Climate finance is big business, padding the pockets of big banks and trapping developing countries in debt that locks them out of global markets. The least developed countries spend twice as much servicing debt as they receive in climate finance — which amounted to just 3 percent of the total pot. Development banks and global climate funds are supposed to provide lifelines, but they often tie up funds in red tape. Credit ratings dissuade the former from lending to high-risk countries, and the latter are notorious for lengthy lending processes, taking years. But the problem isn’t nefarious lenders or opportunist billionaires; the problem is a broken system — a money-go-round that profits the rich and plunges the poor further into crises.
The failures of climate finance play out again and again, having far-reaching implications, from avoidable climate crises to mass migrations and hasty land grabs. Last year when Nigeria’s Alau Dam broke, nearly half a million people were displaced, and damage was in the hundreds of millions. The dam broke just weeks before the World Bank was expected to approve a $500 million loan to improve dam safety across the country. Residents of Antiqua and Barbuda have been engaged in a bitter battle over land rights since Hurricane Irma ravaged the islands in 2017, increasing debts that made the country vulnerable to land grabs like the contested Barbuda Ocean Club. With the United States pulling out of the Paris Agreement, climate finance faces greater uncertainty. The system is on the verge of transformational shift — led by agile actors and defined by savvy investors.
Enter the United Nations Capital Development Fund (UNCDF), a lesser-known UN agency changing the game — swapping debt traps for market opportunities; fast-tracking funds to the most vulnerable; and working directly with local communities to create bridges with private investors.
“A big problem with development finance, including climate finance, is that private capital doesn’t go into risky markets. UNCDF was created to absorb that risk and clear a path for the flow of private capital. We make it safer for banks to lend money, companies to set up shop, and for investors to turn a profit. We work with countries to create sustainable marketplaces, and more markets benefit everyone,” said Pradeep Kurukulasuriya, who took the helm of UNCDF as Executive Secretary earlier this year.
Where that finance flows, opportunities replace crises. In Tanzania, the agricultural region of Tanga spent a decade trying to access climate funds. The project was awarded money for design but not implementation — time and money wasted.
That’s when Tanga UWSA began working with UNCDF to launch East Africa’s first green bond. “The bond let us do something big that we couldn’t have done with commercial loans that depend on our financial status,” said Geofrey Hilly, Managing Director of Tanga Urban Water Supply and Sanitation Authority (UWSA).
“It was a wakeup call for the government; we’ve pioneered the use of these bonds, and the country is learning for to fix their financial structure,” said Hilly.
Meanwhile, in Zimbabwe, half the population is without energy. According to Davies Musoso, Head of Alternative Investments at Old Mutual Investment Group Zimbabwe, that gap is an opportunity. Last year, with help from UNCDF, Old Mutual launched a $100 million private equity fund focused on renewables. Since September, they’ve raised over $20 million locally. Now, they’re courting international investors.
“Support from UNCDF was important,” said Davies. “They helped open doors … meetings with the World Bank, the U.S. Embassy … This attracted government funding, interest from the development finance institutions, and the private sector. They lowered the investment risk profile.”
“You need success stories to attract more investors,” said Nitin Garg, co-founder of FLOW, an African Fintech company expected to triple in value this year. UNCDF was their first investor. The loan was only $20,000, but it gave FLOW the proof of credit they needed to attract international impact investors.
Fixing climate finance doesn’t just deliver clean water and energy; it opens markets to investors who are increasingly deterred by new and volatile U.S. policies, which are hostile toward renewables — one of the fastest growing global markets.
Risk will always be a defining factor, and this is where UNCDF shines. “Someone needs to be first in and change the risk profile in these countries, and that’s what we’re uniquely designed to do. “We’re creating opportunities,” says Kurukulasuriya. “We need to focus on those least developed and fragile countries. A more prosperous world benefits everyone.”
