Article, Global

Banks' climate initiatives: a major disappointment

27.06.2024, Finance and tax policy

To align themselves with the Paris Agreement, banks have established and extolled the virtues of voluntary climate alliances. A recent European Central Bank study shows them to be ineffective.

Laurent Matile

Expert on Enterprises and Development

Banks' climate initiatives: a major disappointment

Huge quantities of coal are powering giant aluminium plants in East Kalimantan, Indonesia.
Swiss banks are involved in these supposedly "green" plants. © Dita Alangkara / Keystone / AP Photo

In November 2021, US Treasury Secretary Janet L. Yellen told the COP26 in Glasgow that “the private sector is ready to supply the financing to set us on a course to avoid the worst effects of climate change”. Under pressure to support the economic transition away from carbon-intensive activities – or, in other words, to “align themselves with the climate goals” of the Paris Agreement – financial players worldwide have joined in a series of voluntary climate-related initiatives. They include the Glasgow Financial Alliance for Net Zero (GFANZ), spearheaded by former Bank of England Governor Mark Carney, and billionaire financier Mike Bloomberg.

At the launch of the GFANZ at the COP26, some 100 banks, insurers and asset managers committed to injecting capital worth USD 130 trillion to bring down CO2 emissions and fund the energy transition. Under that commitment, the projects and businesses funded by the loans from signatory financial institutions would have to be “net zero” by 2050, i.e., they should balance the amount of greenhouse gases emitted with the amount removed from the atmosphere. According to the International Energy Agency (IEA), achieving climate neutrality by 2050 will require annual investments of USD 2’000-2’800 billion in clean energy in developing and emerging countries alone. The announcements made in Glasgow by the financial sector elicited high hopes in some quarters... and a healthy dose of scepticism in others.

In a recent study by the European Central Bank (ECB), however, researchers examined the impact of EU banks' voluntary climate commitments – chiefly the Net Zero Banking Alliance, being one of the eight sectoral initiatives making up the GFANZ – on their lending behaviour and in terms of the climate impact of these practices on corporate borrowers. The findings are an embarrassment for the financial players involved.

Profile of signatory banks

The NZBA signatory banks (hereinafter “NZBA banks”) head-quartered in the Eurozone are mega-banks that devote more of their funding to “brown” sectors, with a greater portion of their loans going to the mining sector (including coal, oil and gas), and a smaller portion to sectors classified as “green” under EU taxonomy. NZBA banks' own priority objectives are power generation, oil and gas, and transport.¹ As regards motivation, the study shows that banks are making voluntary climate commitments to boost their ESG (Environmental, Social, Governance) rating and reap reputational and financial benefits, especially when it comes to institutional investors.

The implications for divestment

Sectoral targets represent a voluntary commitment by banks to reducing the emissions they fund by 2030 and 2050, compared to a predetermined baseline. Should the banks choose to meet their targets by divesting, this should mean less funding for the targeted sectors.

The study finds that NZBA banks have cut back their lending to priority sectors by some 20 per cent. At first glance, this would seem to confirm the hypothesis that banks are disengaging from “brown” sectors. But this is not the case. The study found no evidence of reduced investment by NZBA banks – any more than their non-signatory competitors – in priority sectors, or in other high-emission enterprises such as mining companies or companies whose activities are not classified as “green” under EU taxonomy. NZBA banks also did not increase their lending to “green” companies as defined by EU taxonomy after joining the alliance. The study concludes that this casts doubt on the assumption that NZBA banks are actively divesting from “brown” sectors and investing instead in “green” sectors.

No penalties for polluting companies...

The study further shows that the banks' climate commitments have not led to increases in interest rates for the funding of "brown" companies. The observed increase does not exceed 0.25% for priority sectors and 0.55% for the mining sector. Nor do NZBA banks apply lower rates to "green" businesses as defined in EU taxonomy. In other words, the banks neither penalise bad performers nor reward good performers!

... or leverage effect on companies

The ECB study shows that the NZBA has no leverage effect on companies. Indeed, rather than divesting, "climate-aligned" banks can pursue a strategy of "engagement", by pushing corporate borrowers to cut their emissions. They could first insist that the companies to which they lend should set their own climate targets. Indeed, if a company commits to reducing its carbon emissions, the first step is to set a decarbonisation target, which specifies the amount by which the company aims to cut its emissions and the timeline for that reduction. This is tantamount to laying out a climate transition plan.

However, despite the increase in the number of companies that have set such targets since 2018, those borrowing from NZBA banks showed no greater propensity than others to set climate targets. In other words, NZBA banks have no specific climate leverage over companies by way of their engagement.

No impact from voluntary initiatives

Since the signing of the Paris Agreement, financial institutions have announced – with great fanfare – their intention to factor climate considerations into their lending and investment decisions. The findings of the ECB’s first-of-its-kind study brought the lack of impact of the Net Zero Banking Alliance into sharp focus. Although NZBA banks have reduced the volume of their lending in emission-intensive sectors, the "divestment" is no greater than that of non-signatory banks. Moreover, the study is very clear about the outcomes obtained through engagement strategies: corporate clients of NZBA banks are no more active in setting decarbonisation targets than others. The ECB researchers themselves conclude that their study’s findings hold crucial implications for the ongoing debate about "greenwashing" and whether credit rationing by banks can help the global economy realise its net-zero emissions ambitions. As such, there is still every reason for frustration and bewilderment.

From the voluntary to the mandatory

This discussion is now at a turning point. The year 2024 will be decisive in the EU as regards the climate transition plans which financial institutions, too, are expected to formulate. Indeed, such transition plans are central to a new European regulatory architecture, the precise contours of which are yet to be laid out or harmonised.² If they are to be effective, these transition plans must avoid a narrow approach to short- and medium-term climate risk management, and instead encourage banks to reorient their activities in favour of transition. The oversight bodies must be invested with powers, and penalties imposed in the event of non-compliance. An initial step will be taken in Switzerland with the publication – from 2025 onwards – of the first "mandatory climate disclosures“, including by banks, and which are also expected to contain “a transition plan that is comparable with the Swiss climate goals”. Regrettably, the regulatory framework is still imprecise and leaves room for interpretation as to what exactly is required in terms of climate transition plans. These initial reports will therefore have to be carefully scrutinised to gauge the relevance (or otherwise) of this new approach.

The Net Zero Banking Alliance

So far, the most important voluntary climate initiative launched by banks is the Net Zero Banking Alliance (NZBA). It is supported by the UN and comprises 144 members from 44 countries representing some 40 per cent of total assets under management. Several Swiss banks are on board, including UBS (co-founder), Raiffeisen and the cantonal banks of Zurich, Berne and Basel. In signing the commitment, banks undertake to “align lending and investment portfolios with net-zero emissions by 2050”, with “intermediate targets for 2030 or earlier”. These targets must refer to the sectors being prioritised by the banks for decarbonisation, i.e., the most greenhouse gas intensive sectors in their portfolios, and on which the banks can have a significant impact. Furthermore, banks must publish a transition plan explaining how they intend to achieve their sectoral targets. While still at a preliminary stage, the combination of detailed target setting, UN monitoring and outside validation makes the NZBA a stringent, if not the most stringent climate initiative for banks.

¹ Three years after signing, the banks must have set targets for the nine sectors designated by the NZBA, namely, agriculture; aluminium; cement; coal; commercial and residential real estate; iron and steel; oil and gas; power generation; and transport.
² The main aim is to ensure coherence between the approaches of the Capital Requirements Directive (CRD), the Corporate Sustainability Reporting Directive (CSRD), and the very recent Corporate Sustainability Due Diligence Directive (CSDDD).

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UN tax convention

The South on the offensive

13.06.2024, Finance and tax policy

Negotiations are now in progress at the UN on the future drafting of the Framework Convention on International Cooperation in Tax Matters. Our tax policy expert was on hand, and was impressed by the negotiating strength of the African countries.

Dominik Gross

Expert on finance and tax policy

Delegates at the UN Tax Convention meeting in New York in May 2024. The spearhead for more tax justice
through a shift from the OECD to the UN includes Nigeria. © UN Photo / Manuel Elías

The UN is not its own best PR agency, and certainly not when it comes to tax policy. Hence the failure of world public opinion to notice that at the end of April, something historic was occurring inside the UN headquarters on the East River in New York. For the first time in history, the governments of the 196 UN Member States assembled there to negotiate the future shape of the UN Framework Convention on Taxation, the drafting of which was decided by the General Assembly this past December. The main driver of the process is the group of African countries at the UN, known as the "Africa Group". The countries of the Global South (G77) have never made as much headway with their tax policy concerns at the UN as they have in the past six months.

