Earlier this year we spoke with the LDC Group and IIED about private sector channels for NDC finance in the world’s poorest countries already on the frontline of climate change.
There’s a cruel irony in the leader of the world’s richest country pulling out of the Paris Agreement, just as the world’s poorest countries are showing such mettle in walking the talk. “In the last six years, despite the severe challenges they face, the world’s Least Developed Countries have come a long way from their original position of victimhood on climate issues. They now show some of the greatest thought leadership and most ambitious NDCs of any countries in the world” observes Ethiopia’s Gebru Jember Endalew, the new Chair of the UNFCCC’s LDC Group. I met him this spring with IIED’s climate team and their Adviser Saleemul Huq to discuss how LDC’s can engage the private sector in NDC finance.
Insurers show the longest helping-hand
The easiest point of entry is clearly through insurance because of its valuable role in providing for loss and damage, as well as adaptation. Countries like Ethiopia and Bangladesh are further ahead than most other LDCs in using insurance tools. Everyone acknowledged that insurers need good data before they can enter a market – this is surely another vote for the new climate finance ‘data commissioner’ we’re championing. As an example, Ignitia ,were recent winners of the FT-IFC Transformational Business Awards helping to increase smallholder productivity and demonstrating the incredible value of accurate, widespread weather-forecasting from satellite data.
Although the data requires verification on the ground for insurance claims, every farmer can collect data for themselves, using simple, very cheap weather station instruments. Gebru noted “In Ethiopia crop insurance has expanded to livestock insurance, this is a big deal for pastoralists when they lose their cows and camels because of droughts.. but if droughts happen year in, year out will insurers continue to be interested in our markets, will they still make a profit providing affordable insurance?” he added, “insurance needs to be complemented by action on the ground to bring down emissions”.
Insurers also need agreed reference scenarios, so they – and other actors – know what they should be planning for in terms of adaptation measures, thereby facilitating standardised approaches and specifications. We discussed the idea of adaptation benchmarks in our recent ‘anchors for Paris’ blog.
The conversation turned to the scope for insurers to be LDC allies in global diplomacy. The financial protections and benefits they can bring to LDCs are clear and they can also communicate the risk of countries and regions becoming uninsurable if extreme weather events become too frequent due to increasing carbon emissions. Global insurers Willis Group along with re-insurers Swiss-Re and others are collaborating with the UN on several initiatives such as the PSI and R!SE and could be the LDC Group’s greatest allies. Gebru asked, “what if these insurance initiatives came together with the Red Cross Climate Centre, Global Resilience Partnership and others working on risk reduction, to take finance for resilience right down to the local community level?” We interviewed IIED’s Clare Shakya about local financing needs here.
How is private finance currently active in Ethiopia and Bangladesh?
Gebru recalled how Ethiopia was the first country to publish their INDC and people would say “but you’re just making a shopping list!” This is precisely the point, Ethiopia published a level of detail not yet seen in many other NDCs. He added “There needs to be more ambition, not just amounts but making flows more transparent” and he asked how others can be guided to further elaborate their NDCs. He described how engagement with the private sector was still at an early stage and he saw significant potential for the country’s emerging network of industrial zones, owned by China, India and others, to be green exemplars. China contributes about one-sixth of all lending to Africa and Ethiopia is one of the largest recipients of Chinese investment with financing for dams, roads, rail and manufacturing plants worth more than US$12.3billion.
Achala Abeysinghe, IIED’s lead legal adviser to the LDC Chair emphasised, “Downward accountability from national to local levels is crucial and needs to enable rapid, ambitious action and learning by local communities and the private sector. Without it, LDCs will find it difficult to mobilise local capital markets and spur local innovation.”
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Saleemul Huq, Director ICCCAD and senior IIED Fellow, observed “One of the defaults of LDCs is a very public sector mentality. They don’t see the private sector playing a part, they don’t see the potential, they have very little knowledge of how to deal with the private sector”. He described how in Bangladesh “we’ve been researching the private sector to see who might be involved and found a set of companies in the renewable energy area which are very active, already making money, which suggests that subsidies may not be needed any more. But technology, knowledge and support may still be needed”. He explained how they are also exploring the potential for adaptation technology, looking at the resources national companies and banks have to offer. He sees great opportunities to work with the local markets but even in Bangladesh there’s still a lack of understanding in government around the scope for private sector financing. Perhaps another FT-IFC Transformational Business Awards winner BRAC’s apprenticeship scheme, described last week, can help here.
What will it take to make LDCs investment grade?
Across the LDC universe, investment interest, where it exists, notably in Kenya, Tanzania, Mali, Senegal, Gambia, Ethiopia and Bangladesh is biased towards energy opportunities. While this is valuable, other vital needs for adaptation and other areas of mitigations are being ignored. For example in energy efficiency, mass transport, water and waste management and sustainable agriculture and forestry.
R!SE and ClimateScope analysis of ‘country investibility’, invariably puts LDCs at the bottom of the list. But the patterns of who invests in whom are changing. Saleemul noted that the Bangladesh Chamber of Commerce recently lead Bangladeshi investor delegations to Ethiopia and Uganda. Emerging market to emerging market investment flows are likely to continue to rise because of better understanding of local opportunities, overlooked by investors from further afield.
And what of that gap between LDC needs and the global capital markets? The deepest tension in global climate negotiations has always been the ‘carbon debt’ accrued by the developed world and the consequent restitution owed to the least developed nations. Pretty much all the focus has been on what northern governments owe to southern ones. Yet there’s a much larger pool of capital which could help balance the books, aiding the transfer of wealth and lifting the prospects for all. It lies in the pensions savings (and insurance monies) of primarily northern individuals. Given the nature of their liabilities, these funds are inherently long-term and understandably risk averse. So the challenge lies in building their trust and de-risking the channels to invest in geographies where they haven’t invested before. It’s about building confidence along the investment supply chain – the rewards are massive – $12 trillion globally according to the Business Commission.
Thus, in addition, to making sure that project and fund proposals are investment ready, country fundamentals also have to be right. On the latter point, we touched on two essential matters:
To address the challenge of government inertia towards private sector engagement, it’s clear that greater visibility of the views of local capital market participants would help – more often than not, they know precisely what governments need to do to open local markets to private capital, and make them more accountable and transparent. Clearly a country like Ethiopia is doing somethings right to attract so much inward investment from China, the challenge is, therefore, to make it ‘NDC aligned’.
The conversation also turned to Blockchain. Was this the missing element of MRV to give investors the confidence to invest? The thought is bubbling up in many places but no-one is yet sharing examples of successful transactions which can demonstrate the proof of concept for NDC financing. Watch this space.
 Study by the John L. Thornton China Centre, Brookings Institution
 China Africa Research Initiative, John Hopkins School of Advanced International Studies, Washington DC