29 July 2014

Passing the bucks: the Green Climate Fund, country ownership and the role of international financial institutions

What role will international financial institutions like the World Bank play in channelling the resources of the UN’s Green Climate Fund? And what does that mean for the concept of “country ownership”? This is the second of a series of three blogs on critical issues facing the GCF. The first looked at how much money the fund is likely to contain and who is likely to provide it. The third in the series considers whether the fund is likely to support fossil fuels and other forms of “dirty energy”.
The Green Climate Fund is intended to be “country-owned and driven”, with national governments playing a key role in setting priorities and overseeing how funds are deployed. But the emerging structure is increasingly at odds with this commitment, and it looks increasingly likely that a majority of its funding would be channeled via international financial institutions (IFIs) rather than local and national ones. That’s a significant reversal for a fund that was conceived as an alternative to the current system, which is built around a mix of multilateral financing passed through the World Bank and other multilateral banks, and bilateral financing. The shift in favour of IFIs is a blow to attempts to take climate finance out of the hands of institutions that invest heavily in fossil fuels and other forms of ‘dirty energy’ (see more here). It also risks taking decision-making power away from the people most affected by climate change.

In part, the turn to IFIs reflects ambiguities in the definition of “country ownership”, a concept borrowed from the development aid field. According to the 2011 Busan Partnership for Effective Development Cooperation, developing countries should be responsible for defining their own development model, with approaches “tailored to country-specific situations and needs”, and national institutions playing a leading role. The World Bank has adopted a similar-sounding definition, claiming that “Country ownership means that there is sufficient political support within a country to implement its developmental strategy, including the projects, programs, and policies for which external partners provide assistance.” In practice, though, there are key differences between a process that allows national actors to define their needs, with resources channeled directly via accountable national institutions, and “external partners” assisting in the creation, and shaping of, a strategy, which is then sold to the recipient country after the fact.

The GCF Governing Instrument, a constitution-like document that sets out principles for how it will operate, veers towards the stronger definition of country ownership. It states that GCF financing should be consistent with national climate strategies, and support the creation of such strategies where none exist, and suggests that a “national designated authority” (NDA), typically an environment ministry, should be a key channel for advancing proposals and ensuring consistency with such strategies. Beyond this, recipient countries should be able to nominate institutions that can directly access GCF financing, including those at sub-national and national levels.

The primacy of national institutions has been chipped away by successive decisions of the GCF Board, however. In June 2013, the insistence on countries appointing an NDA was relaxed, and it was decided that a “focal point” (often just a single person) would suffice. This option has been the springboard for arguments that the role assumed by the NDA or focal point should be minimal, restricted to little more than providing written consent that a country does not object to a particular project or program taking place within its territory.

The importance of a national approval process – dubbed a “no-objection” procedure – has also been watered down as over time. When the GCF was formally established at the UN Climate Change Conference in Durban in December 2012, the creation of a no-objection procedure was set out as a per-requisite for financing to commence. In October 2013, a proposal was tabled to establish such a procedure, which would give NDAs or focal points a key role in appointing and approving “implementing entities and intermediaries” through which funding would pass, and making formal written approval a condition for GCF financing. This approval should also have contained confirmation that “appropriate consultation processes” had taken place. But no agreement was reached, mainly due to concerns raised by the USA that it would be too time-consuming.

Subsequent iterations have proposed only a “tacit approval” process, with consent assumed after a period of as little as three weeks if no objection is raised, but the final decision will not be taken before October 2014. A possible compromise suggests that countries could choose a “tacit” procedure if they prefer. As with the designation of “focal points,” this is sold in part as providing countries with maximum flexibility – but in order to allow for this, the overall importance of the procedure is diminished.

