Green Climate Fund fails to strengthen private sector engagement, finds study

The Green Climate Fund (GCF) is the world’s largest dedicated multilateral climate fund and aims to support climate mitigation and adaptation efforts in developing countries. Mobilizing financial resources from the private sector is an important priority for donor countries supporting the GCF. However, the GCF has so far underperformed in this regard.

According to a Climate policy study by Thomas Kalinowski (Ewha Womans University, Seoul, and Research Institute for Sustainability, Helmholtz Center Potsdam), this is due to numerous shortcomings in the GCF strategy. The Green Climate Fund was created in 2010 within the framework of the United Nations Framework Convention on Climate Change (UNFCCC).

It currently manages some 200 projects worth a total of $40 billion, of which the private sector represents only a small part. This is due to several reasons, as Thomas Kalinowski explains: “This lack of commitment from the private sector is largely due to the perception that investments are unlikely to be profitable. Attractive business models are lacking, especially regarding to the climate.” “Adaptation and investments in particularly vulnerable countries in the Global South are considered excessively risky.”

An exception to this is the renewable energy sector, where private sector participation in the GCF is concentrated. According to Kalinowski, this suggests that private climate finance from the Global North is unlikely to play a decisive role in enabling the paradigm shift towards sustainable development in the Global South. In view of this, public funding for development cooperation should not be reduced.

Private sector projects are financed with public funds.

As of September 2022, the Green Climate Fund had 47 approved private sector projects (out of a total of 207 projects). Five of these 47 projects had expired and were no longer in execution, representing a much higher failure rate compared to the public sector, where only two of 160 projects failed. This leaves 42 private sector projects, with a volume of $16.9 billion, out of a total of $40.2 billion in GCF funds. This means that 21% of all projects and 42% of all project funds are allocated to private sector projects.

However, this is not the full picture, as Kalinowski’s analysis shows. In fact, 22% of the total volume of 16.9 billion dollars invested in private sector projects are funds provided by the Green Climate Fund itself. The rest comes from other, largely public institutions, such as the European Bank for Reconstruction and Development (EBRD) and other regional or national development banks.

“In other words, a large part of the financing of Green Climate Fund projects for the private sector does not come from the private sector, but from public sources,” explains the political scientist.

Short-term profit interests versus long-term transformation

However, more important than the quantity of private projects is their quality. Kalinowski highlights the urgent need to ensure that private sector projects are compatible with the principles of the GCF and good development cooperation in general.

“It is essential that climate projects in the Global South are integrated into national climate and development strategies. Efforts to strengthen the participation of private sector and civil society actors in the Global South, and to improve the business environment more broad in recipient countries, they are more “It is more important than maximizing private capital flows.”

If these aspects are not adequately considered, GCF and private climate finance risk increasing the already high external debt burden of countries in the Global South, further destabilizing financial markets and exacerbating economic dependence.

Kalinowski concludes that although renewable energy generation is preferable to the continued exploitation of natural resources, this alone will not provide a path to sustainable development in the Global South.

Provided by Forschungsinstitut für Nachhaltigkeit Helmholtz-Zentrum Potsdam