OP-ED
TO HELP SCALE CLIMATE FINANCE, MDBS MUST SEEK REPLICABLE LEVERAGE
Combining public priorities with private investments is the key to climate action – but speed is of the essence By Gernot Wagner
T he temptations are all too real. Headlines come to those with creative, innovative, first-of-its-kind solutions. But successful climate finance means the opposite: boring, replicable leverage of limited public funds to channel profit-seeking investments in the right direction. Saying this out loud feels like stating the obvious. I am not the first to recognize that charity can’t solve where the profit motive points in the opposed direction. The math couldn’t be clearer: Charitable dollars, almost by definition, can only amount to a portion of the profits earned from activities that benefit from the status quo. That goes for individual efforts as much as for multilateral development banks (MDBs) and other funds spending taxpayer dollars at home or abroad. Throwing one’s hands in the air – writing off charity altogether – of course, is not the answer either. There is plenty of good even the most limited of donor funds can do and there is indeed a name for this search for leverage
that has found its way into most any MDB conversation around climate and development: blended finance. This call for blending public and private funds begins with the understanding that one alone can’t do. Public funds on their own are too small to fix it all, while leaving private funds to their own devices would, if anything, exacerbate the problem. The answer then lies in combining public priorities with private investments. The devil, of course, is in the details. For one, there is a fundamental difference between investments aimed at helping people cope with higher temperatures and more extreme weather events leading to everything from more frequent and intense droughts to floods due to the burning of fossil fuels and to transitioning away from fossil fuels altogether. Traditionally, investments in climate resiliency have been seen to be in the purview of public finance. Climate risk affects us all – one of the original reasons why society does not do
enough to cut carbon dioxide and other greenhouse-gas emissions in the first place. It is only fair, thus, to look to governments for help building the kind of infrastructure or invest in more heat- resistant crops that improve people’s lives. That need not be the case. Private investors will increasingly face the kind of incentives that lead them to invest in resilience measures the world over. That goes for insulating one’s home to better protect against heat. It also goes for increasing crop yields on a hotter planet. One such private mechanism is insurance. If homes in certain areas face ever higher insurance premiums due to increased flood and wildfire risks, or they effectively become uninsurable altogether, the market may well work as intended. That kind of adaptation, of course, will be highly disruptive, which is once again where governments and public funds enter the picture. For one, private insurance helping guide society toward more positive outcomes assumes the existence of
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