In place of national governments, other intermediaries are gearing up to take an increasingly central role. The Governing Instrument mentions “financial intermediaries” just once, in the context of local actors supporting private sector activities. But the funding structure agreed in Songdo gives intermediaries a central role. In the “initial” phases of the GCF, at least, financing will pass through “implementing entities”(which could be national bodies or UN agencies) that can provide grant-support, and “intermediaries” that can provide concessional loans and, potentially, other financial instruments if (as many Board members, and the Fund’s Private Sector Advisory Group, advocate) those are subsequently approved. Beyond this, intermediaries will be allowed to “blend” financing with their own resources – a means that institutions like the IFC have used to combine concessional funds with their own non-concessional lending products.

Two issues dominated the debate on intermediaries at the GCF’s Songdo Board meeting. Significant concerns were raised (by the Board member for Zambia, amongst others) that the proposed bar for accrediting as an intermediary was being set so high that only IFIs (and commercial banks) would be able to qualify. This concern was recognized, to some extent, in the final decision in Songdo, which calls for an approach that would more closely tailor the financial management capabilities of the intermediary with the scope and complexity of the onward lending they would engage in.

Second, there was controversy over a proposed “fast track” procedure for accreditation, which the USA suggested should be extended to Equator Principles banks, a grouping of 79 commercial banks. Signatories to this voluntary code, which is based on IFC standards, include Bank of America, Citigroup and many of the world’s largest fossil fuel financiers, a number of which have backed projects with well-documented human rights abuses. The “fast tracking” of Equator Principles banks was blocked in Songdo, but their potential to be a major channel for GCF financing remains.

Some key questions in the design of the GCF remain to be addressed at the next meeting of its board – notably, the extent to which grants will be used compared to concessional lending, the financial terms on which these will be offered, and whether other financial instruments will be brought into the mix. Much also depends on how the sometimes-vague Board agreements are applied in practice – including how generously the “fit-for-purpose” rules on accrediting “implementing entities and intermediaries” will be interpreted, which should shape how accessible financing is to national governments and specialist agencies, regional and city governments. A narrow application could favor IFIs – but the emerging pipeline of intermediaries seeking accreditation and potential projects is also likely to see the GCF channeling funds via bilateral institutions like the UK’s Green Investment Bank, national development banks like BNDES (the Brazilian Development Bank) and second-tier regional institutions regional institutions such as the West African Development Bank.

21 April 2014

IPCC on mitigation: A roadmap to survival

Greenhouse gas emissions are rising, and our addiction to fossil fuels is to blame.

That, in a nutshell, is the conclusion of an authoritative new UN report published on April 13th. Emissions have not only continued to increase, but have done so more rapidly in the last 10 years. While the growing reliance on coal for global energy supplies is chiefly to blame for the latest increase, the broader picture is that “economic growth has outpaced emissions reductions.”

(Full article on IPCC report, written for Foreign Policy in Focus, continues here )

EU climate plans lack ambition... what could be done instead of carbon trading?

Followers of climate change policy are used to getting their disappointment early. With the launch of the EU’s 2030 climate and energy plan, the European Commission offered several years’ worth of let-downs in one handy package. This article for Red Pepper magazine parses the European Commission's 2030 climate policy proposals.

In far greater depth, this report on Life Beyond Emissions Trading, written for Corporate Europe Observatory, looks at what would fill the void if the EU ETS were allowed to collapse.

Recent articles on the UN’s Green Climate Fund

In advance of its Bali Board meeting in February, I published a summary of 7 things to look out for in the UN's Green Climate Fund. The issues in question are: Is the GCF a Fund or a Bank? Will the GCF fund fossil fuel infrastructure? Whatever happened to the promise of civil society participation? Will the GCF balance mitigation and adaptation? What protection will GCF environmental and social safeguards offer? What are “intermediaries” and why does their role keep expanding? How concessional will GCF concessional lending be?

Just one of those questions was answered in Bali, where progress was made on committing the Fund to financing a greater proportion of adaptation than is typical of most climate financing. This article, co-authored by Robert Muthami from the Pan African Climate Justice Alliance,  examines the latest decisions taken about the fate of the GCF.

My IPS colleague Janet Redman and I explored the question of the Fund's potential fossil fuel lending in this article for Foreign Policy in Focus.

18 July 2013

Songdo Fallout: Is Green Finance a Red Herring?

