The IMF released a new staff climate note in August entitled Mobilizing Private Climate Financing in Emerging Market and Developing Economies, which laid out the IMF’s potential role in helping to increase private finance flows to finance climate action and decarbonise financial markets. An accompanying blog co-written by IMF Managing Director Kristalina Georgieva on 18 August argued, “we need a major shift to harness public and, especially, private [climate] financing. With $210 trillion in financial assets across firms,…the challenge for policymakers and investors is how to direct a big share of these holdings to climate mitigation and adaptation projects.”
The staff note, which is not official IMF policy, followed calls by the US Treasury for multilateral development banks to develop plans for mobilising private climate finance by the UN Framework Convention on Climate Change’s 27th Conference of Parties (COP27) in November in Egypt, per reporting by Reuters in July. BlackRock CEO Larry Fink also called for the World Bank and IMF to do more to de-risk private climate finance in emerging markets at a July meeting of the G20’s finance ministers, arguing, “If we don’t have international institutions providing…first-loss position[s] at a greater scale than they do today,…we’re just not going to be able to attract the private capital necessary for the energy transition in the emerging markets.”
However, the staff note included a series of warnings about the challenges such an agenda faces. Efforts to de-risk projects to entice private sector investment may lead to significant contingent liabilities, with states footing the bill (see Observer Autumn 2022). The note also acknowledged the unhelpful role that investor-to-state dispute settlement claims currently play in protecting fossil fuel investments and frustrating climate policy (see Observer Autumn 2022, Winter 2020). It pointed out that large private climate finance inflows that are not accompanied by increased domestic capabilities in low-carbon manufacturing or large critical minerals endowments could themselves have a destabilising impact on countries, leading to current account deterioration and affecting their balance of payments outlook.
It's great to see that the IMF acknowledges that local fiscal resources should only be derisking private flows in combination with policies to increase domestic green manufacturing capacities. The next step is for the IMF to take this seriously and set out a framework for this more developmental derisking.Prof Daniela Gabor
The IMF staff note suggested, “The IMF can play an important role… [in mobilising private climate finance] through its instruments, including surveillance, capacity development, risk assessments, and climate diagnostic tools. In addition, the RST [the IMF-based Resilience and Sustainability Trust] can act as a catalyst in leveraging private sector financing” (see Observer Autumn 2022). The note argues key levers governments can pursue to attract private climate finance include announcing and implementing climate-related policy reforms; public investment in green infrastructure to create investment opportunities; and developing relevant green taxonomies to support the low-carbon transition.
Beyond the Wall Street Climate Consensus? Experts call for green ‘credit allocation’ approaches
In the face of growing calls to de-risk green investments for the private sector, macroeconomic policy experts have called for different policy pathways to manage the transition to a decarbonised global economy more effectively. A new working paper from academics Katie Kedward, Daniela Gabor and Josh Ryan-Collins published in early August calls for a shift to an ‘allocative green credit policy regime’, as an alternative to the market-led ‘de-risking’ of private investments, with such a regime being “organised around green industrial policy objectives and democratically agreed green missions.” The paper “draws on post-war credit policy regimes…but also deals with the specific challenges posed by market-based finance.”
“It’s great to see that the IMF acknowledges that local fiscal resources should only be derisking private flows in combination with policies to increase domestic green manufacturing capacities,” said Gabor of the IMF staff note. “The next step is for the IMF to take this seriously and set out a framework for this more developmental derisking.”
Similar sentiments were shared by Saule Omarava, a senior fellow at the US-based Roosevelt Institute, on Twitter, who noted, “Glad to the see [the IMF] talk about public taking equity stakes in climate projects, but equity should be about the public taking an active role in managing and directing capital, not just ‘derisking’ private investors.”