The organisational and substantive structure of the tax convention is now to be hammered out by August of this year, i.e., the "Terms of reference" are to be negotiated. If the General Assembly approves them in September, the convention itself and the details of its content can then be drawn up. That would constitute the basis on which legally binding tax reforms could then be formulated, and which would have to be implemented by Member States thereafter. This therefore represents a one-off opportunity for the countries of the Global South and the global tax justice movement to end the OECD's dominance in international tax policy and make the UN the central player, thereby laying the organisational groundwork for a more just multilateral tax policy.

The dilemma of the North

The past 60 years have witnessed several such attempts to end the fiscal dominance of the rich countries of the North. Today, the outlook is brighter than ever, for two main reasons:

The OECD has proved a disappointment as regards its reforms to multinational corporate taxation. When the BEPS 2.0 (Base Erosion and Profit Shifting) negotiation process began in January 2019 – it ultimately produced the minimum tax in autumn 2022 – the aims were still to prevent tax avoidance by multinational corporations in cross-border trade, distribute profit tax revenues more fairly worldwide, and halt the international race to the bottom in corporate taxation. After five years of negotiations, the OECD has been unable to produce anything more than this version of the minimum tax, of which the additional proceeds are flowing, of all places, into existing low-tax jurisdictions for corporations in the North, rather than to places where the corresponding profits are being generated. There is great frustration in the Global South over this outcome. The aim is now to resolve the injustices of the present international tax system also beyond the confines of corporate taxation, and within the United Nations framework.
Global political developments of recent years and the concomitant new experiences of marginalisation at the multilateral level have united African countries on tax policy matters. Those experiences include discrimination regarding access to vaccines during the Coronavirus pandemic, the refusal of creditor states in the North to effectively tackle the sovereign debt crisis in the Global South, or the international community's failure to act to counter the food crisis in many African countries triggered by the war in Ukraine, and the security crisis impacting cargo vessels on the high seas. This new African unity lends additional weight to the continent's tax policy interests at the UN, giving them a power long unseen in global economic policy.

Accordingly, the representatives of the Global South approached the negotiations in April with confidence, and formulated their demands in a consistent and well-founded manner. These encompass the following dimensions of international tax policy: various aspects of corporate taxation, combating unfair financial flows, taxing the digital economy, environmental and climate taxes, taxing large fortunes, information sharing and tax transparency matters, and also tax incentives. The first written draft of the terms of reference of the convention was published in early June. It addresses almost all aspects of G77 demands and forms the basis for the next round of negotiations, set for July and August in New York.

Switzerland drifts along with no ambition

The South's offensive places the OECD countries in something of a predicament. On the one hand, of the issues so far negotiated in the OECD and with its related forums, they want to transfer as few as possible to the UN, they themselves being beneficiaries of the reforms made hitherto. It is no secret that this also applies to Switzerland. Currently, the country is merely drifting along with OECD States in the UN process, with relatively little ambition. At the start of the process, the State Secretariat for International Finance (SIF) was still hoping not to have to participate at all in the negotiations, as the process was deemed a farce. This was clearly a miscalculation. If the OECD group attempts to hinder the UN process by holding fast to the OECD as the authoritative forum for global tax matters, it would further antagonise the countries of the South at the multilateral level. In the light of the current major geopolitical conflicts with Russia and China, "the West" can really no longer afford this. Ultimately, no-one has an interest in seeing Africa, the largest continent, move into the geopolitical camp of Russia and China.

In the UN tax negotiations, the OECD countries are therefore hiding behind what they consider the panacea: "capacity building". They assert their readiness to provide the tax authorities in the Global South with more expertise and money to enable them to catch their tax evaders. In conference room 3, Everlyn Muendo of the Tax Justice Network Africa (TJNA) had a fitting response to this: "We cannot capacity build our way out of the imbalance of taxing rights between developed and developing countries and out of unfair international tax systems." Unlike the OECD, the UN also allows civil society to attend and speak during the negotiations.

It is not a lack of expertise and technical capacity that is costing the Global South tax revenues, but the international tax system itself and the unfair apportionment of taxation rights between North and South that is inherent in that system. The Africa Group and its allies cannot be expected, any time soon, to content themselves with a negotiation outcome that does not offer the prospect of fundamental changes to the international tax system.

The contribution of Alliance Sud expert Dominik Gross to the negotiations in New York at the end of April:

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Interview with former Foreign Minister Micheline Calmy-Rey

"What is happening in Ukraine or in the Israeli-Palestinian conflict is unacceptable"

21.03.2024, International cooperation

In these times of crisis, former Federal Councillor Micheline Calmy-Rey finds that Switzerland's diplomacy lacks a clear stance. As guarantor of the Geneva Conventions, Switzerland should step up its involvement in support of civilians.

Isolda Agazzi

Expert on trade and investment policy / Media relations French-speaking part of Switzerland

"What is happening in Ukraine or in the Israeli-Palestinian conflict is unacceptable"

Devastation after Friday prayers: Palestinian youths and Israeli soldiers regularly clash in Ramallah.
The city is surrounded by three UNRWA-administered camps for displaced persons and almost 1,000 NGOs. © Klaus Petrus

Alliance Sud: Mrs Calmy-Rey, 20 years after the launch of the Geneva Initiative, the Middle East is witnessing the worst war since the State of Israel was created in 1948. How do you view Switzerland's role in this conflict?

The Geneva Initiative supported by Switzerland was an alternative peace plan signed between Palestinian and Israeli civil society aimed at a comprehensive settlement of the conflict and a two-State solution. In 2022, the Federal Department of Foreign Affairs (FDFA) withdrew its support for this Initiative while continuing to talk about a two-State solution. It must be said that over the past decade, the objective of a Palestinian state did become secondary on the international agenda. We have ignored a conflict deemed to have no solution and continued to engage in the rhetoric about a two-State solution, but Western countries have done nothing to bring it about. The best illustration of this is the weakening of the Palestinian Authority. The thinking was that normalising relations between Gulf States and Israel would lead to a resolution of the conflict, but this is clearly not the case. Today, the idea of a two-State solution has resurfaced, but its implementation remains problematic in the light of the lingering issues around the status of Jerusalem, settlements policy, and the right of return for refugees.

Times have also changed. Isn't the two-State solution even more difficult to implement today than 20 years ago?

Yes, you are right. Look at the trend in the numbers of Jewish settlers in the Occupied Palestinian Territories: in 1993 there were 280,000, today there are 700,000. The building of the separation wall has transformed the West Bank into entirely ungovernable micro-enclaves. More than 90 per cent of the land between the Mediterranean and Jordan is under direct Israeli control. For now, the two-State solution remains wishful thinking.

Eine sieben Meter hohe Mauer, die das Westjordanland von Jerusalem und Israel.

Qalandia checkpoint: At the end of the Second Intifada, a wall was built, seven metres high in places, which today separates the West Bank from Jerusalem and Israel. © Klaus Petrus

Bau einer israelischen Siedlung bei Bet El nordöstlich der palästinensischen Stadt Ramallah, Westjordanland

Construction of an Israeli settlement near Bet El, north-east of the Palestinian city of Ramallah. © Klaus Petrus

What do you think of Switzerland's cooperation in the region at present?

I’m finding it difficult to make out a clear Swiss position. Its message is confusing. In its official position, it called on the parties to fulfil their obligations under international law (IL) and international humanitarian law (IHL). Along with 120 other countries, Switzerland approved a General Assembly resolution calling for an immediate humanitarian truce. But this attitude has drawn criticism from some quarters. At the same time, the head of the FDFA announced Switzerland’s suspension of funding for 11 organisations in Palestine and Israel – thereby catering to the wishes of some political parties that are keen to see an examination of whether development aid to Palestine should be cancelled. In the end, only three Palestinian organisations are being affected by the suspension. Lastly, while Switzerland had initially decided not to cut the CHF 20 million paid annually by Bern to the UN Relief and Works Agency for Palestinian Refugees (UNRWA), it may well reassess its funding in the wake of the announcement of the immediate dismissal of 12 of its employees suspected of being linked to the attack on Israel on 7 October. Regrettably, there is a substantial risk that Switzerland's contribution could ultimately be suspended, despite the colossal humanitarian needs in Gaza.

