Songdo Fallout: Is Green Finance a Red Herring?

With the latest Green Climate Fund talks in Songdo, wealthy countries have taken another step toward financializing the world's response to climate change.

From the 29^th 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.

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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.

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Background: What is the Green Climate Fund?

Climate markets

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.

City of London and Climate Change

I've written a new booklet for the World Development Movement looking at how the City of London organises the fossil fuel investments for destructive fossil fuel projects that are leading to runaway climate change, and asks what we can do to stop it. Its aim is to inform campaigners and equip them to take action. You can find it online by clicking here.