Who benefits from mobilising private sector investment for climate transition?

By Giedre Jokubauskaite 

The private sector has arguably caught up with an urgency of climate transition. This is visible from various climate initiatives that feature banksinsurersconsultanciesmultinational corporations, and many others. The idea of ‘mobilising private investment’ for climate transition has also been an essential part of an increasingly popular policy discourse about how to finance green transition. The framing of private investments as key to the transition happens in two steps: firstly, articulating ‘a gap’ of finance needed to achieve climate objectives, and secondly, concluding that only the private sector, with support of the public sector in de-risking and incentive provision, can fill such a gap. Daniela Gabor aptly calls the systemic logic of this narrative the ‘Wall Street Consensus’. However, the privatization of a sector with the key support of public funds is not new: it has originally been applied to funding sustainable development, and now been revamped for policies on ‘green’ transition.

Private sector participation in climate action is crucial – of course it is. Everyone needs to do, well, something to transition towards systems of production, distribution and consumption that can sustain everyone without depleting and exceeding earth’s resources. But this discourse about aligning private sector investment with climate goals misses one crucial point: that is not about whether private sector should be part of climate action, but about how and for whose benefit. Some key questions must be asked before privately owned debt, equity and investments start proliferating: What can states do to get the private sector to contribute to just transition appropriately? If we need both sticks and carrots to change behaviour of companies and consumers, then how much stick will ensure that carrots are working well enough? And how can we make sure that everyone, also people in other countries, has enough carrots when implementing climate objectives?

The point I am making here is that the emphasis on ‘mobilising private finance’ leapfrogs over these strategic considerations and often takes the role of private sector for granted. This is an issue, because ‘investment’ and debt are intrinsically interlinked, and decision-makers should know better than to sleepwalk into a ‘solution’ to climate emergency that leads to more indebtedness, less responsibility, and growing dependence on funders based in the Global North.

The link between debt and private investment in climate transition

Debt has long been a ‘dark side’ of financing ‘sustainable development’ in the Global South– be it through concessional loans with little or no interest, or the commercial lending using ‘normal’ interest rates that depend on borrower’s credit rating and borrowing history. The large volume of direct lending to states that grew ‘on steroids’ throughout the twentieth century and  reached new hights during the covid 19 pandemic, continuously calls for discussions about debt sustainabilitysuspension, and restructuring. Sometimes, in cases where countries can no longer pay for their basic services because of their debt obligations, there have been calls and attempts to cancel public debt. Given the many political challenges and endless campaigns by the civil society, new ways of ‘doing’ development were meant to emerge: with less political baggage, little cost for the taxpayers in the Global North, and ideally, more profitability for the funders. This is where private sector investment enters the stage, although it had been evolving as a separate ‘branch’ of development finance at least since the late 1950s.

Let’s explore how this dynamic of private debt looks like in practice in the field of financing the climate transition. Imagine that country A needs to develop its wind power, because it has promised to do so under the Paris Agreement; and has no available funds, technology or adequate skills to do so. In a traditional public lending scenario, country B would likely give country A a concessional loan, possibly via a multinational development bank (MDB) such as the World Bank, which would guide country A through all the legal, financial and technical aspects of negotiating access to a loan and required technology, and which would plan (and ensure) its subsequent debt repayment.

In the alternative debt scenario of private sector investments, country A will likely be encouraged by the MDBs and/or donor countries to create an ‘enabling environment’ for investors, for instance, by amending its land transfer regulations, creating a predictable regime of granting concessions over wind power, or lowering tax rates on wind power generation. Encouraged by such ‘enabling environment’, investor C from country B will fund and/or implement the wind power project. In legal terms, a special purpose vehicle (SPV) will be created to take on any risks of project non-completion, non-performance and non-repayment, backed by a guarantee by country A. Investor C and country B (via tax revenues) will over time receive return from this investment, while consumers in country A will have to pay a negotiated fee (or more) for electricity generated by this project. As a result, the project is likely to generate ‘clean’ energy and reduce carbon emissions.

However, on a flip side, consumers will pay more than they would otherwise; the government of a state implementing the project will have taken on the entire financial risk with little or no financial return; the tax revenue of the project will be negligent; and, as sometimes happens, communities from the project area will have lost their access to land and livelihoods as a result.