I’m finding it difficult to make out
a clear Swiss position.

What do you think of Switzerland's announcement that it wants to organize a peace conference on Ukraine?

At the WEF in Davos, Switzerland stated that it would help organize a peace conference. Usually, preliminary talks are held, the aims of the meeting are determined, and a public announcement is then made. In Davos, Switzerland did it the other way round. The fact remains that the situation is different from that of a classic mediation between two States at war. The peace conference would take place after four meetings of security advisers from more than 80 countries, the last of which took place at Davos, and all of which were public. The method therefore had to be adapted. I am pleased that Switzerland is making moves and deploying its not insignificant strengths. At the moment, however, we can only speak of preliminary preparations.

What would happen next?

Russia is unlikely to participate directly in the first summit. At the same time, a peace conference without Russia is inconceivable. In Davos, our President and our Foreign Minister expressed their wish to involve Russia. They affirmed that Switzerland wanted to work with as many Heads of State as possible, especially with States that have so far tended to side with Russia. If instead of merely playing host, Switzerland wants to help shape the discussion, it will also have to determine the content, whence the importance of involving States close to Russia and Russia itself. Besides, it is unrealistic at this stage to expect agreement on most of the points of the Ukrainian peace plan. Switzerland should determine, in the abstract, the points on which there is promise of a common denominator between the friends of Ukraine and the defenders of Russia. There are also technical issues on which interim agreements could be reached in the interests of the parties, for example, on cereals, prisoner exchanges, the safety of nuclear power stations, and so on.

I would like Switzerland to be more outspoken and forthright regarding the observance of international humanitarian law.

You were instrumental in Switzerland's bid for membership of the UN Security Council. What do you think of its performance after a year?

Switzerland has been able to pursue its traditional foreign policy in the Security Council. After the earthquake in northern Syria, it worked with Brazil to facilitate humanitarian access. But the country finds itself on the Security Council at a time when multilateralism is in difficulty, being hampered by the vetoes of the major powers. I would have expected Switzerland to be somewhat more proactive in regard to the application of international humanitarian law. It's a pity that the country isn't doing more in this regard, as we cannot accept what is happening in Ukraine or in the Israeli-Palestinian conflict. No-one is observing the Geneva Conventions, as evidenced by indiscriminate bombing in Gaza, and acts perpetrated by Hamas on 7 October that constitute war crimes. It is unacceptable for so many Israeli civilians to be killed, for Palestinians to be trapped in Gaza by Hamas, and for aid deliveries to be impeded. I would like Switzerland to be more outspoken and forthright regarding the observance of international humanitarian law. After all, it was born in Geneva and Switzerland is the guarantor of the Geneva Conventions.

Westmauer oder Klagemauer im Jüdischen Viertel der Altstadt von Jerusalem mit jüdischen Gläubigen und Ultraorthodoxen.

Western Wall or Wailing Wall in the Jewish Quarter of the Old City of Jerusalem with
Jewish believers and ultra-Orthodox. © Klaus Petrus

At the same time, multilateralism seems weakened... Do you still have confidence in UN institutions, and what role should Switzerland and international Geneva play?

The Security Council is being paralysed by vetoes from one side or another. But the technical agencies are concentrated in Geneva, and when the discussion turns to the erosion of multilateralism, we must also look at what is happening here. The Palais des Nations was closed for a fortnight to save on heating costs, the International Committee of the Red Cross (ICRC) will be laying off 4000 staff, and the Office of the United Nations High Commissioner for Refugees (UNHCR) is also set to shed a good many staffers. Geneva is home to an impressive number of technical UN agencies which, while facing problems, also possess the data required for the smooth running of globalisation. They handle mobile frequencies, patents and trademarks, public health, working conditions, the climate, and the coordination of humanitarian aid. The United Nations needs thoroughgoing reform, not only of the Security Council, but also to make its technical agencies more effective.

How do you view Switzerland's development cooperation? Do you think that the regular budget of the Swiss Agency for Development and Cooperation (SDC) should be used to fund the reconstruction of Ukraine?

From what I can see on the SDC website, it advocates political and economic autonomy for States. Switzerland's priority has been and still is to help the poorest people. In any case, I find it indefensible, from a foreign policy standpoint, to cut aid to the poorest countries – this being a regular budget item that is renewed from year to year and a sustainable SDC aim – and reallocate it for reconstruction in Ukraine. This is undoubtedly a highly desirable and necessary objective, but hopefully one that is limited in time and, as I see it, one that should benefit from special funding.

The Swiss people are finding it difficult to understand why arms are not being sent to Ukraine, but to Saudi Arabia, which is waging war in Yemen.

Does Swiss neutrality still apply today?

Switzerland currently pursues a policy of neutrality. It does not send weapons to belligerents, either directly or through intermediaries. Switzerland condemned Russia's aggression, as it contravened international law. It applies economic sanctions against Russia. Had it not followed up its condemnation with sanctions, it would have opened the way for European sanctions to be circumvented, thereby siding with the aggressor. Yet, the Swiss people are finding it difficult to understand why arms are not being sent to Ukraine, but to Saudi Arabia, which is waging war in Yemen. The war in Ukraine is not typical of our times. Today, armed conflicts between States are the exception. Civil strife is on the increase, as are cyberattacks. And what should we do when things become even more complex? The law of neutrality does not prohibit arms exports to Saudi Arabia, as the case of Yemen does not constitute an armed conflict between countries. The definition of war under the law of neutrality clearly poses a challenge of interpretation.

As Special Envoy of the OIF Secretary-General to monitor the situation in Madagascar, you recently headed an electoral observation mission to Antananarivo on behalf of the Francophonie. This year will see a record number of people going to the polls around the world. Is this a litmus test for democracy?

In Madagascar, the question confronting the community of like-minded countries (Switzerland, the EU, the USA and Western countries) was somewhat different. Madagascar is a gateway between Africa and China, and there is a Chinese and Russian presence on the island. The like-minded community observed the electoral process and formulated observations. It wanted a more inclusive, transparent and open electoral process but, for geopolitical reasons, agreed to finance a less-than-ideal process, and the outgoing president was re-elected. Madagascar is a very poor country and electoral processes cannot be measured by the yardstick that is used in Switzerland. Not all Madagascans have access to electricity, not all polling stations are connected, and means of communication are lacking.

The interview was conducted at the end of January 2024 and translated from French.

Micheline Calmy-Rey

Former Federal Councillor Micheline Calmy-Rey was Head of the Federal Department of Foreign Affairs (FDFA) from 2002 to 2011. She pursued a policy of active neutrality, thereby involving Switzerland in a number of international mediations and peace initiatives. The best known of them is the mediation between the Russian Federation and Georgia, which paved the way for Russia’s membership of the World Trade Organisation in 2011. Switzerland was also involved in mediations between Turkey and Armenia. In 2008, Micheline Calmy-Rey successfully negotiated the agreements on the representation of Georgia in Russia and of Russia in Georgia.

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Economic history

What happened at Bretton Woods? And what did not

25.03.2024, Trade and investments

Eighty years ago, 43 countries met in the US resort town of Bretton Woods and laid the groundwork for the International Monetary Fund and the World Bank. The entire post-war order is often exaggeratedly ascribed to that conference. A recently published book puts things in perspective.

Andreas Missbach

Director

What happened at Bretton Woods? And what did not

Fred M. Vinson, US Secretary of the Treasury, signs the Bretton Woods agreements in Washington, USA,
on 27 December 1947. © KEYSTONE / DPA DC /STR

Whenever the global economy shows signs of strains and stresses, the call for a "kind of Bretton Woods akin to what followed the Second World War" is never far away, said Klaus Schwab in the wake of the coronavirus crisis. A recently published book by economic historian Martin Daunton titled "The Economic Government of the World, 1933-2033", helps put the import of the Bretton Woods Conference in perspective.

