent business case. However, real and perceived risks leading to high cost of capital and difficulty in funding early stages of project development are inhibiting capital from flowing into these opportunities. While discussions on broader system reform continue, donor countries should urgently follow up on the momentum to improve and scale blended finance mechanisms that address high cost of capital and building the project pipeline.

Better blended finance mechanisms – especially accessible, affordable and fit-for-purpose risk-sharing instruments and funding for project preparation – are a critical part of this solution. In particular, guarantees can play a vital role. By addressing real and perceived risks, guarantees can be a strongly catalytic use of public capital. Recent reporting shows that with US$1 billion of public cost, US$30 billion of private capital could be mobilised. While guarantees are five to six times more catalytic than loans, they represent less than 5% of current multilateral development banks’ committed climate finance. Scaling guarantee mechanisms with a strong link to project pipeline development funding can have outsized impact in mobilising capital for climate and nature action.

Catalytic use of public capital

It is now crucial to quickly shift from the ‘what’ into the ‘how’ if we want to increase the scale and use of these instruments. From my time at the Dutch Ministry of Finance, I know governments often design policies with the best intentions, but have difficulty designing them in a catalytic way to unlock private capital and build well-functioning markets for the long term. It is crucial however that donor country leaders now follow the momentum and Global South leadership and drive the changes needed to use public capital more catalytically. Ultimately the success of this Summit will depend on whether the solutions offered were sufficiently specific and backed by enough political will to shift incentives to mobilise additional capital.

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