Earlier this month, leaders of the G7 reaffirmed a pledge to mobilize $100 billion per year from public and private sources to help developing countries tackle climate change. This pledge is long standing, tracing its roots back to the Copenhagen Climate Summit in 2009—it is money that is desperately needed but that, to date, has not been readily forthcoming.
“To make the $100 billion a reality, G7 nations must seek new funding mechanisms beyond conventional aid. Innovative finance offers a way forward.”
The path to making this pledge a reality is fraught with complications. Since it first surfaced, skeptics have asserted that the only way for developed countries to live up to this ambitious pledge in today’s fiscally constrained environment is to reshuffle Overseas Development Assistance (ODA) budgets rather than contribute new and additional public funds—essentially, fulfilling the pledge through an accounting technicality. This would mean diverting funds from global development priorities such as health, education, and food security to tackle climate change instead.
To make the $100 billion a reality—and not just an accounting technicality—G7 nations must seek new funding mechanisms beyond conventional aid. We believe that innovative finance offers a way forward.
While still in its infancy, innovative finance has proven a valuable tool in mobilizing private sector resources to fund global development in new and more efficient ways. For example, the International Finance Facility for Immunisation (IFFIm) finances vaccine programs using long-term donor pledges to issue bonds in the capital markets. UNITAID developed a micro-levy on airline tickets raising funding for HIV/AIDS, malaria, and tuberculosis. Spurring greater use of successful innovative finance mechanisms like these will require us to make four key changes:
- ODA as a catalyst: We need to create a development community-led imperative for designing and scaling financing mechanisms that can sustainably mobilize private sector capital in new and more efficient ways. This mandate must focus on adding to, as opposed to substituting, current ODA commitments.
- Flexible time horizon: New solutions for mobilizing large-scale private sector capital require working outside the conventional ODA budget cycles. IFFIm was only made possible because donor countries made an exception to business as usual by making legally binding commitments to contribute funds up to 23 years. Today, exceptions like these are far from the norm.
- Consistent private sector engagement: In order to successfully mobilize new private sector capital at scale from institutional and retail investors, the public sector needs to understand and address private investors’ needs. This means designing solutions that meet the risk, return, and liquidity requirements of private investors.
- Maintain momentum: Today, the global development community’s commitment to implementing innovative finance solutions is erratic. It surfaces only periodically—usually when there’s a headline grabbing pledge to be made. But making real progress in the field requires a consistent commitment, not one that waxes and wanes with the news cycles.
G7 President Angela Merkel is calling for the G7 industrial powers to throw their weight behind the now six-year-old pledge of $100 billion per year. To make good on that commitment—and to make it count—they will need to adopt new thinking and new solutions.