The use of middlemen to leverage private sector climate cash is putting investments at risk because of the rich world’s negligence in ensuring transparency and adequate monitoring, according to a new report by the European Network on Debt and Development (Eurodad).
‘Cashing in on climate change?’ argues that vast amounts of climate cash are currently being channeled through tax havens, where there can be no oversight of the funds’ final destination.
The Eurodad report was released earlier this month, just days after it emerged that Nigerian officials were investigating the €3.4 billion-valued UK-owned subsidiary CDC Group for allegedly allowing €36.5m to be invested in a Nigerian money-laundering front.
“When you channel public money through tax havens, you lose track of it and many times, we just don’t know where the money is being invested, and who is directing the companies,” said Javier Pereira, the report’s author.
Financial intermediaries such as private equity funds and credit unions are increasingly being used to 'leverage' private sector climate mitigation investments, by using a line of credit provided by public sector sources in the developed world to cover investor risk.
“The problem is that they are not complying with the same accountability and transparency obligations that we have in Europe for instance,” Pereira told EURACTIV.
Eurodad’s analysis of CDC’s investment portfolio found that 48% of the subsidiaries it had invested in were registered in tax havens. With Norfund, the development finance institution in Norway, 29 out of 35 funds were based in tax havens.
Both the European Investment Bank (EIB) and the World Bank’s International Finance Corporation (IFC) also make extensive use of tax havens to fund projects, according to the report.
One study last year found that seven of the 12 private equity funds that the EIB invested in were located in Mauritius. Another two were based in Luxembourg, which was put on a 'grey list' of nations with questionable banking arrangements by the G20 in 2009.
But Richard Willis, an EIB spokesman, told EURACTIV that "we have strong and robust procedures in place to check the background of any individuals and politically exposed persons involved in our financial intermediaries, and to ensure that the money used is contributing to addressing an investment gap and funding specific projects."
The EIB tracked its funds through documentation, spot checks on the ground , and post-project inspections by independent evaluation units responsible to an independent inspector-general, Willis said.
"I cannot comment on how other bodies choose their business partners," he added.
Kamalanga coal plant
The IFC had to launch an internal probe last April when complaints were raised about the negative environmental and social impact of funding for the Kamalanga coal plant.
“There’s a tendency for financial intermediaries to leverage money as a way of meeting [governmental] climate obligations with little resources,” Pereira said
The EU favours leveraging much of the $100 billion-a-year Green Climate Fund, which was first promised at the Copenhagen Summit, from financial intermediaries. But Pereira warned that this might not help the world’s poor, tempting as it was at a time of recession.
“The private sector is mainly focused on profit but there are hundreds of adaptation projects to help poor people deal with the consequences of droughts and floods that the private sector won’t be able to help with because they’re just not profitable,” he said.
While Eurodad accepts that financial intermediaries should be used as one tool among many others in the climate funding patchwork, they also call for
- The creation of a public register of financial intermediaries that meet best-practice criteria
- The development of clear guidelines aligning climate investments with developing world priorities
- Increased monitoring and transparency procedures to better track and coordinate the use of climate funds