Time to engage the private sector on climate finance

I was at the Climate Investment Funds meetings in Cape Town last week with several other representatives from development banks, NGOs and governments to discuss results, impacts and the future of this financial mechanism. One of many themes cutting across meetings in Cape Town was the importance and challenge of engaging the private sector in climate finance. The private sector is by far the largest source of investment, the dominant provider of technology, and often essential for implementation of mitigation and adaptation measures. However, based on the discussions this week, it’s apparent there is much to learn about what is actually expected or sought from the business community. Here are some of my observations from the meeting:

1. In my experience references to “the” private sector are common but largely meaningless and often confusing in failing to distinguish between entities as different as major multinational manufacturers, international financiers, and locally- based entrepreneurs. Some speakers even used the term more broadly to encompass markets, including policies directed at consumers.
2. There are some unavoidable tensions between emphasizing country plans and priorities and the promotion of markets for climate-friendly products and services. This is particularly true in smaller and poorer countries. Control of donor resources is fundamental for many governments but sometimes difficult to reconcile with the flexibility, consistency, and speed required by investors. Public-private partnerships (the focus of a Cape Town session) is one solution but not always appropriate or workable.   Finding models which can blend the two, as in the collaborative IFC/World Bank Lighting Africa project, will be increasingly important. The World Bank was able to build a relationship with energy ministries while IFC focused on helping businesses. Together, they have been able to address a wide range of issues from regulatory systems to that of supply chain development.
3. The role of the private sector in adaptation is critical – private parties will incur much of the costs of climate change -- but still to be much better understood. The short time and spatial horizons of most businesses is inconsistent with the multi-decadal, regional results of climate models. To date, with limited exceptions, only a few of the most at risk sub-sectors such as insurance and infrastructure have begun to factor climate change into their planning – and then almost entirely in developed countries. Providing business with good climate change information and increasing awareness of risks are essential first steps.
4. Some financial products intended for private sector benefit may not be practical or effective. For example, some donor funding made as loans may be useless in smaller, poorer countries without well developed “swap” markets to address currency exchange risks. In such markets, firms would have to take the foreign exchange risk, an unlikely proposition.

There were some promising signs and lessons with respect to private sector engagement, for example, emphasis on consultation with the local business community in preparing Zambia’s Pilot Project on Climate Resilience (PPCR). These business organizations are affected by climate change, but their awareness of climate change is low and participation of such groups in consultations is not common. St. Lucia is working on a private sector lending facility for adaptation – an innovative, although still to be defined concept in that the eligibility criteria and extent of concessionality are to be determined. There were also articulate private sector representatives from several developing countries including Brazil, Honduras, Kenya, and Mexico. Several sessions had a distinct private sector emphasis including one on adaptation, another on public-private partnerships, and a third on hydro-met services featuring an innovative technology provider.

As we begin what are likely to be intense and difficult negotiations on the Green Climate Fund leading to Durban, addressing these challenges more effectively should be among the highest priorities.