How helping Global South cope with climate change benefits rich nations

Japan, France, Germany, the US and other wealthy nations are reaping billions of dollars in economic rewards from a global programme meant to help the developing world grapple with the effects of climate change, a Reuters review of UN and Organisation for Economic Co-operation and Development (OECD) data shows.

The financial gains happen as part of developed nations’ pledge to send $100bn a year to poorer countries to help them reduce emissions and cope with extreme weather. By channelling money from the programme back into their own economies, wealthy countries contradict the widely embraced concept that they should compensate poorer ones for their long-term pollution, more than a dozen climate finance analysts, activists, and former climate officials and negotiators say.

Wealthy nations have loaned at least $18bn at market-rate interest, including $10.2bn in loans made by Japan, $3.6bn by France, $1.9bn by Germany and $1.5bn by the US, according to the review by Reuters and Big Local News, a journalism programme at Stanford University. That is not the norm for loans for climate-related and other aid projects, which usually carry low or no interest.

At least another $11bn in loans — nearly all from Japan — required recipient nations to hire or purchase materials from companies in the lending countries.

And Reuters identified at least $10.6bn in grants from 24 countries and the EU that similarly required recipients to hire companies, nonprofit organisations or public agencies from specific nations — usually the donor — to do the work or provide materials.

Offering climate loans at market rates or conditioning funding on hiring certain companies means that money meant for developing countries gets sent back to wealthy ones.

“From a justice perspective, that’s just deeply reprehensible,” says Liane Schalatek, associate director of the Washington branch of the Heinrich-Boll Foundation, a German think-tank that promotes environmental policies.

Analysts say grants that require recipients to hire wealthy countries’ suppliers are less harmful than loans with such conditions because they do not require repayment. Sometimes, they say, the arrangements are even necessary — such as when recipient countries lack the expertise to provide a service. But other times, they benefit donors’ economies at the expense of developing nations. That undermines the goal of helping vulnerable nations develop resilience and technology to cope with climate change, the climate and finance sources say.

“Climate finance provision should not be a business opportunity,” Schalatek says. It should “serve the needs and priorities of recipient developing countries”.

Paris agreement

Many of the conditional loans and grants Reuters reviewed were counted towards developed nations’ pledge to send $100bn a year by 2020 to poorer countries disproportionately harmed by climate change. First made in 2009, the commitment was reaffirmed in the 2015 Paris climate agreement. About $353bn was paid from 2015 to the end of 2020. That sum included $189bn in direct country-to-country payments, which were the focus of the Reuters analysis.

More than half of that direct funding — about 54% — came in the form of loans rather than grants, a fact that rankles some representatives from indebted developing nations such as Ecuador. They say they should not have to take on more debt to solve problems largely caused by the developed world.

Countries of “the Global South are experiencing a new wave of debt caused by climate finance”, says Andres Mogro, Ecuador’s former national director for adaptation to climate change.

At the same time, several analysts say, rich countries are overstating their contributions to the $100bn pledge, because a portion of their climate finance flows back home through loan repayments, interest and work contracts.

“The benefits to donor countries disproportionately overshadow the primary objective of supporting climate action in developing countries,” says Ritu Bharadwaj, principal researcher on climate governance and finance at the International Institute for Environment and Development, a UK policy think-tank.

Representatives of the main agencies that manage climate funding for Japan, Germany, France and the US — the four countries reporting the most such funding to the UN — say they consider the amount of debt a country is already carrying when deciding whether to offer loans or grants. They say they prioritise grants to the poorest countries.

About 83% of climate funding to the lowest-income countries was in the form of grants, the Reuters review found. But those countries also received, on average, less than half as much climate funding as higher-income nations, which mostly received loans.

“A mix of loans and grants ensures that public donor funding can be directed to countries that need it most, while economically stronger countries can benefit from better-than-market rate loan conditions,” says Heike Henn, director for climate, energy and environment at Germany’s federal ministry for economic co-operation & development. Germany has contributed $45bn in climate funding, 52% of it loaned.

The French Development Agency (AFD) offers developing nations low interest rates that would normally be available only to the richest countries on the open market, say Atika Ben Maid, deputy head of the AFD’s climate and nature division. About 90% of France’s $28bn contribution came in the form of loans — the highest share of any nation.

A US state department spokesperson says loans are “appropriate and cost-effective” for revenue-producing projects. Grants typically go to other types of projects in “low-income and climate-vulnerable communities”. The US provided $9.5bn in climate funding, 31% of it loaned.

“It should also be emphasised that the climate finance provisions of the Paris climate agreement are not based on ‘making amends’ for harm caused by historical emissions,” the spokesperson says, when asked whether collecting market-rate interest and other financial rewards contradicts the spirit of the climate finance programme.