From the 29th floor of Songdo, South Korea’s jagged “G-Tower,” one can glimpse the endless construction sites and vacant parks of an emerging “global business utopia,” to use the city’s adopted slogan. The newly built city, home to the UN’s nascent Green Climate Fund (GCF), proudly promotes its green credentials, including an impressive network of underused bike lines. Unfortunately, these run alongside 10-lane boulevards ruled by Hyundai limos and Korean airline buses.

Songdo, in short, is a monoculture plantation of skyscrapers, shorn of the diverse ecosystem that characterizes living cities. And the G-Tower is the symbol that tops the lot: a skyscraper with a Pac-Man-like cutaway, as though the institution is running from the ghosts of the World Bank and other multilateral development banks. Like the Fund itself—a centerpiece of the international climate finance regime, designed to fund climate mitigation projects in the developing world—it is currently empty.

A few streets away from the G-Tower, Songdo’s convention center recently played host to the fourth meeting of the GCF’s governing board. There, the GFC’s 24 board members (government officials selected on a regional basis) made several key decisions. These include how the Fund will be managed (should money ever arrive), by whom, and according to what rules.


The key structural decisions taken in Songdo concerned the GCF’s Private Sector Facility (PSF), which was created to encourage private investment in projects that reduce both the causes of climate change (by mitigating greenhouse gases) and its impacts (by adapting to a warmer world). These decisions walked a diplomatic tightrope—advancing the creation of the institution while carefully avoiding debates over which private sector the Fund is actually meant to target.

On one side, the developed countries represented on the GCF board advocate a PSF that appeals to capital markets, in particular the pension funds and other institutional investors that control trillions of dollars that pass through Wall Street and other financial centers. They hope that the Fund will ultimately use a broad range of financial instruments.

There is a troubling circular logic underlying this, however. The complex repackaging of debt to hide systemic risk was a key contributor to the financial crisis in developed countries, resulting in huge bailouts that increased their indebtedness. As a result, many developed countries now claim that they have little money available for climate finance, and that the GCF should look to financial markets to make up this shortfall.

On the other side, many developing countries and non-governmental organizations have suggested that the PSF should focus on “pro-poor climate finance” that addresses the difficulties faced by micro-, small-, and medium-sized enterprises in developing countries. This emphasis on encouraging the domestic private sector is also written into the GCF’s Governing Instrument, its founding document.

The purpose of the PSF remained unresolved in Songdo, but many of the rules needed to start its operations were agreed upon. A major dividing line related to whether or not the PSF would have its own “governance structure.” This was opposed by many developing countries amidst concerns that it would  give the private sector the largest voice in determining how this part of the Fund is run—potentially opening the door to both generous corporate subsidies and excessive financial risk-taking.

Continue reading at Foreign Policy in Focus

Background: What is the Green Climate Fund?

16 July 2013

Climate markets

Climate Finance Markets Site - www.climatefinance.org

At the Institute for Policy Studies, we've set up a new website on Climate Finance and Markets (climatemarkets.org) to help climate activists and advocates understand financial markets, as well as monitoring the Wall Street-friendly solutions currently being dreamed up by the World Bank, the Green Climate Fund and others.

The site offers a range of materials, including a glossary and a Reader, looking at the new financial tools that are emerging, the role of key private sector actors (from banks to private equity funds), attempts to “leverage” private investment, and alternatives to this Wall Street-driven approach.

Climate Change PLC

This article was written for the Morning Star as part of the launch of WDM's Carbon Capital campaign

From offshore drilling to gas fracking, it's boom time for fossil fuels - and the City of London is at the heart of it.

Oil exploration and production requires huge reserves of cash, which first comes from selling shares and bank lending.

The London Stock Exchange provides a platform to channel investors' money, much of it from ordinary people's pension funds and insurance policies, to fossil fuel companies.

Shell and BP are the largest and third-largest companies in the FTSE 100, but they are far from alone.

Almost a fifth of the index is made up of companies directly involved in extracting oil, gas or coal, while another fifth of the FTSE 100 consists of financial services companies investing in these activities.

