November 19, 2022

Analysis

The Wall Street Consensus at COP27

The derisking roll-out at COP27

At COP26, US Special Envoy for Climate John Kerry sanguinely declared the need to “derisk the investment, and create the capacity to have bankable deals. That’s doable for water, it’s doable for electricity, it’s doable for transportation.” Derisking is financial speak for the public sector—be it through official development aid, multilateral resources or national fiscal resources—accepting to take some risks from private financiers in order to persuade them to invest, public efforts variously described as “mobilizing private finance”or “blended finance.”  In response, the UN Special Envoy for Climate and head of the Glasgow Financial Alliance for Net Zero (GFANZ) Mark Carney announced GFANZ’s intentions to work in partnership with governments and multilateral development institutions to mobilize its $130 trillion for green purposes.

At this year’s COP27 in Egypt, Carney was less triumphant. On the contrary, he defensively explained why the GFANZ financiers had dropped the partnership with UN Race to Zero, intended to police their green pledges and reduce pervasive greenwashing. No longer flanked by top financiers like BlackRock’s Larry Fink (who reportedly stayed away to avoid further incensing the US Republican party), and amid several reports denouncing the systematic failure of the GFANZ-Global North mobilization drive, Carney cut a lonely figure. 

Indeed, Global North countries have consistently underdelivered on long-standing commitments to mobilize $100 billion climate finance annually, the bare minimum estimate of green financing needs for Global South countries. For 2020, the OECD estimated a $16 billion gap in public and private finance mobilized, far more optimistic than Oxfam’s estimates at one-third of that (around $24 billion).  

Based on these numbers, and the event’s proceedings, it is tempting to conclude that the Wall Street Consensus—the global political agreement and ideological rationalization that decarbonization must be finance-led, with the state derisking private investments into green assets—has lost momentum from its heyday at COP26. 

There is, however, a more compelling account of recent developments: the “roll-back” stage of the Wall Street Consensus, when carbon financiers organized strategically to roll-back the state’s newfound willingness to regulate dirty credit, has given way into a to “roll-out” stage, in which the state and supranational organizations scale up monetary, fiscal, and regulatory derisking architectures for green asset classes. 

Roll-back WSC

The WSC provides the ideological software for claims that global finance should be the anchoring point for green transitions. Take the CNBC COP26 panel on mobilising private finance, with Larry Fink (CEO BlackRock), Jose Vinals (CEO Standard Chartered), Alison Rose (CEO NatWest), Andy Briggs (CEO Phoenix), Greg Case (CEO AON) and David Schwimmer (CEO London Stock Exchange). Panelists agreed that decarbonization was fundamentally a challenge of crowding private credit into green activities, by blending public and private finance. Asked who should decide where finance flows, the chorus led by Fink responded in unison: financiers, especially in the US, are taking the lead, but multilateral spaces like COP26 were critical for regulators to catch up and establish derisking partnerships. 

These cheery notions of public sector catch-up and derisking partnerships served to mask concerns about a more muscular regulatory approach, one that could discipline carbon financiers by penalizing high-carbon lending. In Europe, 2020 and 2021 saw significant regulatory investment in the design of public taxonomies to categorized green (and, by exclusion, dirty) activities. 

Perhaps more worrying for the Larry Finks of this world, regulators made significant concessions to climate activists through developing criteria for double materiality, carbon bias in monetary policy, and dirty penalties. BlackRock, most notably but hardly the only carbon financier, had lobbied aggressively on each of these decarbonization battlefronts. As we know from Finance Watch, it strongly opposed double materiality in Europe’s Sustainable Finance taxonomy, seeking to persuade regulators that dirty credit had no material relevance for climate regulation. BlackRock lost that battle, and risked losing a more significant one. Central banks suddenly threatened to drop a crucial obstacle to disciplining carbon financiers—the holy grail of market neutrality. 

The principle of market neutrality reassures central banks that their unconventional purchases of corporate bonds have no distributive consequences as long as purchases reflect existing market shares: if, say, the corporate bond market traded Shell and Total bonds equally, the ECB would be market neutral if it purchased half Shell, half Total. But market neutrality masks a carbon bias, since the ECB subsidizes fossil companies by purchasing their bonds. Without being bound by the market neutrality principle, central banks could decarbonize monetary policy and curtail private finance’s contribution to the climate crisis, thereby minimizing financial stability spillovers, by explicitly targeting dirty credit assets. The mandatory decarbonization of private finance was politically and institutionally possible.