The author shows that what 1944 represented was not the design of a coherent structure that merely needed to be implemented after the war so as to kick-start the post-war economic miracle. What instead occurred at the time was merely the launch of a quest. The post-war order was also shaped by altogether different forces, such as the Cold War (at Bretton Woods, the Soviet Union was still being envisaged as a fully-fledged partner), the related Marshall Plan, and the restoration of Germany's economic position in Europe, itself no less related. The system of currencies flexibly pegged to the dollar, itself in turn convertible to gold at a fixed exchange rate, functioned as envisaged at Bretton Woods only from 1958 to 1968.

There was a faction within the US Administration under Franklin D. Roosevelt, the Democrat President from 1933 to 1945, that also thought of the New Deal in international terms. Already in the early 1940s, it drew up plans for a public Inter-American Development Bank meant to undercut the power of Wall Street bankers and favour long-term public development funding rather than private investment. In 1940, the officer with competence for Latin America at the US State Department said that this would usher in a system where finance would serve trade and development (...) in direct contrast to the earlier system, which was based on the notion that development and trade should serve finance. Resistance from Wall Street and in Congress did temporarily scuttle these plans, but the matter had become a topic in its own right, thanks to the discussion around an "International Bank for Reconstruction and Development" (IBRD, still the official name of the World Bank today) in Bretton Woods.

The Global South at the side table

The Bretton Woods Conference was dominated by the USA and Great Britain, and substantial elements of it had been negotiated beforehand. But countries of the Global South were also represented – provided they were already independent (such as in Latin America) or semi-autonomous (such as India). Still completely dependent on commodity exports at the time, Australia, too, shared the same concerns. The conference on the monetary and financial order was not, however, the only forum in which to address their priorities. Already in 1943, a conference had been held on food and agriculture, followed by one on labour a year later, where Australia attempted in vain to establish full employment as pillar of the post-war order on a par with the monetary and trade aspects.

The book

"The Economic Government of the World, 1933-1923" (published by Farrar, Straus and Giroux, November 2023, 986 pages) takes you behind the scenes of the institutions that have shaped the global economy over the last ninety years.

Titelseite des Buchs «The Economic Government of the World, 1933–1923»

The USA and the UK had already agreed on the core elements of the International Monetary Fund, whereby members could peg their currencies to the dollar, which in turn would be convertible to gold at a fixed rate. The underlying idea was to combine stability and flexibility in the monetary system so as to enable countries with trade deficits to devalue their currencies in a controlled manner, thereby avoiding austerity and unemployment. This went hand-in-hand with capital controls designed to shield countries from destabilising capital flows. The US chief negotiator at Bretton Woods, Harry Dexter White (his British counterpart was the economist John Maynard Keynes, to whose economic philosophy – Keynesianism – the entire post-war order would later be attributed), wrote in an early draft of the monetary order that countries should prevent capital flows that served to help the rich avoid "new taxes or social charges".

The USA and the UK also proposed a decision-making model that was linked to the monies paid into the fund, based on the principle of "one dollar, one vote". This conferred disproportionate influence on the UK and veto power on the USA. China and India, backed by Australia, the Latin American countries and France, protested in vain against this. To this day, the quota issue – now rendered all the more urgent by the altered balance of economic power across the global economy – remains unresolved.

There were 19 Latin American delegations at Bretton Woods. Their spokespersons underlined the specific trade balance-related problems affecting countries that were dependent on commodity exports. Their primary concern was not with currency matters but instead with the sharply fluctuating prices of mineral and agricultural raw materials. These countries therefore tried to add development issues to the mandate of the International Monetary Fund (IMF): they called for commodity agreements to stabilise prices and for leeway to promote and protect their own industries so as to reduce their dependence on imports. Their efforts were largely unsuccessful, and while the "Articles of Agreement" of the IMF do contain a commitment to development, implementation is left up to the IBRD, that is to say, the World Bank.

Reconstruction alone, or also development?

The invitation to the Bretton Woods Conference clearly prioritised the monetary fund – for which "definite proposals" were to be formulated – over a bank for reconstruction. For the delegations from the Global South, however, key aspects of the discussion on the IBRD were of great relevance. One centred on whether the bank should primarily guarantee private investments or grant loans independently. The UK and the representatives of Wall Street wanted a bank that would primarily coordinate and secure private transactions. That was not surprising, as the UK was still the leading financial centre – 70 per cent of global financial transactions were taking place in sterling even after the war – before Wall Street overtook the City of London. A second question revolved around the matter of "reconstruction" versus "development" in the Bank's mandate. Lastly, there was the related matter of whether the Bank would be able to grant loans that yielded no direct economic return, such as for structural sewerage or health programmes that boost a country's long-term productivity, or strictly for specific projects that are also of commercial interest – a power plant for example. Anyone following the current discussions regarding the World Bank would be hard put not to utter a "sounds familiar" – even 80 years on.

The upshot was a compromise that placed reconstruction and development of IBRD members on an equal footing. There was not much flexibility on the other issues, however. Just 20 per cent of the capital could be granted directly as loans (the remainder was earmarked for securing private investments) and indeed – barring (unspecified) exceptional cases – only for specific projects with a "productive purpose".

The third and last attempt: an international trade organisation

While the discussion and decision-making revolved only around the Monetary Fund and the World Bank in 1944, thought had nonetheless been given from the onset to an international trade organisation as the third pillar of the global economic order. Here too, the aim was to prevent conditions like those that prevailed during the interwar period, when countries erected high protective tariff walls and engaged in trade wars (Daunton prefaces his book with a quote from Donald Trump: "Trade wars are easy to win").

After the disillusionment of Bretton Woods, and now reinforced by an independent Indian subcontinent, the countries of the Global South placed their hopes in the negotiations on the International Trade Organisation (ITO). These talks took place in Geneva in 1947 and in Havana in 1948. The non-industrialised "developing countries" made up a majority at the Havana Conference. That meeting was overshadowed by the Marshall Plan, and many countries of the Global South were hoping or expecting to benefit from aid on the same terms. It nevertheless became increasingly apparent to them that this would not be the case (even though the official USA refusal came only after the conference). Spearheaded by the countries of Latin America and by India, the "developing countries" used their majority at the Havana Conference to make the ITO Charter more rigorous by incorporating the demands they had failed to obtain at Bretton Woods: restricting free trade so as to build up their own industries, preferential tariffs and commodity agreements. Furthermore, the ITO was to operate by the principle of "one country, one vote".

Foto von Wirtschaftshistoriker Martin Daunton.

Professor Martin Daunton

Martin Daunton is Emeritus Professor of Economic History at the University of Cambridge. He is currently a visiting professor at Gresham College in London.

This all came to nothing when US President Truman decided, in December 1950, not to submit the agreement to Congress. Most other industrialised countries had made their approval contingent on that of the USA, with the result that the ITO died a quiet death in the early 1950s. What remained was the General Agreement on Tariffs and Trade (GATT), which had already been negotiated in 1947 and provided for gradual tariff reductions. It was only in 1994, with the founding of World Trade Organization (WTO) in an entirely different context and after seven years of negotiation, that the architecture was completed as originally planned.

The post-war economic order was termed "embedded liberalism" by John Ruggie (later to become the UN special representative on human rights and transnational corporations). Martin Daunton asserts that to the countries of the Global South, what was being embedded was "a form of neo-colonialism and a global economy based on the interests of the advanced industrial economies."

Their demands did not simply vanish into thin air, however; they were revived in the United Nations starting in the 1960s. Decolonisation had altered its membership, with 16 African countries joining the UN in 1960 alone. The first United Nations Conference on Trade and Development (UNCTAD) took place in Geneva in 1964. In the 1970s, debates on the "economic government of the world" were dominated by the theme of a new international economic order, which the South had placed on the agenda. After years of negotiations, Ronald Reagan and the Latin American debt crisis of the 1980s put paid to that attempt.

Many of the structural problems raised by the South at Bretton Woods are still unresolved today. Hence the reason why the reference to that Conference still makes sense even after reading Martin Daunton's book, which puts the import of the Conference in perspective. This is especially true with regard to the following aspect of the briefing by UN Secretary-General António Guterres to the General Assembly in 2023: "It is time for a new Bretton Woods moment. A new commitment to place the dramatic needs of developing countries at the centre of every decision and mechanism of the global financial system."