Short on details

The agreement does not state outright that developed nations should make amends for historical emissions. It does reference principles of “climate justice” and “equity” and notes countries’ “common but differentiated responsibilities and capabilities” to grapple with climate change. It makes clear that developed countries are expected to provide climate finance.

Many interpret that language to mean that wealthy nations have a responsibility to help solve climate-related problems they have had an outsize role in creating, says Rachel Kyte, an Oxford University climate policy professor who was World Bank special envoy for climate change in 2014 and 2015.

But the agreement is short on specifics. The pledge says nations should mobilise climate finance from “a wide variety of sources, instruments and channels”. It does not define whether grants should be prioritised over loans. Nor does it prohibit wealthy nations from imposing terms advantageous to themselves.

“It’s like setting a building on fire and then selling the fire extinguishers outside,” Ecuador’s Mogro, who was also former climate negotiator for the Group of 77 (G77) bloc of developing countries and China, says of the practice.

Reuters and Big Local News reviewed 44,539 records of climate finance contributions reported to the UN Framework Convention on Climate Change (UNFCCC), the entity in charge of keeping track of the pledge. The contributions, from 34 countries and the EU spanned 2015 through 2020, the most recent year for which data is available.

The UNFCCC does not require countries to report key details of their financing. So reporters also reviewed 133,568 records collected by the OECD to identify hiring conditions tied to climate-related finance over the same period.

The review confirms that developed countries count some conditional aid towards their $100bn climate finance commitment. Because the UNFCCC records lack detail, Reuters could not determine if all such aid was counted.

To better understand the funding patterns revealed by the data, reporters consulted 38 climate and development finance analysts and scholars, climate activists, former and current climate officials and negotiators for developing nations, and representatives of development agencies for wealthy nations.

The Reuters findings come as countries try to negotiate a new, higher climate financing target by year end. The UN has estimated that at least $2.4-trillion a year is needed to meet the targets of the Paris climate agreement, which include keeping the average global temperature from rising more than 2ºC above pre-industrial levels.

Recent spending pales in comparison. Wealthy countries probably met the $100bn annual goal for the first time in 2022 through direct contributions from country to country as well as multilateral funding from development banks and climate funds. The OECD estimates that wealthy nations funnelled at least $164bn towards the climate finance pledge via multilateral institutions — about 80% of it loaned — between 2015 and 2020, in addition to countries’ direct contributions.

Reuters was unable to determine the percentage of those loans that carried market interest rates or hiring conditions, due to uneven reporting by multilateral groups.

At least $3bn of the direct spending went to projects that did little to help countries reduce emissions or guard against the harms of climate change, a June 2023 Reuters investigation found. Large sums went to a coal plant, a hotel, chocolate shops and other projects with little or no connection to climate initiatives.

Suffocating debt

Heavily indebted countries face a vicious cycle: debt payments limit their ability to invest in climate solutions, while extreme weather causes severe economic losses, often leading them to borrow more. A 2022 report by the UN Development Programme found that more than half of the 54 most severely indebted developing nations also ranked among the most vulnerable to the effects of climate change.

With the amount of financing for climate projects still far from what’s needed, however, some analysts argue that lending needs to be part of the climate finance equation.

Development aid representatives from the US, Japan, France, Germany and the European Commission say loans enable them to funnel far more money to significant projects than they could if they relied solely on grants.

In interviews with Reuters, eight representatives who have worked on climate issues in developing nations say they consider loans to be necessary to fund ambitious projects given the limited funding wealthy nations have allocated for climate finance. But they say future pledges should require that rich nations and multilateral institutions be more transparent about the lending terms and offer guardrails against loans that create suffocating debt.

Echoing years of pleas from developing nations, UNFCCC executive secretary Simon Stiell has publicly urged wealthy nations to offer concessional loans, with very low interest rates and long repayment periods. This makes them less costly than those sold on the open market. UNFCCC and OECD had no comment for this report. UNFCCC instead referred Reuters to Stiell’s past remarks.

About 18% of climate loans from wealthy countries, or $18bn, were not concessional, the UN reports from 2015 to the end of 2020 show, including more than half of the loans that the US and Spain reported. These totals are probably underestimated, given that it is voluntary for wealthy nations to report to the UN whether their loans were concessional.

France gave a $118.6m non-concessional loan to Ecuador’s port city of Guayaquil in 2017 to build an aerial tramway. The loan, which France counted as part of its climate finance pledge, shows how the global programme can create expensive debt in developing countries in exchange for few environmental gains, while lending nations benefit.

Dubbed the Aerovia, the cabled gondolas were billed as a climate-friendly alternative to the congested bridges connecting industrial Guayaquil to a neighbouring city where workers live. Four years after its inauguration, the Aerovia transported about 8,300 passengers a day. That was one-fifth of the ridership projected in early planning documents, resulting in lower-than-expected revenue and environmental benefit.

