In June, more than 100 countries as well as representatives from global private sector entities gathered in Paris to affirm a single goal: No country should have to choose between fighting poverty and fighting for the planet. The Paris Pact for People and the Planet was the result of close work with India, who co-chaired the Summit’s steering committee and was represented in Paris by Minister of Finance Nirmala Sitharaman. This outcome has been enshrined in the G20 Leaders’ Declaration at the historic Delhi Summit in September. The achievement reflects the spirit of the Indo-French partnership for the planet — we act together to overcome the artificial North/South divide and seek to find tangible solutions to the greatest challenges of our times.
Transforming the international financial system to better support sustainable development is one such challenge. In order to address the overlapping challenges of poverty reduction, climate change and biodiversity protection, we need a shift from billions to trillions in global investments. Much discussion and controversy have focused on the public sector, especially the commitment by developed countries to provide USD 100 billion in climate finance per year between 2020 and 2025. This goal is now expected to be met in 2023 for the first time. France has not only contributed its fair share, but exceeded its commitment by providing Euro 7.6 billion in climate financing in 2022, illustrating that President Emmanuel Macron’s pledge to “make our planet great again” was not mere words. Here, too, India is a priority partner for us — since 2012, the French Development Agency has committed more than Euro 2 billion for sustainable development projects in India.
France will continue to honour its commitments. But we know that public sector financing will not be sufficient for the cause. What we also need is a positive shock from private-sector funding. The role of the private sector has so far been somewhat of a blind spot.
The Paris Pact for People and Planet seeks to address this. It proposes actions aimed at scaling up private capital flows to transform emerging and developing economies. It resonates with World Bank President Ajay Banga’s commitment to ensure each dollar of lending from the World Bank is complemented by at least one dollar of private finance. How can we unlock more private-sector funding to face the climate and development crises?
First, we should engage in a review of the global vertical climate funds in order to optimise the use of their resources
and increase partnerships between peers and with the rest of the climate-finance architecture.
Second, it is time to review the post-2008 financial regulation with respect to its unintended impacts on the mobilisation of OECD savings towards non-OECD countries. In a nutshell, we need more simplicity and consistency in the rulebook to lower risk and risk perception for global investors who fund sustainable projects in developing countries. However, prudential rules are not the only determinants of private actors’ investment choices: Providing the right signals and labels to invest in sustainable projects, maintaining a stable and transparent environment, and promoting investment opportunities are also essential.
Third, credit-rating agencies must be included in the reform agenda of multilateral development banks (MDBs). We don’t want MDBs to be penalised and lose their rating because of the reforms introduced to make them more effective. Rating agencies should take into account the innovative blended finance schemes we are designing and use the new data on actual defaults. This new data shows that in many developing economies, contrary to most OECD countries, projects with good multilateral guarantees are less prone to default than companies, which are less likely to default than sovereigns.
Fourth, we should push further the thinking on the “green finance” framework to make the most of the global savings pool. The objective is to align the financial sector with the objectives of the Paris Agreement, something that has led to misunderstandings and distrust between developed and developing countries. In essence, it simply means harnessing the full trust of private finance to support low-carbon and resilient pathways around the globe. We should use mitigation costs as a compass to make every dollar spent the most effective marginally. In this respect, country-led, multi-actor partnerships such as Just Energy Transition Partnerships are the right way to raise the required investments. These partnerships are already operative in Indonesia, Vietnam, South Africa and Senegal. We should do more with countries willing to phase out coal from their electricity mix.
On many of these issues, India’s G20 Presidency has enabled path breaking progress. We now need to jointly support the G20 Brazilian presidency to bring this agenda to the finish line.
Finally, unlocking private sector finance for the green transition does not exonerate governments from addressing debt vulnerabilities in developing countries. Too many low-and middle-income countries face unsustainable debt trajectories. This was also a key topic of the Paris Summit in June — how to accelerate debt suspension and treatments when needed, and find new tools such as climate-resilient debt clauses. Every major creditor country must live up to its responsibility. We have also seen in India’s neighbourhood, the impact of debt traps on vulnerable economies. In the case of Sri Lanka, the Paris Club and India have stepped in to create a successful platform for debt restructuring. All major creditors in the region should now avoid contributing further to debt vulnerability.
In these endeavours, I believe India has a crucial role to play because of its economic size, but more than that, because of its unique capacity to build bridges rather than stir up divisions within the international community. In Paris on July 14, President Macron and Prime Minister Narendra Modi highlighted that our partnership is a force for “advancing cohesion in a fragmenting world”. This spirit, which is that of India’s vasudhaiva kutumbakam, must guide our efforts to make the global financial system more efficient and more just.
The writer is economist, former French minister and current Ambassador of France to the OECD
