http://fpif.org/songdo-fallout-is-green-finance-a-red-herring/
Songdo Fallout: Is Green Finance a Red Herring?
With the latest green finance talks in Songdo, wealthy countries have
taken another step toward financializing the world's response to
climate change.
By Oscar Reyes, July 16, 2013.
From the 29th floor of Songdo, South Korea's jagged "G-Tower," one
can glimpse the endless construction sites and vacant parks of an
emerging "global business utopia," to use the city's adopted slogan.
The newly built city, home to the UN's nascent Green Climate Fund
(GCF), proudly promotes its green credentials, including an
impressive network of underused bike lines. Unfortunately, these run
alongside 10-lane boulevards ruled by Hyundai limos and Korean
airline buses.
Songdo, in short, is a monoculture plantation of skyscrapers, shorn
of the diverse ecosystem that characterizes living cities. And the
G-Tower is the symbol that tops the lot: a skyscraper with a
Pac-Man-like cutaway, as though the institution is running from the
ghosts of the World Bank and other multilateral development banks.
Like the Fund itself-a centerpiece of the international climate
finance regime, designed to fund climate mitigation projects in the
developing world-it is currently empty.
A few streets away from the G-Tower, Songdo's convention center
recently played host to the fourth meeting of the GCF's governing
board. There, the GFC's 24 board members (government officials
selected on a regional basis) made several key decisions. These
include how the Fund will be managed (should money ever arrive), by
whom, and according to what rules.
The most widely publicized decision taken during the meeting was the
appointment of Hela Cheikhrouhou, a Tunisian national, as the Fund's
first executive director. She comes to the GCF from the African
Development Bank, where she led its work on energy, the environment,
and climate change. Prior to that she had a five-year stint at the
World Bank working on private-sector investment and infrastructure in
Latin America, and had spent eight years at Citibank before that.
Cheikhrouhou's biography reads like that of a candidate groomed by
the multilateral development banks and private sector in the
expectation that the GCF should become one of their own. But while
her appointment is a conservative choice, it was arguably the
least-bad option from a three-person shortlist that also included the
Dutch former head of the European Climate Foundation and a Colombian
official from the Inter-American Development Bank. The lack of
high-profile candidates was notable, although not surprising, given
the absence of any secured financing for the GCF and a requirement
that appointees relocate to Songdo.
Which private sector?
New leaders win media headlines, but institutional design and rule
setting tend to have more influence over time. The key structural
decisions taken in Songdo concerned the GCF's Private Sector Facility
(PSF), which was created to encourage private investment in projects
that reduce both the causes of climate change (by mitigating
greenhouse gases) and its impacts (by adapting to a warmer world).
These decisions walked a diplomatic tightrope-advancing the creation
of the institution while carefully avoiding debates over which
private sector the Fund is actually meant to target.
On one side, the developed countries represented on the GCF board
advocate a PSF that appeals to capital markets, in particular the
pension funds and other institutional investors that control
trillions of dollars that pass through Wall Street and other
financial centers. They hope that the Fund will ultimately use a
broad range of financial instruments.
There is a troubling circular logic underlying this, however. The
complex repackaging of debt to hide systemic risk was a key
contributor to the financial crisis in developed countries, resulting
in huge bailouts that increased their indebtedness. As a result, many
developed countries now claim that they have little money available
for climate finance, and that the GCF should look to financial
markets to make up this shortfall.
On the other side, many developing countries and non-governmental
organizations have suggested that the PSF should focus on "pro-poor
climate finance" that addresses the difficulties faced by micro-,
small-, and medium-sized enterprises in developing countries. This
emphasis on encouraging the domestic private sector is also written
into the GCF's Governing Instrument, its founding document.
The purpose of the PSF remained unresolved in Songdo, but many of the
rules needed to start its operations were agreed upon. A major
dividing line related to whether or not the PSF would have its own
"governance structure." This was opposed by many developing countries
amidst concerns that it would give the private sector the largest
voice in determining how this part of the Fund is run-potentially
opening the door to both generous corporate subsidies and excessive
financial risk-taking.
