Who Can Count to 100 Billion?

By Assaad Razzouk

On Thursday 10 November 2011, I spoke at an OECD / IEA workshop in Paris entitled “Expert workshop on tracking climate finance flows from the private sector and multilateral development banks.” Despite the dry title, the topic is of great significance: Developed countries have a collective commitment under the December 2010 Cancun agreements to “mobilize” USD 100 billion per annum by 2020 of “climate finance” for developing countries; and a predictable argument is ongoing about what “mobilize” means; what qualifies as “climate finance” and whether this aspirational USD 100 billion is on top of the capital flows which might currently qualify as “climate finance” from rich (even if some are a bit less rich than they thought they were a few months ago) to poor countries.

There are no existing frameworks to have an argument within, and the OECD, the IEA and others are therefore trying to build such a framework, hence the workshop I attended, and its attendance: OECD government representatives, IEA representatives, statisticians and data gatherers, policy wonks, representatives of the multilateral development banks and consultants. Participants at workshops like this one are trying to do the right thing: Establish a common definition of “climate finance;” attempt to harmonize relevant reporting methodologies; identify weaknesses in data gathering and try to do something about them, etc. –because the less rigorous the framework one applies to what is the USD 100 billion and how it is computed, the more the scope for disagreements between developed and developing, and the scope to wriggle out of doing anything additional.

Into the ring steps the Soros-backed think tank Climate Policy Initiative or CPI which released last month a report entitled “The Landscape of Climate Finance,” concluding that its “research suggests that at least USD 97 billion per annum of climate finance is currently being provided to support low-carbon, climate-resilient development activities” (page i). Miraculous! USD 97 billion is almost USD 100 billion, so there: we’re done, ahead of schedule! Even better, CPI has already figured it all out: “out of the estimated USD 97 billion in global climate funding, on average USD 55 billion is provided by the private sector, while at least USD 21 billion is provided by public budgets … [and] bilateral and multilateral agencies and banks also contribute another USD 20 billion by leveraging the public funding they receive” (see page iii).

The report is 101 pages. I read them all before the workshop because at Sindicatum we are investing USD 300 million in climate finance, we think we can invest billions profitably and therefore I hoped the report would help me find these providers of USD 97 billion per annum to talk shop. What I found instead is that most of the CPI report actually shows that the numbers cannot be trusted; and highlights where improvements need to be made in how we track data and which methodologies we should apply, in order to arrive at sound numbers. Indeed the USD 55 billion provided by the private sector appears to be a CPI estimate provided notwithstanding the fact that the “real scale and details of private finance are hard to grasp”, “much of the information collected is not publicly available”, “the OECD also tracks ‘net private grants’ provided internationally, but little is known about the objectives and recipient countries of these grants” etc. and by the OECD’s own admission, it doesn’t have this data. Furthermore, it seems to me that most of the USD 97 billion in the CPI report, even if it had no double-counting, which I doubt, is littered with “business as usual” loans and investments. In my comments at the Workshop, I said that very little commercial lending into renewable energy projects in developing countries is genuinely non-recourse finance (I cited a few examples) and this lending must therefore logically be excluded from any computation of “climate finance” because its non-recourse nature simply means that it isn’t climate finance at all.

CPI somehow nonetheless manages to hit the magic number, even though most readers of their report should conclude, as I did, that the USD 97 billion is not a sound number at all. It is hard not to think that CPI just thought it would be politically convenient to arrive at a number which, what a coincidence, was approximately USD 100 billion. Contrast this to my on-the-ground experience that there is enormous exaggeration by multilateral institutions, bilateral institutions, banks and private sector participants in relation to how much they are actually investing in “climate finance” and the only reliable numbers we can find are for grants and concessional loans. As I argued in a previous piece, our experience is that investment is declining in the very same field where ambitious USD 100 billion proposals (which probably will never see the light of day) are using up precious time and resources: The CPI report is a perfect example of time and resources being utilized to seemingly engineer the right answer because that’s easier than actually doing the investment work.

Nowhere near USD 97 billion is flowing per annum from developed countries to developing countries and it’s neither needed in that form nor to that extent. Far more powerful would be to encourage developing countries (via limited grants and concession finance) to put policies in place which the private sector can then leverage to mobilize the necessary investments (see my colleague Gareth Philips’ blog for an example). These would be clearly additional investments, i.e. not business as usual, and one could quantify them. I would guess that most of the money would be sourced locally, with foreign investors like us acting as catalysts and sponsors. The UNFCCC already provides a framework to capture this type of approach under its emerging Nationally Appropriate Mitigation Actions (NAMAs) efforts, or domestic initiatives such as ETS (the EU, New Zealand, Australia, California etc) or bilateral offset mechanisms (Japan)). By way of example, if a Government were to declare that new policies to reduce and ultimately remove fossil fuel subsidies was a NAMA and register this with the UNFCCC, then they could also monitor investment into the resulting actions. Grant aid and concession finance can be targeted towards this goal and even CPI would be hard pressed not to compute the figures correctly. In the meantime, I think it is quite dangerous to issue reports purporting that zillions are already being invested in climate finance when most of these investment are in fact business-as-usual: We are obfuscating the need to invest billions to deal with climate change by conveniently fudging the numbers instead of making sure that the price of carbon-intensive energy increases through policy initiatives which mobilize increasing amounts of private sector investments.

Assaad Razzouk co-founded and is CEO Sindicatum Group. Assaad was an investment banker at Nomura International plc in London, where he was successively Head of the Middle East Group, Head of Corporate Finance – Emerging Markets, Head of Corporate Finance – Financial ICT, and Deputy Head, Global Corporate Finance.  Prior to that Assaad was at Price Waterhouse. He is a graduate of Syracuse University (Summa Cum Laude) and holds an MBA from Columbia Business School.

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