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Article, Global

Making impact measurement more flexible

20.03.2024, International cooperation

The impact of international cooperation is a recurring theme in the media and in Parliament. Yet the ongoing debate says more about the shortcomings in the evaluations and the inadequacy of communication regarding international cooperation in general, than about the actual impact of projects.

Kristina Lanz

Expert on international cooperation

Discussion with a women's group in Madagascar. © Andry Ranoarivony

While the Swiss Agency for Development and Cooperation (SDC) and the State Secretariat for Economic Affairs (SECO) like to emphasise their successes, Parliament and the media regularly use flashpoints like Afghanistan as an occasion for criticising the inadequate impact of international cooperation (IC). But how is the effectiveness of IC even measured, and does the current measurement method make sense? The Control Committee (CC) of the Council of States has also raised this latter question. It commissioned the Parliamentary Control of the Administration (PCA) to examine the tools used to gauge the impact of IC, with the study focusing on the tool most frequently used – that of evaluations. The report of the PCA is now public, and makes one thing abundantly clear: while evaluations are useful as a management tool, they are rather ill-suited to impact measurement.

The effectiveness of international cooperation is reported to Parliament on the basis of success rates, with both SDC and SECO showing above-average success rates of over 80 per cent. These success rates are based on the consolidation of external, project-specific assessments. As the PCA shows, this is problematic for various reasons. The quality of individual assessments varies and there is no standard methodology; most evaluations take place during the life of projects and therefore provide no indication as to their long-term impact; the recommendations of individual evaluations are classified as inadequate and there is not always follow up by the SDC, SECO and the FDFA’s Peace and Human Rights Division (PHRD); moreover, the individual evaluations make scant reference to the overarching aims of international cooperation.

But, as the Control Committee of the Council of States also notes, it would be wrong to conclude from these findings that international cooperation is ineffective. It primarily recognises that Switzerland does achieve many of its international cooperation goals and also implements useful projects. Yet, it is critical of "the Federal Council's practice hitherto of using dubious success rates to account for the effectiveness of international cooperation." But neither does the CC wish to abolish evaluations as such or to declare them to be pointless, as they can undoubtedly be useful as internal management mechanisms if they are meaningfully designed and in fact serve internally to manage or, in other words, to adapt projects.

The trend towards evidence-based approaches and impact analyses

Besides the critical assessment of current impact measurement practices, there are growing calls in Switzerland for evidence-based approaches and impact analyses. On the one hand, this means that scientific evidence will be increasingly factored into the design and conception of new projects, and on the other, that more scientific impact analyses will be undertaken. These in turn refer primarily to "randomised control trials" (RCTs), which have gained appreciable impetus in recent years thanks to the work of Nobel Prize laureates Esther Duflo and Abhijit Banerjee. The principle is simple: the project design entails randomly forming two groups – one that benefits from the development project and another that does not. For example, a number of schools in Kenya are randomly selected – textbooks are distributed to the children in half of the schools, while the children in the control group receive none. Both school attendance and grades are recorded for all the children, before and after the books are distributed. A year later, the same data is again collected. If the group that received textbooks actually shows better school attendance and grades, it may be concluded that the project has been successful and can be replicated in other settings. That, at least, is the theory.

In practice, however, various questions and dilemmas arise:

Most IC projects today are considerably more complex; they are not merely about distributing schoolbooks or medicines. In fragile contexts, in particular, numerous factors interact and contexts change quickly, requiring projects to be swiftly adapted. This is hardly compatible with the experimental logic of scientific impact analyses.
Modern international cooperation embraces criteria such as participation and localisation. Many of today's IC projects are therefore implemented by local entities, which also help develop the projects. At best, project beneficiaries should also have a say. This, too, does not square with the logic of impact analyses, in which people are viewed more as objects of study than as active individuals.
Following on from point 2, randomised field studies also raise ethical questions, as many people affected by poverty and discrimination are deliberately included in experiments without benefiting from them.

The case for a rethink

What, then, is the solution? Taxpayers, development agencies and people affected by poverty all have an interest in seeing international cooperation work. But does that really call for more and more figures and statistics? Often based on rigid bureaucracies, planning instruments and evaluations, current practice offers little indication of the actual added value of IC. And at best, randomised field studies are suited to a small proportion of IC projects.

Parliament and the public deserve one thing above all: an honest debate on international cooperation, including both the successes and the challenges. Switzerland has scored many international cooperation successes, as borne out repeatedly by individual projects and scientific studies. But it often takes time for impacts to be felt. When it comes to the rule of law or the strengthening of local civil society – both of which are fundamental to sustainable development – an immediate impact is not always clearly achievable. Besides, as the case of Afghanistan shows us, achievements can be quickly wiped out, especially in times of crisis.

Apart from improved communication and outreach work, both the practice and impact of IC can be enhanced by better harnessing existing scientific studies and encouraging stakeholders to conduct their own studies – especially in the realm of thematic and country strategies. But project work itself requires more flexibility than rigidity, and it is important for all projects to be clearly managed for results. In concrete terms, this means working with local partners to establish aims that are aligned with those prescribed by law, i. e., assisting in the alleviation of need and poverty in the world and promoting respect for human rights and democracy, the peaceful coexistence of peoples as well as the conservation of natural resources (Art. 54.2 of the Federal Constitution), and also the specific goals laid out in the IC strategy. Rather than relying on rigid logframes for project implementation, it should be possible, at any time, to adjust measures (and goals if need be), should the planned measures prove no longer expedient or if the context changes. This calls for constant monitoring, which could well be done by the implementing partners, especially as local partners usually know best when and which adjustments are needed. Moreover, post-project evaluations can also be useful in determining whether and how the set goals have been achieved. However, as the PCA report also states, these evaluations should ideally be interdepartmental in nature and guided by clear criteria.

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Climate justice

No fossil fuel phase-out without climate finance

21.03.2024, Climate justice

Switzerland is not prepared for the burgeoning expectations regarding its future contribution to international climate finance. New funding sources must be found if additional funds are to be allocated for climate protection and adaptation in the Global South.

Delia Berner

Expert on international climate policy

No fossil fuel phase-out without climate finance

Extraction of fossil fuels in Bakersfield, USA. © Simon Townsley / Panos Pictures

Last December at the climate conference in Dubai, puzzled media representatives asked Swiss Environment Minister Albert Rösti whether he was comfortable with promoting the phase-out of fossil fuels by 2050. He reassured them that he was. The world will have phased out coal by 2040, he added, in line with Switzerland's position in the plenary. What he did not say was that phasing out coal, oil and gas will require several hundred billion dollars in climate funding for the Global South – per year. And another comparable amount will be needed to fund adaptation in least developed countries – which, despite having produced almost no greenhouse gases, are being ever more greatly impacted by the consequences of the climate crisis – and for compensating those affected. That will be several times the current financing target of $100 billion per year. The financing shortfall for climate protection measures in the poorest countries is growing constantly. Despite this, the funds being provided by those – like Switzerland – who caused the climate crisis, still fall short of the 100 billion promised. Besides, the debt crisis and other factors are hampering the self-funding capacity of least developed countries. Many countries in the Global South feel left in the lurch by the North.

Against this complex backdrop, this year's climate conference will be working out a new funding target. The yardstick will be the extent to which it enables the countries in the Global South to implement ambitious climate protection plans and adapt to global warming as best they can. An ambitious and credible new climate funding target is a must if, in the course of 2025, all countries are to submit new five-year climate plans that are in line with the aims of the Paris Agreement. The stakes will therefore be high when delegates gather in Azerbaijan in November for the negotiations, and expectations placed on the rich countries will rise substantially. Switzerland, too, should therefore be encouraging polluter countries to provide much more public funding for climate finance. In a guest article in Climate Home News, the chief negotiator for the Least Developed Countries (LDCs), Malawi's Evans Njewa, called on negotiating delegations from the Global North to cease hiding behind their parliaments: "They stress that they have no mandate, or possibility to scale up funds, as parliaments will not approve. So, as parliamentarian debates about budgets and allocations begin early in the year, they need to act now", he said.

Swiss Government resisting the need for action

This pattern can also be seen here at home. Despite speaking up, during climate negotiations, for the worldwide phase-out of fossil fuels by 2050 in keeping with the aims of the Paris Agreement, Switzerland is dragging its feet when it comes to funding, as it cannot point to any domestic policy decisions to increase funding contributions. In reality, the Federal Council is not even attempting to obtain additional funding from the parliament. Why is this so?

