The Green Climate Fund and private sector climate finance in the Global South

ABSTRACT

Governments and international organizations are increasingly using public funds to mobilize and leverage private finance for climate projects in the Global South. An important international organization in the effort to mobilize the private sector for financing climate mitigation and adaptation in the Global South is the Green Climate Fund (GCF). The GCF was established under the UNFCCC in 2010 and is the world’s largest dedicated multilateral climate fund. The GCF differs from other intergovernmental institutions through its fund-wide inclusion of the private sector, ranging from project design and financing to project implementation. In this paper, we investigate private sector involvement in the GCF through a qualitative exploratory research approach. We ask two main questions: Do private sector projects deliver on their ambitious goals? What are the tensions, if any, between private sector engagement and other principles of the GCF (most importantly the principles of country ownership, mitigation/adaptation balance, transparency, and civil society participation)? This paper argues that private sector involvement does not provide an easy way out of the financial constraints of public climate financing. We show that the GCF fails to deliver on its ambitious goals in private sector engagement for a number of reasons. First, private sector interest in GCF projects is thus far underwhelming. Second, there are strong tradeoffs between private sector projects and the Global Partnership for Effective Development Co-operation (GPEDC) principles of country ownership, transparency, and civil society participation. Third, private sector involvement is creating a mitigation bias within the GCF portfolio. Fourth, while the private sector portfolio is good at channeling funds to particularly vulnerable countries, it does so mostly through large multi-country projects with weak country ownership. Fifth, there is a danger that private climate financing based on loans and equity might add to the debt burden of developing countries, destabilize financial markets, and further increase dependency on the Global North.

Key policy insights

• The main problem of GCF private sector engagement is lack of interest from the private sector. For now, the GCF will strongly rely on public funds for its mission; thus establishing a strong track record of high impact climate projects should take priority over the promises of mobilizing private financial resources.

• Given the strong mitigation bias of private sector projects, public sector financing needs to be even more focused on climate adaptation.

• The GCF needs to ensure that the private sector’s short-term interests in profitability do not undermine its own long-term goal of transformational change and development.

• The GCF needs to make sure that private sector projects are compatible with Global Partnership for Effective Development Co-operation (GPEDC) principles and its own rules on country ownership, transparency, and civil society participation.

• The GCF needs to pay more attention to building a sound institutional framework to ensure that climate finance does not add to the already existing debt burden, economic dependency, and financial instability of partner countries.

KEYWORDS:

• Climate finance
• development cooperation
• Green Climate Fund
• developing countries

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 The board meeting on November 12–14, 2019 was attended in person as an accredited passive observer. The remaining board meetings were observed online. (https://www.greenclimate.fund/boardroom/meetings).

2 In the GCF de-risking refers to a strategy to mobilize private finance by reducing the risks investment, for example by using public finance (blended finance).

3 The GCF does not provide a detailed distinction between the private and public sector in project co-financing. We thus categorize co-financing as public if the AE is a public institution. Please find a list of our categorization of the accredited entities in Table 1.

4 The remaining six projects are either purely public projects or not categorized by Stoll et al. (2021).

5 The remaining are cross cutting projects that combine mitigation and adaptation.

6 See for example literature on the East Asian developmental state, which is vast. For a first overview, see Johnson (1995); Kalinowski (2015); Thurbon (2016); Woo-Cumings (1999).