London is also one of the world's main banking hubs, hosting the global headquarters of HSBC and Barclays, and the European, Middle Eastern and African operations of every leading US investment bank. Between them they lend billions every year to fund new extraction projects.

The City of London and Canary Wharf also play host to an enormous supporting cast of financial analysts, ratings agencies, corporate lawyers and accountants.
And if things go wrong, Lloyd's of London is the world's biggest insurance market, covering everything from oil leaks to the "political risk" that extractive projects may face civil disturbances or state repatriation.

To see how this plays out let's take the example of Tullow Oil, a small company by the standards of the oil industry, but still the 40th-largest player on the FTSE 100.

Fans of Sunderland football club might know it via Invest in Africa, a Tullow-run front charity that sponsors their shirts.

But Tullow is only really a household name in Ghana, where the company's offshore discoveries turned oil into the number one issue in recent elections.
As the history of nearby Nigeria's "oil curse" shows, it's mainly foreign corporations, politicians and security firms who strike it rich when oil is discovered, while poor people remain poor.

Production in Ghana began in 2010, and the early signs don't look good. Against a backdrop of inadequate environmental regulations, flaring - burning off toxic waste gases - is already widespread.

Tullow gets its funding from a mix of equity - selling shares to raise funds - debt and sales revenues.

The vast majority of its shares are held by "institutional investors." The largest of these is BlackRock, whose 11 per cent stake in the company is distributed across a dozen or more of its funds, which manage money for anyone from large insurance companies to rich individuals.

Pension firms including Prudential, Legal & General and Scottish Equitable are also major shareholders.

The combined value of Tullow's shares, currently over £7 billion, is mostly based on the company's estimates of how much oil it can extract from drilling sites including Ghana, Uganda and Kenya.

While some of the biggest corporations issue bonds - large "I-owe-you" slips - Tullow is typical of companies its size in agreeing a loan package with a syndicate of lenders.

Last year it set the seal on a deal with 27 major banks, including RBS and Lloyds TSB - in which the British government owns significant stakes - and the World Bank's International Finance Corporation (IFC), allowing it to borrow over £2.2bn until 2019.

Revenue from oil sales translates into large profits - £445 million post-tax in 2011 - which are paid out to shareholders and reinvested in further exploration and production. The oil is mostly sold as futures ahead of actually being extracted, with Tullow using London's network of brokers and commodity traders to find buyers, many of whom will use it as the basis for financial speculation.

A whole host of Tullow's support services can be traced back to London's financial services industry too.

City law firm Ashurst is helping the firm to sue the Ugandan government for a £250m tax claim.

Several City insurance firms limit Tullow's liabilities in case of oil spills. Investment banks, including Barclays, and specialists structure "mergers and acquisitions" that free up cash for new exploration.

The City of London is a financial services hub that helps fossil fuel companies to maximise profits and minimise accountability.

Shareholder activism can shine a spotlight on abuses, like the recent protests at GCM Resources over its controversial coal mine planned in Bangladesh.

But companies won't really change unless the rules governing them change, which means we need to push the British government and the EU to alter course.
Even small measures could help, such as "publish what you pay" rules to force extractive industries on the London Stock Exchange to disclose their payments to foreign governments.

This could help campaigners in the global south to track unfair deals and government kickbacks.

Britain could set an example by using its board positions at the European Investment Bank, IFC, RBS and Lloyds TSB to force through cleaner lending policies.

It could help create an international tribunal that holds firms and their executives accountable for any environmental and human rights abuses they commit.

It could even take a lead in pushing the European Union to decarbonise electricity supplies and transport.

As a first step, the World Development Movement is demanding that the government force banks, pension funds and other finance companies to come clean on the impact of the dirty energy projects they finance.

New regulation coming into force later this year will mean these businesses will have to disclose the carbon footprint of the lightbulbs in their London offices, but they won't have to report on the carbon emissions from the coal and oil projects they finance around the world.

The government must be put under pressure to start holding the finance sector to account and to make banks disclose the carbon footprint of their investments.