Debt from the loan has added to Guayaquil’s $124m budget deficit. Guayaquil expected to pay 5.88% interest, according to early planning documents. France was projected to earn $76m in interest over the 20-year repayment period. That interest rate would be unusually high for a climate-related loan, finance analysts say. A 2023 OECD analysis of concessional loans from 12 developed nations and the EU found they offered an average interest rate of 0.7% in 2020. Guayaquil and France declined to disclose the interest rate of the final loan agreement for the tramway.

“This is a classic example where a bad loan, which has been given to a country in the garb of climate finance, will create further ... financial stress,” says Bharadwaj, the climate researcher from the International Institute for Environment and Development.

Wealth transfer

The loan agreement did not require Guayaquil to hire a French company. Nonetheless, French transport company Poma won the contract to build the tramway, along with Panamanian company Sofratesa, founded by a French citizen. The companies also operate the tramway, so the municipality collects no revenue from passenger fares to help repay the loan. Neither company responded to questions from Reuters.

Nearly all of the Aerovia’s components — including its cabins, electrical control panels and cables — were manufactured in France and Switzerland and then shipped to Guayaquil, according to a slide presentation prepared by the local government before the tramway’s launch.

To Euan Ritchie, senior policy adviser at Development Initiatives, an international policy organisation, the project amounts to a “transfer of wealth from Ecuador to France”.

Contesting that claim, a spokesperson for the French development agency says the tramway belongs to the city and the agency assessed the risk of financial stress before approving the loan. The aerial tramway has already resulted in a “significant greenhouse gas reduction”, despite low ridership, says the spokesperson, who provided no estimates. The spokesperson says the agency did not participate in selecting contractors.

Still, France’s development agency trumpeted the successes of French companies in landing such contracts. The agency’s 2022 annual report says that more than 71% of its projects that year involved “at least one French economic actor” garnering them €2bn in “economic benefits”. The spokesperson declined to provide estimates of how French suppliers benefit from climate-related funding.

Strings attached

Almost 32% of all Japanese climate loans required borrowers to use at least some of the money to hire Japanese companies, OECD records show. Those loans have funnelled at least $10.8bn back to the Japanese economy, the Reuters review found.

The loan requirements helped Sumitomo and Japan Transport Engineering Company win three contracts worth more than $1.3bn to supply 648 train cars for electrified railway and subway projects in the Philippines. A Sumitomo sister company, Sumitomo Mitsui Construction Company, won two contracts worth more than $1bn to build rail expansion and station buildings.

A Sumitomo spokesperson says that though the loans require the main contractor to be Japanese, they do not require the use of Japanese subcontractors. The spokesperson did not reply when asked if the company used local subcontractors for the Philippine rail project.

Japan Transport Engineering Co did not respond to questions.

Aid with hiring conditions robs local companies of business opportunities and eliminates the chance for developing countries to build expertise in sustainable technologies, says Erika Lennon, senior attorney at the Center for International Environmental Law. Eleven sources says the requirements contradicted Paris agreement clauses that urged parties to prioritise “technology transfer and capacity-building” for developing countries.

Asked by Reuters about Japan’s conditional loans, Kiyofumi Takashima, a spokesperson for the Japan International Co-operation Agency (JICA), says they carry very favourable terms for borrowers and usually involve local consultants, contractors and workers. Japanese consultants and contractors make “full efforts to transfer technology and skill” to local actors, he says.

JICA policy during the time period Reuters reviewed required that this type of loan carry an interest rate of 0.1% and a 40-year repayment period.

Conditional aid can carry additional costs because recipients cannot consider cheaper contractors. The OECD in 2001 recommended a halt to such requirements, citing research that found they can increase costs for recipient nations by up to 30%.

Saori Katada, a Japan foreign policy expert at the University of Southern California, cites academic research that has found Japanese companies usually charge more than their counterparts from neighbouring countries, like China, South Korea or Taiwan.

Other countries frequently impose similar hiring requirements on grants. Reporters found that 18% of all climate-related grants reported to the OECD between 2015 and 2020 carried such requirements for all or part of the grant.

The EU extended $4bn in grants that required recipients to hire companies or agencies from specific countries. The US reported $3bn and Germany $2.7bn in grants with similar strings attached.

A spokesperson from Germany’s ministry for economic co-operation & development says their grants do not require hiring German companies and there is no policy to favour national suppliers. However, they frequently require recipient countries to pay Germany’s international development agency, GIZ, for consulting and other technical services, the spokesperson says.

Nearly all of the EU’s aid since 2021 has been free of such hiring requirements, an EU spokesperson says.

All aid, regardless of who won the contracts to do the work, benefits recipient countries, a US state department spokesperson says. The spokesperson contested the notion that the US had imposed grant conditions that funnelled $3bn back to its own economy. The aid may have required hiring of companies or agencies from other countries — not just the US — says the spokesperson, who did not offer any specific examples.

This is “part of the same story of the financing going in the wrong direction”, Kyte says.

Reuters