(Bloomberg) --
There’s a powerful temptation to believe that financial wizardry can help solve global warming.
Far too little is being spent on green projects, and what funds are available aren’t being channeled to developing countries that need them most. That’s why it’s become popular at United Nations climate summits such as COP26, taking place in Glasgow, to talk about “blended finance” — the idea that a small amount of public money can be used to “mobilize” a much larger amount of private money from pension funds and other asset owners. With the right instruments, the thinking goes, the world will be able to decarbonize fast enough to avoid the worst effects of climate change.
The reality is less impressive. Research from the Overseas Development Institute found that in low-income countries, each dollar lent by major multilateral development banks only mobilized 37 cents of private money. It’s a worrying track record, when the International Energy Agency and UN Intergovernmental Panel on Climate Change estimate that at least $1 trillion a year is needed to meet the Paris Agreement’s stretch goal of keeping temperatures from rising less than 1.5 degrees Celsius from pre-industrial levels.
The financiers at BlackRock Inc. have a suggestion to solve the shortfall. The company’s investment institute proposes that wealthier countries should give, not lend, $100 billion a year to poorer countries, to encourage more private finance to invest in clean energy and industry.
A lot of the money that has been channeled to developing nations so far has been in the form of loans. Data from the Organisation for Economic Co-operation and Development shows that only about $16.7 billion of climate-related money was given as grants in 2019. BlackRock’s argument is that the no-strings-attached approach should “address broader reputational risks around investing in particular countries” because past attempts have been “too targeted on funding individual projects, rather than being used to mitigate risks more broadly.”
In other words, BlackRock seems to be calling for not just lowering the risk of specific projects, but entire sectors or even countries. Public funds could, for example, take the “first loss” on investments. The company argues for protecting investors from risks such as “political stability and legal enforcement” by setting up dedicated emerging-market green investment banks and underwriting a minimum price on pollution. The approach, it says, could yield huge returns by reducing global climate risks overall.
The proposition doesn’t come from pure altruism. Lowering the risk perception of developing markets would open up big possibilities for investors. BlackRock this week revealed that it had raised $673 million for a new emerging-market climate infrastructure fund, exceeding its $500 million target.
Nor is BlackRock a mere bystander in the world’s financial system. It’s not just the biggest asset manager, by far. It’s also an astute influencer of the world’s financial system. The company advised the U.S. Federal Reserve on bond purchases early in the pandemic, and has guided the European Commission on sustainability requirements in banking rules.
This influence matters when you consider that developing countries are devising their own proposals for reform, which will compete for the same kind of political heft that BlackRock brings. For example, finance ministers representing vulnerable groups last week called for large scale debt relief — a notable move given countries that bring up the issue tend to be punished by markets and credit ratings agencies because of worries they’ll be less likely to pay back loans.
On the opening day of COP26, Barbadian Prime Minister Mia Mottley called for $500 billion in annual allocations of IMF Special Drawing Rights to help poor countries. Her special envoy for investment and financial services, Avinash Persaud, points out that there’s already a proposal for $50 billion of the recent Covid issuance of SDRs to go into a special, yet-to-be-designed IMF facility for climate action.
“To reach the scale necessary we need to add one more zero, make it annual and allow private investors to compete to access these funds on the basis of how much climate mitigation and adaptation they can achieve across the world,” he wrote in a note.
As these complicated debates continue, extreme weather events are only worsening around the world. Meanwhile the quicker post-pandemic economic recovery in developed nations is stoking inflation and boosting interest rates, and with that the risk that capital leaves markets once seen as a source of risky-but-worthwhile debt investments at a time when they need them the most.
Kate Mackenzie writes the Stranded Assets column for Bloomberg Green. She advises organizations working to limit climate change to the Paris Agreement goals. Follow her on Twitter: @kmac. This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
©2021 Bloomberg L.P.
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