So far, Switzerland's climate finance contributions have come mainly from the International Cooperation (IC) budget, which itself is already receiving insufficient funds for worldwide poverty alleviation, and is now facing the prospect of yet another massive reallocation of funds towards reconstruction in Ukraine. This means that current climate financing is already being double-counted along with poverty alleviation projects. But new, additional money is needed if Swiss climate funding is to effectively help support climate plans in the Global South. The Federal Council should be working at the legislative level to devise alternative funding options so that IC funds can continue to go towards global poverty alleviation, the strengthening of basic education and health services, and towards other key tasks. A year ago, it entrusted the Administration with working out ways in which Switzerland could provide more climate funding in future. At the end of last year, an externally commissioned study was published without comment on the website of the Federal Office for the Environment. In it, experts recommend that Switzerland should tap into new funding sources, for example, proceeds from the carbon emissions trading scheme. Yet the Federal Council has done nothing so far. The new legislature plan indicates that, for the next three years, the Government has no intention of submitting an item of business on climate funding to the parliament. It will be relying exclusively on the new four-year credit line for international cooperation for the 2025–2028 period, which offers no scope for additional climate funding.

If the Federal Council fails to act – which would be irresponsible in this case, as the climate negotiations are within its remit – the parliament can also take the initiative. During the past winter session, National Councillor Marc Jost brought forward a motion to enable the parliament to draft new legislation on international climate and biodiversity funding.

Without finance, there is no action

The Baku climate conference is fast approaching – so what remains to be done? Switzerland must rethink its previous negotiating position on funding and strive for an ambitious goal that aligns with the needs of the people in the Global South and distributes the financial responsibility fairly among rich countries, as the ones accountable for the climate crisis. Only in this way can coal be phased out by 2040 and all fossil fuels by 2050. The international pressure to agree on an ambitious target will therefore be intense.

This will also inevitably mean greater pressure on Switzerland to scale up its contribution many times over. If funds are to be increased quickly enough, Switzerland must begin the legislative work now and find new sources of climate funding.

Evans Njewa puts it as follows: "We must all remember that without finance, there is no action, and without action we will never be able to manage the climate crisis."

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Article

Carbon offsetting abroad: the illusion of voluntary action

07.12.2023, Climate justice

Pressure from civil society and the media has rightly discredited the carbon markets. The current system is not delivering on its promises and is harming the Global South.

Edited by Maxime Zufferey

Carbon offsetting abroad: the illusion of voluntary action

Excessive recourse to offsetting instead of a substantial reduction in emissions is in no way sustainable.

The voluntary carbon market facilitates the trading of carbon credits. It allows a company to continue emitting CO₂ while offsetting its own emissions by funding projects that reduce emissions elsewhere. On paper, carbon offsetting is seen as the most effective market-based approach for achieving results in terms of reducing global emissions. The idea is to maximise the efficiency of available resources in reducing emissions by using them where they are most beneficial. For example, once a company has reduced its own emissions as cost-effectively as possible, it could then allocate resources to low-carbon technology projects or reforestation projects to arithmetically offset the emissions it has not yet reduced. In practice, however, the assumption that cheap carbon credits are the answer is much criticised. They are seen as undermining the goal of reducing emissions and helping, counterproductively, to maintain the status quo. More recently, increased scrutiny by civil society has raised doubts about the often-misleading promises of 'carbon neutrality' made by some companies under the guise of offsetting, while their emissions continue to rise.

Carbon markets: taking stock

The carbon market has been controversial since its inception in the late 1980s and especially since the signing of the Kyoto Protocol in 1997. Its development has given rise to parallel markets, namely the 'compliance' market and the 'voluntary' carbon market, which are sometimes difficult to distinguish due to the potential overlap between them. The compliance market involves mandatory emission reductions and is regulated at the national or regional level. The best known of these markets is the European Union Emissions Trading Scheme (EU ETS), which Switzerland joined in 2020. Under this mechanism, certain large emitters – power plants and large industrial companies – are subject to an emissions cap, which they can offset by buying allowances from other members who have reduced their emissions beyond the target. This cap is reduced each year. A laborious implementation process, the system has led to a certain reduction in emissions in the sectors concerned. However, there has been criticism that it has been too generous in allocating free allowances to large emitters, that it has allowed an influx of international credits and that it has not set sufficiently ambitious reduction targets. Furthermore, the price of carbon is still too low; it should reflect the social cost of a tonne of emissions and be gradually increased to USD 200. The voluntary market, on the other hand, currently has no minimum reduction targets and remains largely unregulated. Outdated carbon credits are also frequently used, as are credits whose quality and price vary widely, sometimes even below USD 1.

The limits of the voluntary market

The crisis of confidence that has hit the voluntary carbon market is not only due to its unregulated nature and inadequate framework, but also to the technical limitations of the mechanism. Carbon credits rarely correspond to the exact unit of 'compensation' claimed, and their impact is systematically overestimated. This is due to the use of an unreliable quantification method and the lack of a comprehensive monitoring system that is genuinely free of conflicts of interest. Moreover, it is often unclear whether offset projects meet the additionality criterion, i.e. whether they would not have been implemented anyway, without the financial contribution of carbon credits. This is particularly true for renewable energy projects, which have become the most cost-effective source of energy in most countries. Another major challenge is double counting, i.e. the crediting of carbon credits by both the host country and the foreign company. This practice violates the principle that a credit can only be claimed by one and the same entity. The Paris Agreement has increased the risk of double counting because, unlike the Kyoto Protocol, it also requires developing countries to reduce their emissions.

There are also many doubts about the permanence of registered offsets. The extraction and burning of fossil fuels is part of the long-term carbon cycle, while photosynthesis, and hence the sequestration of carbon by trees or the absorption by the oceans, is part of the short-term biogenic carbon cycle. Trying to offset the long-term accumulation of CO₂ in the atmosphere with offset projects limited to a few decades therefore seems illusory. In addition, anthropogenic climate change itself, with the increasing frequency of fires and droughts and the spread of pests and diseases, threatens the storage of carbon in temporary sinks such as soils and forests. There is also the risk of leakage, where a project to protect forests in one region leads to deforestation elsewhere. As for the prospects for technological solutions using carbon capture and sequestration devices, these should not be overestimated. They are currently neither competitive nor available on the scale required in the short term. Even in the future, they are likely to play only a limited albeit necessary role.

Carbon colonialism perpetuates injustice

More fundamentally, over-reliance on offsets rather than substantial emission reductions is unsustainable. As Carbon Market Watch points out in its report (Corporate Climate Responsibility Monitor) on the integrity of the climate change targets of companies claiming to be pioneers, the implementation of these companies' current 'net-zero roadmaps' is highly dependent on offsets. At the current rate, demand for land to generate carbon credits will far outstrip availability, directly threatening the survival of local communities, biodiversity and food security. At the same time, emission reduction projects popular in the voluntary market, such as reforestation and other 'nature-based solutions', are often based on 'fortress models' of conservation, in which protected areas are fenced off and militarily protected – at the expense of the original inhabitants. Far from being "empty spaces" to be planted with trees by polluters, these projects often take place on land inhabited by indigenous communities. The new gold rush for nature-based solutions through the privatisation of natural carbon sinks is exacerbating historic and complex land conflicts and confronting forest dwellers with the real threat of dispossession. This rings even truer when such projects deprive indigenous communities of their right to self-determination and to give their free, prior and informed consent to all projects affecting their territories.

Overall, the current system is woefully inadequate to the urgency of the climate crisis, and is also deeply unjust. It grants pollution rights to the biggest greenhouse gas emitters – mainly large corporations and economies in the Global North. They are allowed to continue with business as usual, while economic systems and lifestyles, mainly in the Global South, are restricted. This carbon colonialism thus shifts the responsibility for combating climate change and corporate deforestation onto local communities that have contributed the least to climate change.

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Article, Global

Pandora's box is open

21.03.2024, Financing for development

In October 2023, the OECD Development Assistance Committee (DAC) took a decision that has largely escaped public notice. It is about including "private sector instruments" in development financing, and could hold far-reaching implications for the poorest countries in the South.

