Devex Invested: At COP 27, calls to reinvent the global financial system

Climate finance is taking center stage at the 27th United Nations Climate Change Conference in Egypt — from how to finance a just transition, to discussions about how and whether to compensate lower-income nations for loss and damage caused by natural catastrophes.

Private capital can help address some of these challenges, though not all. One thing seems clear: there is a growing chorus calling for reform at multilateral development banks so they can better address the climate crisis.

Mottley crew pushing for reform

Barbados Prime Minister and climate advocate Mia Mottley — who my colleague Colum Lynch named the “Caribbean queen of COP 27” in a must-read profile — wants to see a reinvention of the financial system created by the Bretton Woods Agreement at the end of World War II.

Her proposals, dubbed the Bridgetown Agenda, include initiatives to pump money into struggling countries, expand multilateral lending by $1 trillion, and make it easier for countries to gain access to concessionary loans.  

Mottley told my colleagues at COP 27 in Sharm el-Sheikh yesterday that those proposals are “resonating with a number of people” and she is “quietly confident” they will be adopted. She hinted at backing from a G-7 country, and said we’ll “soon find out” which.

Climate-vulnerable countries need concessional financing, she told world leaders, calling for a trust focused on climate mitigation and $500 billion in Special Drawing Rights to unlock trillions in private-sector financing.

Mottley is not alone in seeking changes, though her vision may far surpass what the heavy hitters are willing to support. At least some of her ideas may have backing in Washington. Alexia Latortue, assistant secretary at the U.S. Treasury Department, tells my colleague Shabtai Gold that the U.S. means business in calling for an overhaul of MDBs — as laid out in a landmark speech last month by Treasury Secretary Janet Yellen.

“The message was unequivocally clear that this is not a passing speech from the U.S., it was not passing commentary from some shareholders,” Latortue said, in what came across as a stark warning. “Treasury is robustly engaged with the leadership of the World Bank.”

Former U.S. Vice President and environmentalist Al Gore echoed the demand for reform during his speech at COP 27.

“We need to reconvene Bretton Woods and completely revamp and reform the World Bank system and make access to private capital available for developing countries,” he said.

Read: Mia Mottley hints at G-7 support for the Bridgetown Agenda at COP 27 

Treasury: Need for development banks’ reform is ‘unequivocally clear’ (Pro)

+ For more on climate finance and COP 27, check out our Road to COP 27 series.

Check’s in the mail

World Bank President David Malpass tells Shabtai that he has “embraced” the idea of reforms — and the U.S. Treasury has given him until next month to come up with a plan.

“We are working with the shareholders on a menu of approaches towards accomplishing that goal,” he said in an interview Friday, just before he flew to Sharm el-Sheikh.

While Malpass might not be the most popular attendee at COP 27 following his recent gaffe about whether human activity is responsible for global warming, he told Shabtai he’s focused on, among other things, a methane reduction initiative and a trust fund for incentivizing low-carbon development. The bank is also planning to “surge” financing for adaptation projects in low-income countries. The World Bank on Tuesday formally launched its new climate fund, known as Scaling Climate Action by Lowering Emissions, or SCALE, to provide grants for emissions reductions through a pooling of funding resources.

Malpass: Poverty reduction and climate change are ‘the same breath’

+ Want to get more insights from COP 27? Join us on Thursday and Friday for Devex @ COP 27, featuring a series of provocative conversations with leaders from government, INGOs, financial institutions, and civil society.

Fragile contexts

Bringing in private capital to scale the response to the climate crisis is critical, but it can be challenging, especially in fragile states, my colleague Sara Jerving reports.

Although some institutions, such as the U.S. International Development Finance Corporation, have mandates to do more in challenging settings, there has been little movement on that front. There are still few projects and scant money when compared to “non-fragile contexts,” Erol Yayboke, an expert at the Center for Strategic and International Studies tells her.

One potential issue is that officials at these institutions have little experience in conflict settings and little incentive to do risky transactions. More funding for project preparation is also needed to build a better pipeline of bankable projects in these areas, Sara reports.

Read: Climate finance is a catch-22 in fragile states (Pro)

And don’t miss: Is there as much climate finance as you’ve been told? (Pro)

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By the numbers

• $632 billion: average spent on climate mitigation and adaptation globally by public and private entities in 2019 and 2020, according to the Climate Policy Initiative. Low-income countries received less than high-income countries, with nations in Africa, the Middle East, Latin America, and the Caribbean receiving only $70 billion.

• $3.4 trillion: the needed average annual investment in mitigation initiatives between 2020 and 2025. There is currently a financing gap of 66%, according to a Rockefeller Foundation report. There’s an even bigger gap for adaptation and resilience efforts, where only about one-tenth of the annual need is met.

• 34% of the 2,000 top public and private companies worldwide by revenue have publicly stated net-zero targets, according to a research by Accenture.

• 93% of those large companies with net-zero commitments will miss their targets if they don’t accelerate progress, according to the same research by Accenture.

• Nearly 40% of organizations will accelerate sustainability efforts in the next year, according to a Deloitte survey of 700 executives.

Not just lip service

The African Development Bank may be promoting lending to female entrepreneurs, but it must do more to ensure gender equality internally — as do other banks, my colleague Vince Chadwick reports.

When it comes to gender equality, rather than “paying lip service, we need to practice what we preach to others, and especially to the African countries that we aim to support,” says Malado Kaba, AfDB’s director of gender, women and civil society, who previously served as Guinea’s first female minister of finance and the economy.

Read: Director says African Development Bank lagging on gender equality

What we’re reading

Why the Asian Development Bank wrote a prescription for an overhaul. [Devex Pro]

U.K. claims it is still delivering a £11.6 billion climate finance pledge. [Devex]

Climate philanthropy: Small gains, big hopes, but reality still bleak. [Devex]

U.S. works on plan for companies to fund emerging nations’ fossil fuel switch. [Financial Times]

Empty ESG pledges ensure bonds benefit companies, not the planet. [Bloomberg]