As world leaders and finance moguls land in Paris for the Summit for a New Global Financing Pact, it’s time to take concrete steps for sustainable finance and not let this be another international summit without substance. French President Emmanuel Macron says the agenda is to increase “financial solidarity with the [Global] South”. India, the president of the G20 this year, is co-chairing the steering committee of the summit with France and can be counted on to be that voice of the Global South.
Promises and payment
Every day, the cost of climate change and inaction becomes dearer, particularly for low- and middle-income countries that face the brunt of it. According to One Planet Lab’s white papers released for the Summit, the scale of investment needed to meet the United Nation’s Sustainable Development Goals, climate COP21 and Biodiversity COP15 objectives set at the global and national levels is to the tune of an additional $4 trillion every year. If you break down the maths, that’s over $2 trillion a year to meet the Paris Agreement objectives and $2 trillion required to achieve the UN SDGs. But the hard truth is that only $204 billion of official development assistance came last year – a record in itself.
This gap between promises and payment goes to show that international funding is unpredictable and poorly structured, and does not address the liquidity challenges of developing countries. For instance, only 25% of global climate investment goes to South Asia, Latin America, and Africa, which house some of the most vulnerable regions. Further, global funds clamp down on the fiscal independence of these countries by posing several conditions before the money comes in. Domestically, too, the tax structures of developing countries lead to institutional weakness, illicit finance flows, and higher risk perceptions. The consequence: Developing countries pay for their own development transitions through limited public funds. And it’s hard to mobilise private players to take the jump here because the returns are not high enough to bear the real or perceived risks of investing in low- and middle-income countries. Can Mr. Macron’s summit turn the tide?
Three components
The finance summit is scheduled in the middle of a consequential year, which includes discussions around reforms of the World Bank, India’s G20 presidency, the UN’s SDG Summit, the UN Secretary-General’s Climate Ambition Summit, and COP28 that will include the first Global Stocktake under the Paris Agreement. The summit will be successful if it can serve as a critical point for the transformation of international financial and development architecture. It must, therefore, include three components: Pact, platform, and pathway.
First, create a pact for global flows of finance that covers two levels of social contracts — domestic and international. At the domestic level, high debt limits the fiscal space of developing countries. Increasing this space of countries would need modernising and standardising existing tax structures, clamping down on illegal cross-border money movement, empowering tax administrations and curbing ineffectual fossil fuel subsidies. These efforts should be accompanied by proportionate taxation of actors and goods involved in emission-intensive global flows.
At the international level, finance is needed for adaptation as well as loss and damage stemming from climate change. Therefore, the international social contract must rest on a strong foundation of global solidarity rather than empty pledges. New resources can be mobilised by tapping into global flows, such as taxing the production of fossil fuels, shipping of goods, and transportation of fossil fuels. For instance, taxing each barrel of oil just one dollar would generate around $30 billion per year. Such an approach decouples financing for the vulnerable from the political resistance of taxpayers in rich countries.
Second, create a global platform to de-risk finance and mobilise large volumes of private investment in sustainable infrastructure. Vulnerable countries need several types of blended finance – for scaling renewables, clean tech for livelihoods, transitioning away from fossil fuels, and the co-development of emerging clean technologies. Financing these needs novel mechanisms, such as a Global Clean Investment Risk Mitigation Mechanism that pool risks across geographies and lower costs for all. Particular attention should be given to hedging against currency fluctuation risks that increase the cost of finance. Transparency and real-time data can bridge the psychological and financial divides.
Finally, chart a political pathway that creates time-bound deliverables on climate finance from one summit to another. Everything won’t be achieved in a single finance summit but the France summit can prevent the can from being kicked further down the road. The summit must outline the maths of finance, the mechanisms of delivery, and establish the momentum for real investment over the next two years. When we approach the 80th anniversary of the UN in 2025, reformed finance for sustainable development should have formed the basis for renewed and meaningful multilateralism. The Global South, from where the bulk of global growth will come, has earned its seat at the table; the dishes served must now suit their palate.
