Global Policy Forum

The UN is looking for ways to involve the private sector in climate change mitigation and adaptation efforts. Supporters of this strategy stress that business can contribute a large part of the $100 billion a year in climate finance required by 2020, as financing from governments is faltering. Currently, private sector investment focuses mostly on clean technology projects. The UN is promoting “public-private partnerships” that would also look into adaptation for countries already experiencing the effects of climate change. Critics, however, argue that such schemes obscure business practices that contribute to climate change to begin with. In addition, relying on the private sector for alternative financing does not address why governments’ declining revenues prevent them from contributing to climate finance, or why they choose to not sufficiently fund this area. 

By Megan Rowling

At the U.N. climate talks in Doha late last year, Britain’s minister of state for energy and climate change told journalists the UK government is “leading the way” in mobilising private-sector finance for efforts to tackle climate change in developing countries.

As an example, Greg Barker cited a green energy trade mission to East Africa last October to look at how British companies could help the region develop renewable energy sources and create new markets for their exports.

"We want to use the UK's $4.5 billion climate fund to leverage in UK private finance and investors to help countries fight climate change, but also bring value to UK plc (public limited companies)," he told the BusinessGreen website shortly after the visit.

It’s an aspiration frequently echoed by cash-strapped donor governments around the world, which face demands to increase their funding for climate change mitigation and adaptation in poorer countries at a time when they’re struggling to plug huge holes in their budgets. And they’re not alone - there’s widespread recognition that a large proportion of the $100 billion a year the world has vowed to mobilise in climate finance by 2020 will have to come from the private sector.

But what remains unclear is how that is going to happen and on what scale. So far, businesses have shown the most interest in investing in clean energy technologies. What they’re not so keen to work on is enabling poor communities to protect themselves from the negative impacts of climate change, including more extreme weather and rising seas.

Governments like the UK are trying to encourage private companies to get their feet wetter by offering financial incentives to invest in climate change projects. Research just out from the London-based Overseas Development Institute (ODI) provides valuable insights into where this money is going. The think tank has compiled an online resource of 73 public-private investments totaling $8.5 billion, drawing on its reviews of Japanese, US, UK and German support for private climate finance from 2010 to 2012.

ADAPTATION, POOR COUNTRIES LOSE OUT

The lessons teased from the analysis show that a huge 99 percent of the investment goes on initiatives to mitigate climate change. Efficient fossil-fuel power and solar energy get the most support, accounting for 22 percent and 17 percent of the $8.5 billion respectively.

“With the exception of a small number of interventions to support insurance instruments, there was virtually no direct investment involving the private sector that targeted adaptation to climate change,” writes research fellow Shelagh Whitley on the ODI website. “This may be because of challenges in defining what constitutes an adaptation intervention, and the fact that many countries are still at the relatively early stage of including adaptation in their national planning processes,” she adds.

Few of the public-private activities have targeted the poorest countries, the research shows, with 84 percent of identifiable investment going to middle-income nations. The United States, for example, is channeling nearly 45 percent of its private climate finance support to India, of which half is going to the solar sector, and Germany is putting 40 percent into Turkey.

The reasons may be that faster-developing nations offer more investment opportunities, a better regulatory environment and greater ability to absorb finance than poorer states, the ODI says.

A lot of the money is in the form of government-backed loans that fund projects implemented partially or fully by private companies. And some of these climate finance flows benefit businesses based in the donor country directly or indirectly – especially in the case of Japan (the full amount) and the United States (about half). But only 20 percent of the $8.5 billion reviewed by ODI was actually investment from the private sector itself.

What these findings tell us is that, while things have started to happen, there’s still a long way to go before private-sector investment in climate change reaches anything like its much-touted potential.

A new paper from the Climate and Development Knowledge Network argues that the relative scarcity of public funds should be regarded as an opportunity for the private sector. But more work is needed to demonstrate how public finance can best unlock private capital for low-carbon and climate-resilient investment in developing economies, it says.

DISASTER RISK ‘BLIND SPOT’

How to get the private sector more on board is also a huge issue for the community of aid agencies and others trying to protect people and assets from the growing threat of disasters. So much so, in fact, that the latest edition of the U.N.’s flagship Global Assessment Report on Disaster Risk Reduction, due for release in May this year, will focus on risk as a major “blind spot” for the private sector.

Margareta Wahlström, head of the United Nations Office for Disaster Risk Reduction (UNISDR), said this week that her agency expects the report to have “a profound effect” on how companies of all sizes manage disaster risk in the future. 

“We are looking to achieve a paradigm shift from simple business continuity planning and disaster response to integrating disaster risk reduction into business planning in the same way as cyber security or financial audits,” she added, noting that the response to the report would influence trillions of dollars of investment in critical infrastructure.

The report is also due to include new research showing that direct economic losses caused by disasters have been underestimated, and indirect losses to businesses are more significant than direct losses.

Current methodology puts overall economic losses from disasters - including earthquakes - over the last 12 years in the range of $1.5 trillion, according to the UNISDR. If the true scale of the damage is even bigger, with climate change predicted to worsen weather hazards in the coming years, then companies can no longer afford to look the other way and let governments and NGOs do all the heavy lifting.