Towards a sustainable, and transformative international financial system
Image: The big shift
Are we on the right track?
By: Sandra Guzmán Luna
On 22-23 June, a major meeting entitled "A New Global Financial Compact" will take place in Paris, France, originally convened by President Emmanuel Macron of France and the Prime Minister of Barbados, Mia Mottley. The meeting was born out of a strong demand from developing countries that, under financial pressure from the pandemic, the economic crisis, and the climate crisis, have been forced to seek financing from institutions that, far from helping their stability, have increased their external debt.
The limited fiscal space has reduced the capacity of countries to invest in addressing climate change and has increased the inability to address structural problems such as deepening poverty, unemployment, and the increase in illegal activity in response to the economic precariousness experienced in many countries, which threatens the security of the population, particularly in the case of Latin America and the Caribbean. In the context of the pandemic, illegal activities associated with the sale of drugs have increased in the region and the world, intensifying the levels of violence (EL PACCT, 2022).
The decisions coming out of COP27 called for the first time for international financial institutions, including multilateral development banks, as well as central banks and others, to act on climate change. This call was not an accident, it was the result of constant pressure to connect the reality of international financial institutions with the changing needs of the world. While the institutions that make up the World Bank Group have been developing what they call "Alignment with the Paris Agreement" (WB, 2022) , which seeks not only to increase climate finance but also to align their operations to this purpose, there is a fundamental question about the "enforceability" of such actions and to what extent they are really a paradigm shift.
In Bonn, Germany, in the negotiation sessions leading up to COP28, this issue was taken up again as part of the Global Stocktake discussions, where questions were asked about the role of these financial institutions in mobilising and providing finance. Notably, representatives from countries such as Saudi Arabia pointed out that the role of these institutions should not be discussed in the context of the United Nations Framework Convention on Climate Change (UNFCCC). However, most participants recognised that the governments of the countries that are signatories and ratifiers of these global agreements are also "shareholders" of these financial institutions and are therefore the ones who must send clear signals and mandates for these institutions to change the format and direction of decisions.
In March, in the framework of the spring meetings of the World Bank and the International Monetary Fund, it was emphasised that these institutions, created in a post-war and reconstruction context, are living in a quite different moment of multiple crises that should move them towards reform. However, it is a transformation that is required, in which their objectives and schemes of action and functioning are redefined.
The leaders of these institutions cannot continue to operate on the same premises of making money from the extraction of nature and from already impoverished countries. Their leaders must understand that the climate crisis threatens the stability of the entire financial apparatus. Services and productive activities are already threatened in a context of climate crisis and this limits the generation of economic capital, which will force countries to ask for more financial "support" and increase their demand and dependence on these institutions, but their limited repayment capacity will also be a threat to the financial system, which will soon find itself with a limited flow of capital. In other words, this is only part of a vicious circle that will affect the financial apparatus, whose original flaws must be addressed, or it will be a failed system that will soon cease to be functional, giving way to new forms of financing actions that could fuel illicit activities in countries.
While there is progress in terms of climate change consideration in financial institutions, and there is a growing wave of initiatives on the subject (TCFD, TNFD, GFANZ, and others), the reality is that the integration of the issue at the top of the priorities of these institutions is still a long way off. Accelerating the capacities of institutions in this area at all levels (managerial and technical) will be a major challenge. But it will also have to be accompanied by the strengthening of citizens who can demand better accountability and who can accompany these processes in a structural manner. In other words, civil society in its various forms will play an especially significant role in pushing for these changes to take place. For their part, governments will have to continue to make progress on the regulations mandating these structural changes; while the private sector, also in its various forms, will play a role, but its participation will have to take place in a context of clear rules and not in voluntary schemes, which to date have not been a guarantee of success.
In conclusion, financial institutions are not immune to climate change, on the contrary, they are highly vulnerable and therefore need to be more responsible for addressing it. Although actions are already underway, the road is still long, but there is no time to wait, and more radical and deeper action is needed if the problem is to be tackled. In this sense, there is an international debate on what should emerge from this summit to be held in Paris, and civil society has analysed various messages that could mark the thermometer and indicate progress:
1. Redefining historical debt schemes: This includes debt cancellation for the most vulnerable and least developed countries. Renegotiation of debt schemes for countries that need fiscal space for climate action, such as emerging economies. These schemes can be so-called debt-for-climate action swaps and nature protection, but whose agreements must be made under principles of fairness, transparency, and respect for human rights, avoiding the creation of perverse incentives.
2. Redefining financing schemes according to the needs of developing countries: This implies accelerating public funding for adaptation and addressing loss and damage, in the form of grants and direct access to finance schemes, as this is the main need of developing countries. Accompanied by an investment in processes to decouple economies from extractive activities, as in Latin America and the Caribbean, the countries with the highest emissions receive 10 times more income from mining and oil activities than from sustainable activities (GFLAC, 2022), a pattern that must change.
3. Immediate mobilisation of the 100 billion pledged and it is scaling up. The provision of $100 billion is an obligation and its fulfilment is a necessary act to increase confidence. However, its scaling up is especially important to meet the needs of countries, and thus to design a new collective and quantifiable climate finance target, which should be a minimum of 500 billion dollars per year, considering the needs identified so far in developing countries. These needs should be accounted for in a comprehensive manner and with international assistance, to have a better calculation. These immediate needs must be covered by public and predictable resources and through mechanisms such as the Green Climate Fund, the Adaptation Fund and others that have better equity in decision-making, but whose access schemes must also be reformed.
4. Cessation of investment in new fossil fuel plants. This should include a strong announcement to cease investments in new fossil fuel extraction, exploration, and production plants from 2025 as a central pathway to achieve emissions stabilisation by 2030 and in line with the Intergovernmental Panel on Climate Change (IPCC, 2022).
5. Transforming finance flows: The clearest signal will be sent when financial institutions begin to integrate climate change into all their operations and make all finance flows consistent with low-carbon and climate-resilient development, as outlined in Article 2.1.c of the Paris Agreement.
6. Improve transparency and participation schemes: These changes can only be possible if financial institutions and countries commit to creating robust and transparent structures that show the progress of these changes in the flow of investments. And this must be accompanied by strong citizen participation schemes including women's groups, youth, and local and indigenous communities that can actively verify that these changes are happening. That is, to allow organisations and groups to move from being observers to being active entities in achieving the objectives.