When the board returned to the issue the following day, a new Private
Sector Advisory Group had been added, with wide-ranging powers and a
composition that would have allowed the financial sector and other
corporations to fill eight of its 12 seats. Four of these seats would
have been allocated to developing countries. But the precedent set on
the board itself is not promising, with the developing country
private sector seat filled by a Canadian-Australian representative of
the World Business Council on Sustainable Development-a lobby group
for transnational corporations.
Further amendments followed, and the eventual decision was to set up
three committees governing the PSF: an Advisory Group with
private-sector members and, after much argument, up to two civil
society representatives; an Investment Committee to review proposed
instruments and spending decisions, including their compliance with
environmental and social safeguards; and a Risk Management Committee
to exert due diligence and ensure that the PSF does not engage in
overly risky investments. The precise composition and role of these
committees was not agreed upon, however, and will be up for
discussion again at the board's next meeting.
Developing a business model
The GCF board decisions on the private sector fit into a broader
discussion of the Fund's "business model framework" (BMF), the
language it now uses to discuss the overall vision and ground-rules
governing how the fund will operate.
Several other decisions about the BMF took place, most notably on
"direct access" and country ownership. Direct access means that
funding from the GCF would go to national governments, or national
and subnational institutions serving under them, for further
disbursal to relevant projects. "Enhanced direct access" is country
ownership with added bite, devolving more decision-making powers to
the country level and away from donor countries.
For the U.S. delegation, this was a leap too far, and it repeatedly
blocked any attempt to put the words "enhanced" and "direct access"
in the same sentence. For a brief moment it looked like agreements on
the entire business model would stall due to U.S. intransigence-an
inauspicious start for the fresh climate policy approach promised by
President Obama. Eventually, though, a compromise was struck that
would have the board consider "additional modalities that further
enhance direct access" at its first meeting in 2014.
Slow progress and fudged decisions were in evidence elsewhere as
well. For example, a long discussion on "financial instruments"
ensued. An agreement to begin with grants and concessional loans
already existed, but the Songdo meeting saw an extended debate on
whether these initial instruments "will" be followed by other
financial instruments or whether those others would merely be
"considered."
Participants haggled over three paragraphs of text, clause by clause,
for close to three hours. By that time, the chair intervened to note
that the compromise proposal was virtually identical to what had been
agreed upon at previous meetings. And so, they deleted the three
paragraphs so laboriously deliberated.
The silent treatment
In its treatment of observer organizations and transparency
commitments, the Songdo meeting could only be described as
regressive. Civil society "active observers," who can intervene in
board discussions (but not decisions), were entirely silenced on the
last day of the meeting, and were refused permission to discuss with
board members.
A debate on webcasting, meanwhile, occasionally flirted with reality
but mostly embraced surrealism. An initial discussion paper, prepared
by private consultants, had put a $30,000 price on webcasting, which
observers were quick to point out was 10 times higher than the cost
of equivalent webcasting services used by the UN's Adaptation Fund
board meetings.
Australia and the United States, meanwhile, led the charge in
complaining that webcasting should be avoided for fear that it could
distort the board's discussion. The Democratic Republic of Congo
(DRC), Zambia, and Sweden retorted that transparency in
decision-making was not an optional extra. Despite this, the board
agreed to a "compromise" (proposed by France) that its recordings
would be posted online three weeks after the event. In response, the
DRC board member noted that in this context information is a
perishable good. The decision on webcasting, he might have added, had
already gone rotten.
The Songdo board meeting left many issues unresolved. The pivotal
questions of when and how the GCF will be funded, and by whom, remain
the elephant in the room. Those issues sit at the top of a crowded
agenda for the board's next meeting, scheduled to take place
September 4-6, 2013 in Paris. That's a considerably more romantic
setting than Songdo. But it remains to be seen whether the GCF will
continue its flirtation with the financial sector-or genuinely
embrace its pro-poor mission-at the last board meeting before its
formal launch.
Oscar Reyes is a writer and activist focusing on climate and energy
finance. An associate fellow at the Institute for Policy Studies, he
recently helped to launch climatemarkets.org, a website connected
with IPS' Sustainable Energy and Economy Network.
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