Financiers, then, convened at COP26 with the goal of rolling back mandatory decarbonization, altering the grammar of climate finance and extinguishing concepts like carbon bias or dirty penalties from regulators’ vocabularies. Their appeal to partnerships had an added strategic benefit, seeking to defang calls from countries in the Global South for mandatory involvement of private investors in debt restructurings. 

At COP26, there were signs that their strategy was working. The Network for Greening the Financial System—the 100-plus central banks designing climate rules together—made disclosure of climate risks and stress test scenarios the centerpieces of its press release. Neither the host Bank of England nor the ECB fought to put their own efforts towards mandatory decarbonization on the table, instead agreeing on a return to the 2019 voluntary decarbonization approach. In part, this was a compromise with the US Federal Reserve, whose lack of appetite for decarbonization changed little from the Trump to Biden Administrations. It later turned out that the Bank of England’s governor, Andrew Bailey, had plans to join the roll-back coalition. Inflationary pressures in early 2022 provided the perfect opportunity. The Bank announced it would sell all corporate bonds to shrink its balance sheet, abandoning efforts to discipline carbon financiers. 

The Russian invasion of Ukraine unleashed a new appetite for fossil fuels and further weakened public resolve to curtail dirty financing. Under pressure to deliver on inflation targets, central banks could have chosen to deploy “Ecological Tightening” (ET) instead of Quantitative Tightening—selectively increasing the cost of borrowing for dirty firms while coordinating with governments to fix dysfunctional European energy markets that pegged prices to the most expensive fossil wholesale supplier. But the limits of the inflation targeting regime that institutionalizes monetary dominance became painfully clear, leading instead to zugzwang central banking—where each possible course of action that does not seek to dismantle the dysfunctional macrofinancial architecture leads to a worse outcome, including decarbonization. Even the ECB, the last standing champion of mandatory greening, missed the ET opportunity. Its concrete decarbonization plans, announced in late 2022, fell significantly short of a Paris benchmark due to the benign treatment of carbon finance. Climate stress tests and “supervisory expectations” for transition plans notwithstanding: roll-back WSC was always about reversing mandatory decarbonization. 

Roll-out WSC

Global inflationary pressures have since reinforced the political appeal of derisking. Derisking provides a compelling status-quo political message: in the new age of geopolitical tensions, energy competition, higher interest rates, and massive global debt pressures, decarbonization is possible without massive public investment. All it takes is tinkering with risk/return profiles to make projects investable, that is, transferring some risks from private to public balance sheets. In a green hydrogen project, for example, the state can absorb risks from private investors in various ways: fiscal derisking (including equity stake for the state; protection against currency, demand, or political risk; price guarantee for surplus renewable energy), monetary derisking (of green bonds issued by project, preferential loans or exchange rates) and regulatory derisking (preferential regulatory treatment for green hydrogen producers, green hydrogen input requirements for hard-to-abate sectors, removal of subsidies for state-owned incumbents). Civil society organizations concerned with worsening human right outcomes, since investable projects (or green assets) in water, electricity and transportation, housing, education, healthcare or energy have to generate cash flows that pay investors, can easily be dismissed on macroeconomic grounds: with shrinking fiscal space, critiques of derisking are just “perfect is the enemy of good” wishful thinking. 

The overarching policy question at COP27 has thus become “how do we scale up derisking to make decarbonization investable for BlackRock?” Three distinct examples are worth exploring: the Network for Greening the Financial System (NGFS), the Liquidity and Stability Facility (LSF) for Africa, and green hydrogen and Just Transition Partnerships.

The NGFS, now under the presidency of Singapore, outlined four key initiatives at COP27: climate scenarios, better climate data, capacity building for climate analysis in central banks and blended finance. The first three are firmly anchored in the logic of voluntary decarbonization, the fourth explicitly about derisking. 

The Blended Finance Initiative aims to “improve risk-reward ratios for marginally bankable transition projects to attract private capital,” through “catalytic and concessional funding from the public sector and philanthropic sources to crowd in multiples of private capital,” by “absorbing a portion of project risks.” Central banks can play a role as “convenors, facilitators and influencers.” 