Laura Ebneter

Expert on international cooperation

Laurent Matile

Expert on Enterprises and Development

The way of measuring development funding has been a topic of discussion since its inception. While donor countries in the North wish to be seen as being as generous as possible, countries in the South want the biggest possible share of the funds to go where it is most needed. This is the backdrop to the current debate on the inclusion of public contributions for loans and various types of investment in enterprises located in countries of the South.

A modernisation process fraught with pitfalls

In February 2016, and as part of the process of "modernising" the definition of Official Development Assistance (ODA), members of the Development Assistance Committee (DAC) of the Organisation for Economic Co-operation and Development (OECD) agreed for the first time on principles by which to account for Private Sector Instruments (PSIs). These instruments include loans to enterprises, equity investments, mezzanine financing¹ and guarantees.

At the time, however, DAC members failed to agree on the rules that would govern the inclusion of PSIs in ODA, in accordance with the principles agreed. Provisional reporting methods were therefore put in place in 2018. As PSIs represent just 2-3 per cent of total ODA, the solution was deemed acceptable while the DAC worked to find a more permanent solution. In October 2023, a new permanent agreement was reached on PSIs, with potentially far-reaching consequences for development financing.

The problem of additionality

Since the introduction of ODA in the 1960s, one of its key principles has been that of concessionality. Under this principle, development funds are exclusively grants, or take the form of preferential loans. The OECD-DAC decision of October 2023 supplanted this principle and redefined ODA. The new rules require that when private sector instruments are included, evidence must be presented regarding the role of the funds allocated to these instruments in adding value, whether financially or in terms of content and development (see “The three definitions of additionality”). DAC member countries are expected to provide information on the type of additionality of the PSIs they use. This is mandatory.

But the DAC itself regrets that the data provided so far has been sketchy and that the additionality reports submitted are "incomplete and unconvincing". Yet, solid reporting on additionality is the key to ensuring that DAC members effectively allocate scarce ODA resources where the needs are greatest, and where they can be most impactful.

The three definitions of additionality

For a PSI activity to qualify as ODA, it must provide additionality at the financial level or in value and development terms:

A PSI activity provides "financial additionality" when private sector partners (e.g., a local enterprise) are unable to raise funds on the capital markets (local or international), on the terms and/or the scale needed; or where the activity mobilises private sector funds that would not otherwise have been invested.
There is "value additionality" when, in addition to its investment, the public sector provides non-financial value for private sector partners, which was not available from capital markets and is intended to help generate better development outcomes. This "value" is often sought through investment conditionality (e.g., imposing ESG [environmental, social, and governance] criteria), active participation (e.g., in the board of directors), capacity building activities, advisory services and other forms of technical assistance, and by other means.
Lastly, there is "development additionality" if the project aims to achieve a development impact that would not have materialised without the partnership between the public and private sectors.

In the absence of adequate additionality reporting, however, one can only make presumptions about, rather than demonstrate the added value of PSIs. In other words, without this information, there is the risk that ODA could be artificially "inflated" by creative accounting practices, and this would increasingly water down the definition of "development assistance". On a seemingly positive note, as of 2026, information provided on the additionality of PSIs will undergo special examination by the DAC Secretariat "to enhance the integrity of ODA". It is to be hoped that these verifications will make for greater transparency.

The key role of development finance institutions

According to a Eurodad study, between 2018-2021, a total of USD 20.6 billion was reported as PSIs, representing 3 per cent of total ODA. By themselves, the four main European countries (UK, EU, Germany and France) account for 80 per cent of the total of PSIs from DAC members. Switzerland ranks 11th, with 0.7 per cent of the total.

Eighty-five per cent of the total was channelled through Development Finance Institutions (DFIs), including the Swiss Investment Fund for Emerging Markets (SIFEM) in Switzerland. The respective DFIs of the four major European donors – British International Investment (BII) in the UK, the European Investment Bank (EIB/EU), the Kreditanstalt für den Wiederaufbau (KfW) and the Deutsche Investitions- und Entwicklungsgesellschaft (DEG) in Germany, and France's Proparco – account for 91 per cent of all PSI ODA reported by these DAC members. Some of these DFIs have seen their portfolios double in the space of ten years, and the amount of DFI activity is expected to grow further in the years ahead.

Distribution of PSIs by country groups (based on income)

Source: OECD-DAC Creditor Reporting System 2023.

These development finance institutions have a profitability mandate and therefore invest preferably in countries and regions with a lower risk profile and more secure profit expectations. As the figure above illustrates, between 2018 and 2021, most of the private sector instruments were invested in upper middle-income countries (59 per cent), followed by lower middle-income countries (37 per cent). Only 4 per cent of PSIs were allocated to least developed countries (LDCs). This shows that only marginal amounts of the development funds managed via PSIs reach the countries most in need.

SIFEM: Switzerland's development finance institution

Switzerland reports some CHF 35 million as ODA in the form of PSIs, which include capital payments of CHF 30 million per year to SIFEM, plus a few other instruments (less than CHF 5 million). SIFEM specialises in the long-term funding of SMEs and other "fast-growing" enterprises, in order to stimulate economic growth and create jobs.

Amounts mobilised from the private sector

A distinction must be drawn between PSIs and "amounts mobilised from the private sector", in other words, all private funding mobilised through public development finance interventions, regardless of the origin of the private funds. These funds are not part of ODA, but may be included in the broader indicator of development financing – total official support for sustainable development (TOSSD).

In its latest edition, the 2023 DFI Transparency Index – which analyses the activities of the 30 leading DFIs with assets totalling USD 2000 billion – SIFEM occupies a very low position in the transparency rankings! At the close of 2022, SIFEM's investment portfolio amounted to USD 451 million, and was allocated almost entirely to middle-income countries (MICs). More specifically, 62 per cent was invested in lower middle-income countries and 34 per cent in upper middle-income countries. Low-income countries (such as Ethiopia and Malawi) accounted for just 3 per cent of the investment portfolio. As of the same date, only 42 per cent of the portfolio was invested in priority countries for Switzerland's international cooperation.

Private sector instruments for whom?

We are witnessing a critical period where wars, the fallout from the coronavirus pandemic and the growing impacts of climate change are plunging millions of people into poverty. Donor-country resources are remaining flat or diminishing, and are therefore being used to cope with a growing number of crises and wars. This raises the question as to whether the development of private sector instruments, the vast majority of which are allocated to better-off developing countries, is the ideal path for Switzerland's international cooperation (IC). The current database is not sufficient to allow for a definitive assessment of the effectiveness of these instruments. But the current geographical distribution is such that we question whether private sector instruments are contributing to the constitutional mandate of IC – i.e., to assist those in need and combat poverty in developing countries and regions, and to favour the most disadvantaged population groups. These instruments should therefore not play a pivotal role in Switzerland's international cooperation, also in the future. But it is much more crucial to ensure that the modernisation process does not further dilute the principal benchmark for development financing, i.e. ODA, and that Pandora's box is closed once again.

¹The OECD defines mezzanine financing as instruments relating to types of financing that fall between an enterprise's senior debt and equity, displaying features of both debt and equity.

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Article

A new El Dorado for commodity traders

07.12.2023, Climate justice

In a carbon market that has demonstrated its limitations, an unexpected player has invited itself to the negotiations. Commodity traders have recently stepped up their CO₂ trading, without scaling back their fossil fuel business operations.

Emissions trading has also attracted strong interest of the largest emitters, above all commodity traders.

Natural gas labelled "CO₂-neutral" or concrete with "net zero" certification: the list of seemingly climate-neutral consumer goods has grown steadily over recent years. The accounting trick behind carbon offsetting is that a greenhouse gas emitter – whether a company, an individual or a country – pays for another player to avoid, reduce or cease their emissions. This enables companies to market themselves as they see fit by presenting themselves to their customers as committed climate protectors, even though they are not reducing their own emissions. The voluntary carbon market has reached a crossroads, oscillating between an outright boom and the crisis of confidence recently triggered by greenwashing allegations.

