New Global Financing Pact UPSC NOTE

On June 22-23, 2023, France is set to host an international Summit for a New Global Financing Pact.
Called for by French President Emmanuel Macron
This summit fit into an international context marked by the cascading consequences of concurring climate, energy, health and economic crises, particularly in the most vulnerable countries

Challenges faced by sustainable finance

International funding is unpredictable and poorly structured, and does not address the liquidity challenges of developing countries.
For instance, only 25% of global climate investment goes to South Asia, Latin America, and Africa, which house some of the most vulnerable regions.
Further, global funds clamp down on the fiscal independence of these countries by posing several conditions before the money comes in.

Domestically, too, the tax structures of developing countries lead to institutional weakness, illicit finance flows, and higher risk perceptions.
The consequence:
Developing countries pay for their own development transitions through limited public funds.
It’s ard to mobilise private players to take the jump here because the returns are not high enough to bear the real or perceived risks of investing in low- and middle-income countries.

Steps to be taken

The summit will be successful if it can serve as a critical point for the transformation of international financial and development architecture.
It must, therefore, include three components: Pact, platform, and pathway.

1. Create a pact for global flows of finance:

First, create a pact for global flows of finance that covers two levels of social contracts — domestic and international.

At the domestic level

At the domestic level, high debt limits the fiscal space of developing countries.
Increasing this space of countries would need modernising and standardising existing tax structures,
Clamping down on illegal cross-border money movement,
Empowering tax administrations and curbing ineffectual fossil fuel subsidies.

At the international level

Finance is needed for adaptation as well as loss and damage stemming from climate change.
The international social contract must rest on a strong foundation of global solidarity rather than empty pledges.
New resources can be mobilised by tapping into global flows, such as taxing the production of fossil fuels, shipping of goods, and transportation of fossil fuels.

For instance, taxing each barrel of oil just one dollar would generate around $30 billion per year.
Such an approach decouples financing for the vulnerable from the political resistance of taxpayers in rich countries.

2. Create a global platform

Create a global platform to de-risk finance and mobilise large volumes of private investment in sustainable infrastructure.

Vulnerable countries need several types of blended finance – for scaling renewables, clean tech for livelihoods, transitioning away from fossil fuels, and the co-development of emerging clean technologies.
Financing these needs novel mechanisms, such as a Global Clean Investment Risk Mitigation Mechanism that pool risks across geographies and lower costs for all.
Particular attention should be given to hedging against currency fluctuation risks that increase the cost of finance.

Transparency and real-time data can bridge the psychological and financial divides.

3. Political pathway

Chart a political pathway that creates time-bound deliverables on climate finance from one summit to another.
The summit must outline the maths of finance, the mechanisms of delivery, and establish the momentum for real investment over the next two years.

When we approach the 80th anniversary of the UN in 2025, reformed finance for sustainable development should have formed the basis for renewed and meaningful multilateralism.
The Global South, from where the bulk of global growth will come, should treated well.