The 2022 United Nations Climate Change Conference (COP27) held in Egypt in November was important for spotlighting climate finance in emerging markets. Particularly the Loss and Damage fund, which aims to provide compensation for emerging economies’ losses impacted by climate change, received global attention.
A less talked about but highly significant discussion revolved around the Bridgetown Initiative led by Barbados. The Bridgetown Initiative aims to speak on behalf of climate-vulnerable countries along the Equator and calls for an overhaul of the current global financial system led by the IMF and the World Bank to enable the mobilization of more private financing for the climate transition and improved resilience in so called “frontier countries”.
What is the Bridgetown Initiative
The Bridgetown Initiative was devised by a group led by Barbadian Prime Minister Mia Mottley and her climate finance envoy Avinash Persaud. The idea was first unveiled by Mottley at COP26 Glasglow and further developed with the help of international academics and civil society during a gathering in July 2022 at Bridgetown, Barbados. So far, the initiative has earned public praise from figures such as French President Emmanuel Macron and IMF managing director Kristalina Georgieva.
The Bridgetown Initiative aims to overcome some of the main shortcomings of mobilizing climate finance for small island developing states (SIDS) like Barbados:
- high climate vulnerability: in SIDS, a tropical storm can destroy an island’s infrastructure with significant economic and social losses. Rebuilding this infrastructure requires much funding, as does investing in climate resilience against increasing increasing frequency and intensity of such extreme weathers;
- low ability to raise finance: SIDS don’t have many ways to mobilize capital to build or rebuild infrastructure due to their small-scale economies, the lack of domestic capital markets, and the fact that international finance puts a risk premium on the high climate risks that increases financial risks; which leads to a
- dependence on official development assistance (ODA) or remittances for economic development.
To overcome these challenges, Avinash Persaud, the developer of much of the Bridgetown Initiative, highlighted his key prerequisites for the Bridgetown Initiative in an interview with The New York Times’ The Daily:
- “the world does not take to begging”: SIDS should not ask for handouts from rich countries and cannot depend on catastrophe support as donor countries often fail to deliver with other world events filling agendas of developed countries’ leaders.
- think big: SIDS represent only 1% of the world’s population and “the world is not going to change its financial system for this 1%”. Yet, by including what he calls the “frontline population” of 3.3 billion people living across the Tropics, the Bridgetown Initiative has much broader relevance.
Five Proposals of the Bridgetown Initiative
The Bridgetown Initiative includes five proposals to address immediate liquidity challenges in SIDS and to build a new international financial system that responds better to the climate and development crises for Frontline economies:
- Drawing in $5trn of private savings for climate mitigation: A Climate Mitigation Trust should be adopted that borrows from the international capital markets and invests in low-carbon transition in developing countries. The Trust brings down the cost of capital for developing countries with the backing of $500bn of Special Drawing Rights, donor guarantees or similar instruments.
- Widening access to concessional finance for the climate-vulnerable: As climate adaptation projects are hard to attract private investors, a limited widening of the eligibility for concessional lending is needed for investment in resilience in climate-vulnerable countries.
- Expanding MDB lending for climate and SDGs by $1trn: The Bridgetown Initiative calls for MDBs to lend a further $1 trillion by raising their risk appetite and including donor guarantees and SDRs when determining their lending room.
- Funding Loss and Damage: Funding could be drawn from a levy on fossil fuel production or an international carbon border tax and benefits, especially for countries located between the Tropics of Cancer and Capricorn due to their extra need for climate-related disaster recoveries.
- Making the financial system more shock absorbent: by normalising natural disaster and pandemic clauses in all lending instruments, where once disasters hit, these clauses lead to an immediate and unconditional suspension of debt service and an extension of the loan maturity by two years.