Lack of transparency

We call this kind of transaction ‘an investment’ because dominant policy discourses tend to focus on the positives of such commercial deals. Yet, the downside of this kind of investment is indebtedness and extension of economic dependence. The key difference is that this kind of private debt is not visible in the recipient country’s balance sheets, and it is therefore more difficult to trace, scrutinise and challenge. This is particularly the case in the light of the confidentiality that shrouds public private partnerships and private sector investments, and a repeated refusal of the private sector and its funders to address such transparency concerns.

All this is to say that, arguably, debt relations did not disappear with a growing support to private sector investment. They only became more subtle, and less visible. While there are differences between promoting private sector investment by public funds and direct lending to states, the core features of private sector investments are remarkably similar to the features of a debt relationship.

Firstly, as in case of public debt, a private sector investment also creates a long-term regulatory and financial commitment by the country where a project is taking place. This commitment towards funders comes with economic, environmental and social conditions attached, same as in case of more traditional public sector lending. Secondly, given the profit generating imperative of any investment, people in a country where such investment is taking place end up paying more for an implementation of a project than they would have done if this country had funded the project directly from its national budget. In other words, the issue of value accumulation for the shareholders of the investors, or the creditors financing their activities, remains central in any project design. Thirdly, these transactions are based on a systemic logic of economic and technological dependence, whereby a country receiving an investment has no choice but to create good conditions for an investor to invest, because it needs the capital and technologies to ‘green’ its economy. In case of climate emergency, this need, among other things, is propelled by national obligations under the Paris Agreement.

So what? What’s wrong with private sector debt?

What is the problem with the outcomes described above? If it moves a given country towards climate transition and more renewable energy, wouldn’t this be good enough? Don’t we have to accept that some sacrifices and costs are necessary, and that some ‘externalities’, otherwise known as ‘environmental and social impacts’ on communities and final consumers, are inevitable? There are many issues with such language of inevitable sacrifice for a greater good, or the idea that not everyone can ‘win’ from a climate transition – and not enough room to discuss these issues here. However, here are some of the legal and policy issues that often underpin these transactions:

  • Intergenerational inequity, or kicking the ball down the road for the future generations to pay for the current transitional measures. Importantly, these ‘future generations’ are not based predominantly in the Global North, where most private investors are located. These future payments for services are, among other issues, a ‘hidden cost’ of all public private partnerships (PPPs) and other private initiatives. This cost has to be taken seriously, in order to appreciate the full extent of wealth redistribution and financial burdens that are accumulating through private debt. This is a particularly salient point for climate policy, given that intergenerational conflicts are already pronounced in this context.
  • Undermining the “common but differentiated responsibilities (CBDR)” principle, or evading responsibilities for historical carbon emissions. The UN Rio Declaration (Principle 7) and the UN Framework Convention of Climate Change (Article 3) posits the CBDR principle as a way of bringing together the interests and concerns of developed and developing states. When international environmental law architecture was originally negotiated, developing countries were willing to accept climate change as a ‘common concern’ if and only if their responsibilities were different from responsibilities of those countries that originally caused the problem of climate emergency. States in the Global North passing on the responsibility to private sector to address climate change – and indirectly expecting the populations of developing states to pay for related transitional measures – are therefore acting against the CBDR principle and the ideas of climate justice that it represents.
  • Neocolonialism, or upholding dependence of countries in the Global South on the capital and technologies of the Global North. With a growing pressure to combat climate change, some states have no options but to rely on climate technologies that are being developed in the Global North. If these technologies are transferred in the process of private investments, they become an asset for the investor, and a liability for the state that is relying on them. In other words, protected technologies that are used to combat climate change can become a source of wealth generation and extraction for tax paying actors in the Global North, rather than a mechanism of knowledge sharing and international cooperation, as they are often portrayed in international policy debates.

Are there really no alternatives?

Given these and many other downsides of private sector debt as a mechanism of green transition, we must ask again: are there really no alternatives? To answer this positively would mean to give up climate justice as a reference point for policy decisions.

Various alternatives do exist: the Green New Deal style public investments that don’t rely excessively on borrowing from financial markets, or better still, bottom up alternatives that push for social and economic innovation; the levies aimed at carbon majors and other most polluting industries which don’t permit passing the cost down to the final consumers; various initiatives focusing on degrowth rather than green growth; climate reparations; and any other mechanisms that redistribute existing wealth towards countries that emit little and need most assistance, and which ensure direct participation and co-ownership of projects by local communities.

Either way, a necessity of private sector investment for climate transition is a false necessity.

Giedre Jokubauskaite is Senior Lecturer at the University of Glasgow.

ImageFas Khan on Unsplash

Note: This blog was originally published in the Debating Development Research Blog in June 2023.