Much-Needed Climate Funds Flee Sinking Caribbean Islands

(Bloomberg) -- According to U.S. climate envoy John Kerry and other Western leaders, the private sector will lead the battle against climate change given governments can't raise enough money. Officials from Caribbean islands 1,750 miles south of Washington are less optimistic.

Kerry, backed by financial elites including BlackRock Inc.'s Larry Fink and former Bank of England Governor Mark Carney, says that trillions of dollars of private capital is available to help countries transition to cleaner energy and protect themselves from more extreme weather. But in reality international banks are upping sticks and leaving one of the regions most vulnerable to climate change.

In the last five years, global financial institutions such as Bank of Nova Scotia and Royal Bank of Canada have scaled back their presence in the Caribbean region, selling their businesses in several markets. While they haven't cited the risk of conducting business in climate-vulnerable nations, the moves are leaving the Caribbean with less access to international markets at a time they need it most, according to Michai Robertson, an advisor to the Chair of the Alliance of Small Island States, a group of negotiators at United Nations-convened climate summits. Bank of Nova Scotia didn't respond to questions and RBC declined to comment.

“They don't say outright ‘this is the reason why we're leaving the country,' but it has to more than likely fall under financial viability of it all,” he said from his family home on Antigua, an island of fewer than 100,000 people located in the Caribbean. They left “after the major hurricanes that plagued our region.” Hurricane Irma, which hit in 2017, caused around $80 billion of damage.

The capital flight highlights a major downside of relying on private finance to solve the climate problem. Smaller and more remote nations that are the most affected by storms, drought and rising sea levels can't secure enough funding from investors predominantly based in the world's major financial centers, even with incentives and financial engineering designed to boost returns. The money they do receive predominantly goes toward projects that cut emissions, rather than adaptation measures, such as sea walls, which don't tend to generate profits.

Losing even one global financial institution can have a huge impact on these small countries, especially when the need to attract finance for climate-related goals is more acute than ever. A large bank's presence can serve as important reassurance for other investors and help a nation like Antigua and Barbuda lower borrowing costs for the government and citizens. Insurance premiums have already climbed since the banks departures because of growing climate risk, according to Robertson.

It raises questions over whether private finance can succeed where governments have failed. The COP26 climate conference in Glasgow last year saw rich nations once again fail to provide $100 billion of funding promised to poorer countries annually. Instead, politicians like Kerry are touting the enormous potential of privately-mobilized capital to raise more than 10 times the amount.

“We need something different now in terms of financial instruments and methods to accelerate the deployment of the trillions of dollars that are there,” Kerry said in an interview with Bloomberg News in November. “Finance needs a bankable deal.”

One of the key announcements at COP26 was the Glasgow Financial Alliance for Net Zero — a pledge by banks and asset managers representing $130 trillion to meet climate neutrality by mid-century. Yet when Robertson read the group's inaugural progress report, he could only find two references to small island developing states, also known as SIDS, like his own. He said that the group's criteria for a good investment could push out SIDS, especially when a country's size and capacity to absorb investment is a highly weighted criteria.

SIDS, a group of 38 countries, including 13 Caribbean nations, have struggled to attract any kind of climate finance, public or private. The group received $1.5 billion in climate finance in 2019, a drop from $2.1 billion in 2018, according to a report published by the Organisation for Economic Co-operation and Development last year.

Private finance is largely being mobilized toward middle-income countries. South Africa for example, was the beneficiary of an $8.5 billion plan to transition away from coal. Much of that comprises concessionary finance, which is where developed countries or development banks agree to take the first loss, boosting the return profile for private investors.

The world's top climate scientists have been critical of the role of private finance in developing countries, especially when there is such an urgency to invest in projects in poorer nations that are already living with the worst impacts of climate change. The UN-backed Intergovernmental Panel on Climate Change said in a report last month that funding of adaptation measures “remained small,” with the private sector contributing just 1% of the finance directed toward these efforts in 2018.

“For us a return on an investment is not having a road sink under a storm surge so we're able to access hospitals, after an extreme weather event,” Robertson said. “But it's not valued in the same sense in the private finance sector.”