Highlights and analysis of the Bridgetown Initiative
Compared with provisional commitments to increase funding for climate finance e.g., through the Least Developed Countries Fund (LDCF) and Special Climate Change Fund (SCCF), the Bridgetown Initiative provides a package of solutions with some of the most pressing topics for small island states in mind, i.e., sovereign debt, cost of borrowing and post-disaster recovery:
Seeking climate finance without significantly increasing sovereign debt burden
The Bridgetown Initiative aims to minimize the cost of climate mitigation and adaption on governments’ balance sheets without adding to their debt distress risks:
- Establish a Global Climate Mitigation Trust that, different from other IMF trusts, lends directly to projects instead of to governments. It thus aims to reduce country-specific negotiations and quotas and instead fund climate mitigation projects with proven technologies. Financing through both public money (from the Trust) and leveraged private savings should include high ESG standards;
- Expand MDB concessional financing to middle-income countries vulnerable to climate disasters to fund climate resilience and adaptation projects where a revenue stream is lacking. By increasing risk appetite and expanding capital pools through IMF SDR reallocation, MDBs could save middle-income countries from the high (and increasing) cost of capital and reduce the risk of unsustainable public debt.
The initiative, therefore, calls for a rethinking of the relationship between climate finance and sovereign debt. On the one hand, this thinking aims to overcome the challenge that climate finance in SIDS and similar emerging economies too often depends on fiscal spending, which requires the issuance of sovereign debt. On the other hand, this approach reduces the need for concessional financing from development finance institutions (DFIs), such as the World Bank which depends on the sovereign debt to GDP ratios (thus highly indebted countries might not be eligible) or the country’s existing credit line with these institutions (based on DFI’s internal quotas). Rather it aims to mobilize private capital by lowering the risks through some public finance (which is effectively blended finance). By reducing the lending directly to sovereigns but by lending to projects, sovereign debt in debtor countries is not affected.
Calling for critical changes to the international financial system
The Bridgetown Initiative also aims to reform elements of the existing international financial framework to that better protect countries between the Tropics of Cancer and Capricorn against the consequences of climate change. These reforms encompass two key components:
- include “natural disaster and pandemic clauses” in all debt instruments that suspend debt service for two years when disasters occur to release necessary liquidity for immediate disaster response;
- include “loss and damage” grants (instead of debts) in the current climate finance architecture that support climate-vulnerable countries in post-disaster recovery. These grants could come from a fund raised by levying on fossil fuel production or an international carbon border tax to level the playing field between carbon taxes paid on domestic and imported products.
These two components aim to ensure that as climate risks increase, the global financial system is shock absorbent and is capable of supporting vulnerable countries with disaster response and recovery. They are also achievable ways to allow the global financial system to fight against climate change more effectively by ensuring that those who contribute the most greenhouse gases bear a fair share of financial responsibilities, rather than leave the greatest burden to climate-vulnerable countries.
Reception and Conclusion
The Bridgetown Initiative has catalysed debate and drawn significant attention at COP27. In a speech at the opening of COP27, French president Emmanuel Macron expressed support for the plan and joined Mottley’s call for a task force to present detailed proposals to the World Bank and IMF ahead of their 2023 Spring Meetings. Kristalina Georgieva, the managing director of IMF, said in an interview that she was broadly supportive of the Bridgetown Initiative. The World Bank’s President David Malpass and US climate envoy John Kerry also mentioned that action and reforms to increase climate finance can be done.
As such, the Bridgetown Initiative has been labelled as one of the breakthroughs at COP27. However, for the Initiative to yield tangible results, challenges lie ahead. Most of all, DFIs need to increase their risk appetite in SIDS and developing countries’ financing, develop new financial instruments through guarantees and equity funds, and develop insurance instruments for climate change effects.
The success of this journey depends on the willingness of the main investors of these DFIs – thus their member states. Particularly for large multilateral development banks (MDBs) such as the World Bank and the Asian Development Bank, the main member states are developed countries like the US, Germany, Japan, and France (for AIIB it would be China). Without strong political will, any progress on the realization of the Bridgetown Initiative could be disappointingly slow.
Therefore, while it seems worthwhile and possible to improve the global financial development system according to the Bridgetown Initiative in the medium term, existing bilateral and regional solutions must equally be expanded and applied to address the immediate challenges faced by climate-vulnerable developing countries to address sovereign debt, green transition and climate resilience.
Title picture credit: Timothy Sullivan (UNCTAD) https://www.flickr.com/photos/53390373@N06/48712675018