John Kerry’s new climate finance bid

Greetings from Washington, where unusually high temperatures during the IMF and World Bank spring meetings have kept the climate on everyone’s mind. As the meetings end, there is (sadly) little sign of a big breakthrough on climate financing, World Bank reform or debt restructuring for poor countries. (Although, as perennial optimists, we hope maybe the ministers will deliver a surprise this weekend.)

But there are definitely some seeds of good news, such as a new climate initiative from John Kerry, US special envoy on climate. Below, we bring you four new takeaways from the final days of the IMF/World Bank meetings. (Gillian Tett)

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1. Kerry kick-starts a new blended finance plan

We have observed before that the phrase “blended finance” is the financial equivalent of spinach — namely something that seems worthy, but boring. In theory, the concept is exactly what is required to move desperately-needed capital into emerging markets for the green transition; it essentially uses public sector or philanthropic money to underwrite (and de-risk) projects backed by private funds. But, in practice, relatively few scaleable projects have emerged, partly because it requires collaborating across bureaucratic silos.

But this week John Kerry, the American special envoy on climate, is unveiling a new template that he hopes will get traction in the coming months — and spur multilateral development banks into more action. More specifically, he hopes to use about $15mn of US State Department funds, augmented with $35mn cash from USAID and philanthropic foundations to create a $50mn “first loss” tranche for climate initiatives in poor countries.

This pot sounds tiny. But “that $50mn will then invite a mezzanine level engagement by others like international financial institutions or development finance institutions”, Kerry told Moral Money. He also hopes to raise a far bigger tranche of senior debt from private sector asset managers, so that “ultimately you could have $1bn deployed” from that initial $50mn “That is the way we want to accelerate [climate finance] and deal with risk upfront.”

There are several potential hurdles to be overcome. It is unclear whether the IFIs or DFIs would accept a mezzanine role in a capital structure, since they have historically insisted on seniority. It may also be hard to find shovel-ready projects. But some big asset managers, such as BlackRock, seem eager to back the concept and Kerry says he will be actively “targeting Gfanz [Glasgow Financial Alliance for Net Zero] membership” for other injections of senior debt, with the hope that “the template will take off” at December’s COP28 summit.

If so, the US government may not be alone: the gossip in DC this week is that when the UAE hosts COP28 it will use some of its vast largesse to provide the first-loss tranche for its own blended finance initiatives. If nearby Qatar “can spend $200bn to organise an event to kick a ball around”, the UAE should be “ready to do something similar to look like they are saving the world”, observes one well-placed source. Either way, if Kerry — or the UAE — can create a workable and scaleable template, it could get more finance flowing. Here, at least, is hoping. (Gillian Tett)

2. Greenwashing worries leave Africa with few options for climate funding

If you want to understand why blended finance is needed, it is worth pondering some other nuggets of news this week. In recent months a flood of private investment funds have emerged in major economies for climate funding, with momentum helped by the passage of the US Inflation Reduction Act.

But sub-Saharan Africa remains a climate funding desert — as shown by a startling presentation from the economists Anna Belianska and Giovanni Melina. This indicates that $43bn has been committed by climate funds to emerging markets this century. (Remember, in 2009, rich nations promised they would send at least $100bn a year in climate finance to poorer countries by 2020). However, out of this only $11bn has actually been disbursed, and of that only $3bn has gone to sub-Saharan Africa.

What can these countries do? The green bond market is largely out of the question for many. South Africa dominates issuance with just a smattering of offerings by other African nations. A “substantial risk of greenwashing” by these countries has left investors wary of African green bonds, IMF economists said.

Carbon markets offer potential, but are too new to be a viable option now, they said. So concessional finance — which includes below-market borrowing rates, repayment grace periods, and grants — remains the largest source of climate funding for these countries. But this is still very modest in scale. Hence the challenge — and the need for leverage. (Patrick Temple-West)

3. The future of sovereign debt restructuring

Another hot topic this week was whether the IMF can bang heads together to offer sovereign debt restructuring and relief to poor countries. Some profoundly alarming presentations have been floating around this week showing that poor countries are either being completely shut out of the capital markets after the recent banking turmoil, or forced to pay exorbitant rates for new funds. On top of this, the deepening US-China split has undermined attempts to get Beijing to work with western creditors to create joint restructuring plans for countries that default.

But there was one chink of light: on Wednesday the World Bank, IMF and India (which is the current president of the G20) oversaw the first meeting of a new Global Sovereign Debt Roundtable, after which they issued a statement that pledges to jump-start restructuring initiatives and increase data sharing.

Sadly, this statement did not make any commitments about new funding for restructuring, and it is unclear how far China will collaborate with the others. But the fact that this group met at all is progress — of a sort. Watch what happens next to Zambia, which is in default and could be the first test case of whether collaboration is getting easier. (Gillian Tett)

4. Congo finance minister eyes carbon market windfall

The tough new emissions rules for carmakers that the Biden administration proposed this week will have significant ramifications for the Democratic Republic of Congo. Daniel Yergin, an energy expert and author of the timeless book The Prize, on Wednesday wrote that the accelerating clean car push meant a mining boom was coming. Cobalt is a key ingredient for most electric vehicle batteries. Its demand is surging. And the DRC produces 70 per cent of the world’s cobalt.

Speaking on Wednesday — as the Biden administration unveiled its proposed electric car rules — Nicolas Kazadi, the DRC’s finance minister, told us at the IMF that the number of poor people in the DRC was still growing.

“The mining sector is not enough to create more jobs,” he said. To diversify, the country is focusing on refining raw minerals domestically rather than in the US and other countries. Huge smelters are in the works, he said.

Despite its natural resource riches, the DRC is “among the most affected countries by climate change”, Kazadi said, with shifts in rainfall patterns set to wreak havoc on the country’s agriculture. The finance ministry estimated it faced a $300bn climate funding gap by 2030, he said. (Yes, billion).

Where’s the DRC going for this money? Carbon markets.

“We want to raise funds on the carbon market,” he said, but “the price given for Africa is very low”. With help from the World Bank and other players, carbon prices in Africa could be valued higher. And just $3 for a tonne of carbon could raise $450mn a year, with that sum growing into the billions as carbon prices increased, he said. The carbon sequestration that Congolese forests could provide for the world made the country a natural choice for carbon market money, he argued. (Patrick Temple-West)

Smart reads

• The EU’s new Net Zero Industry Act suggests it “lacks the long-term focus the issue [of the green transition] demands,” argues the FT’s Claire Jones.

• Fatih Birol, head of the International Energy Agency, warns investors in new fossil fuel projects that this is “not only a bet against the world reaching its climate goals — it is also a risky proposition”.