Influencer central banks, we learn from the Blended Finance Initiative, will directly engage in derisking exercises to create “innovative financing instruments” and “attract a broader range of private investors” into new asset classes, working in conjunction with MDBs. Indeed, the Singapore Pavilion, where the NGFS was institutionally located, dedicated Day Two of Finance at COP27 entirely to examining obstacles to scaling up derisking. 

Second, the COP27 announcements put the Liquidity and Sustainability Facility (LSF) at top of a list of initiatives to reduce the cost of green borrowing for African countries, alongside multilateral guarantees and other market-building measures. Developed by the United Nations’ Economic Commission for Africa in partnership with the investment manager PIMCO, the LSF is a vehicle for derisking African sovereign debt, through a repo facility that provides concessional repo financing to private investors in African sovereign Eurobonds. The repo instrument, it is worth recalling, has been at the centre of recent financial scandals, be it the run on pension funds in the UK, or the implosion of crypto markets triggered by the collapse of FTX, because of its leverage-building capacity.

The LSF constructs a fiction of liquidity for sovereigns, ignoring the well-know questions of cyclicality hardwired into the repo instrument, perverse incentives for African countries to prioritize foreign currency debt like Eurobonds, and institutional conflicts between the commercial managers of the LSF and national central banks. At COP27, the LSF announced its USD 100 million inaugural transaction, financed by Afreximbank, with a basket including Egypt, Kenya and Angola Eurobonds. The original LSF ambitions to raise $50–100 billion via senior lending from OECD central banks or the SDR allocation were not met. And so an Africa-based institution is diverting trade finance for African companies into subsidies benefitting foreign investors into African Eurobonds. The cui bono from derisking couldnt get a starker answer.

Finally, the announcements emphasized derisking-based energy transitions through “transition partnerships” and green hydrogen projects. The International Partner Group (US, EU, UK, France, Germany, Norway) announced specific plans for two Just Energy Transition Partnerships, for South Africa and Indonesia, with future plans for Vietnam, Senegal and India. The $20 billion derisking Indonesia Partnership promises $10 billion mobilized by IPG members, and $10 billion from GFANZ, to support a JETP Investment and Policy Plan for the energy sector. While Indonesia may be strategically using its critical resources—nickel, tin, aluminium—to renationalize value chains and promote technological upgrading of national industrial champions, it is also playing a derisking game with international investors. That this game might turn out expensive for the Indonesian state and its citizen—who is loading risks from private investors—is never mentioned in the upbeat press releases. Yet, as the Institution of Economic Justice points out, the derisking at the core of the $8.5 billion South African Partnership effectively commits South African fiscal resources to make private renewable projects investable at the expense of fuel subsidies for poor households. 

The South African partnership is a stark reminder of the pressure for Global South countries to join the global rush for green hydrogen.  Europe has put green hydrogen at the core of its RePowerEU plan to delink from Russian fossil fuels. By 2050, it expects almost a quarter of global energy demand to be met by green hydrogen. RePowerEU aims for half of Europe’s demand for green hydrogen, estimated at 20 million tons annually by 2030, to be produced locally, the other half imported. At COP27, the EU signed several green hydrogen import partnerships, including with Namibia, Egypt, and South Africa. Derisking is explicitly at core of these arrangements, with the EU committing to mobilize private capital for megaprojects in the Global South. Such partnerships reduce the scope for African and other countries to strategically control green hydrogen chains, and threaten to  trap them into the same patterns of unequal ecological exchange that have characterized carbon capitalism, this time as exporters of green commodities, generators of financial yield, and consumers—but not producers of clean tech. 

Even the better reported battles over numbers at COP27—for instance on loss and damage—hide the derisking devil in the details and language of “mobilization.” How will these funds be spent? How much of the public grants or loans from the Global North will be deployed for derisking private investments in the Global South? Ultimately, derisking is a tool against the very things that would make the green transition just: adequately funded public services, affordable access to renewable energy, decent housing, and thriving green manufacturing sectors in middle and low income countries. It may well be that derisking partnerships can be reimagined to give the state space for disciplining rather than simply subsidizing private finance, but so far, there is little effort in that direction. 


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