On the one hand, there is the economic reality of a voluntary carbon market, which quadrupled to USD 2 billion in 2021 alone – and could well reach USD 50 million by 2030 – and which is attracting strong interest from the biggest emitters, foremost among them commodity traders. This exponential market growth is attributable, in part, to the growing number of "net-zero" commitments by the private sector in the face of popular pressure and, in part, to the economic and logistical alternative that offsetting represents compared with reducing carbon footprints. On the other hand, damning reports about the poor quality of voluntary carbon market projects are coming thick and fast. They caution against the unbridled development of a market whose real impacts on climate protection is depicted as ranging from negligible to downright counterproductive. The ETH Zurich and the University of Cambridge have shown, for example, that a mere 12 per cent of all existing credits in fields where most offsetting occurs – renewable energies, cooking stoves, forestry and chemical processes – actually reduce emissions. Reports on the flagship South Pole project Kariba by the investigative journalism platform Follow the Money have told of vastly overestimated figures. The Zürich-based company then cancelled its contract as Carbon Asset Developer for the project in Zimbabwe. As for the NGO Survival International, it denounces a voluntary carbon offset project in northern Kenya, which is taking place on land belonging to indigenous communities. Their investigation uncovered potentially serious human rights violations that are jeopardising the living conditions of local livestock farmers.

What then is the voluntary carbon market? An ill-conceived marketing solution and dangerous distraction from the urgent need for transformative climate protection measures by the private sector? Or a genuine business opportunity to support corporate efforts to tackle climate change and a much-needed multi-billion-dollar cash injection for projects to cut emissions and protect the biodiversity in developing countries?

CO₂ certificates – the commodity of the future

As a pioneer in the bilateral trade of CO₂ certificates under the Paris Agreement, Switzerland is a key player in the carbon market, including in its voluntary segment. It is home to South Pole, the leading provider of voluntary CO₂ certificates, and to Gold Standard, the second largest certifier. Perhaps more surprising is the market positioning of the Swiss and Geneva-based commodity trading giants, admiralships of a commodities sector that is posting one record a year after another. These new investments are explained by the potential of this opaque market to generate substantial margins and prolong business as usual. It is worth noting that this market is unregulated when it comes to prices or the distribution of revenue from CO₂ credits. According to Hannah Hauman, Trafigura's Head of Carbon Trading, the carbon segment is now the world's biggest commodity market, having already overtaken the crude oil market.

In 2021, Trafigura – one of the world's largest independent oil and metal traders – decided to open its own carbon trading office in Geneva and to launch the largest mangrove reforestation project on the Pakistani coast. A year later, however, its coal trading volume increased to 60.3 million tonnes. In its 2022 annual report, not only did Geneva-based energy trader Mercuria declare its carbon neutrality, it also disclosed that 14.9 per cent of its trading volume comprised carbon markets, versus 2 per cent in 2021. In early 2023, Mercuria co-founder Marco Dunand announced the creation of Sylvania, a USD 500-million investment vehicle specialising in nature-based solutions (NbS). Shortly thereafter, he launched the first jurisdictional programme with Brazil's Tocantins State to cut emissions from deforestation and forest degradation, with a volume of up to 200 million in voluntary carbon credits. Even so, at almost 70 per cent, oil and gas still make up the company's main business. Vitol, Mercuria's neighbour on the shores of Lake Geneva and the world's largest private oil trader, can look back on over 10 years of experience in carbon markets and is considering expanding its activities in that field. In carbon trading, the company is aiming for a market volume comparable to its share of the oil market. For 2022, that share was 7.4 million barrels of crude oil and oil products per day, which corresponds to more than 7 per cent of global oil consumption. Communication is less transparent from crude oil trader Gunvor, which is also planning to ramp up its CO₂ trading volume in the years ahead; the same goes for Glencore, which has a years-long track record in the area of biodiversity-related offset payments, central to its sustainability strategy. For 2022, Glencore estimated its emissions throughout the value chain to be 370 million tonnes of CO₂ equivalent, or more than three times Switzerland's total CO₂ emissions.

These companies describe themselves as drivers of the transition, and take credit for having accelerated that process by incorporating carbon trading into their portfolios. The fact remains that they are pursuing a two-pronged strategy by investing in both low-carbon and fossil fuels, with the latter still clearly dominating. Besides, none of these commodity traders has yet announced their intention to phase out fossil fuels, which is indispensable if we are to remain below the 1.5°C temperature increase stipulated in the Paris Agreement. The opposite is the case: companies are relying heavily on carbon offsetting to fulfil their climate undertakings, and this allows them to continue pursuing their short-term profit targets while delaying the worldwide phase-out of fossil fuels. Given the absence of regulations to limit fossil fuel investments and climate-degrading activities, it is illusory to think that the commodity trading industry can bring about the transition and that the goals can be attained through the voluntary carbon market. So long as companies fail to do the utmost to lower their own emissions, nature-based solutions will remain greenwashing, and declarations of intent in favour of the transition will be no more than a sham. These companies are pretending to put out a massive fire that they themselves keep feeding.

Dubai as referee

The UN Climate Change Conference (COP28), taking place in Dubai in December 2023, is expected to set the course for the future and the credibility of the voluntary carbon market. Among other things, the negotiations will cover the implementation of Article 6.4 of the Paris Agreement, which could serve as a harmonised framework for a genuine worldwide carbon market. And to this end, the prominent role of COP President Sultan Al Jaber, CEO of the world's 11th largest oil and gas producer, the Abu Dhabi National Oil Company (ADNOC) – which has just opened a carbon trading office – and the massive presence of fossil fuel and commodity multinationals at the negotiating table could well tip the balance. The requirements in respect of transparency, generally applicable rules and effective controls in the voluntary carbon market are therefore likely to be watered down.

While advocates of the voluntary carbon market acknowledge some of the sector's current shortcomings, they remain convinced that the various self-regulation initiatives, such as the Voluntary Carbon Markets Integrity Initiative (VCMI), and the formulation of standards will lead to a clear demarcation of credible carbon credits. Opponents, for their part, do not believe in the transformative power of a voluntary, self-regulating market. They see the discussion around carbon offsetting as a possible diversionary tactic that reinforces the status quo. They argue for a complete paradigm shift. The current carbon offset market based on the "tonne for tonne" principle – i.e., a tonne of CO₂ emitted somewhere is mathematically offset by a tonne of CO₂ saved elsewhere – should be transformed into a separate market for climate contributions based on the "tonne for money" principle, i.e., a tonne of CO₂ emitted somewhere is financially internalised at the true social cost of a tonne of emissions. Thus, by setting a sufficiently high internal price for their residual emissions, carbon credits would become the expression of the environmental and historical responsibility of the private sector, without the latter being able to claim paper carbon neutrality. Only then would this instrument be a useful complement to quantifiable reduction commitments – and never a substitute for them! There is also an urgent need for rigorous due diligence for all carbon projects, including mechanisms to safeguard human rights and the biodiversity, as well as an effective complaints mechanism.

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Activism is fraught with danger

22.06.2020, International cooperation

For decades, the neoliberal development model has been accepting of the repression of human rights. It is time for a paradigm shift.

Kristina Lanz

Expert on international cooperation

When completed the Grand Ethiopian Renaissance Dam (GERD) on the Blue Nile will be the largest hydropower plant in Africa.
© Pascal Maitre/Panos

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Banks' climate initiatives: a major disappointment

Profile of signatory banks

The implications for divestment

No penalties for polluting companies...

... or leverage effect on companies

No impact from voluntary initiatives

From the voluntary to the mandatory

The Net Zero Banking Alliance

The South on the offensive

The dilemma of the North

Switzerland drifts along with no ambition

"What is happening in Ukraine or in the Israeli-Palestinian conflict is unacceptable"

I’m finding it difficult to make out a clear Swiss position.

I would like Switzerland to be more outspoken and forthright regarding the observance of international humanitarian law.

The Swiss people are finding it difficult to understand why arms are not being sent to Ukraine, but to Saudi Arabia, which is waging war in Yemen.

What happened at Bretton Woods? And what did not

The Global South at the side table

The book

Reconstruction alone, or also development?

The third and last attempt: an international trade organisation

Professor Martin Daunton

Making impact measurement more flexible

The trend towards evidence-based approaches and impact analyses

The case for a rethink

No fossil fuel phase-out without climate finance

Swiss Government resisting the need for action

Without finance, there is no action

Carbon offsetting abroad: the illusion of voluntary action

Carbon markets: taking stock

The limits of the voluntary market

Carbon colonialism perpetuates injustice

Pandora's box is open

A modernisation process fraught with pitfalls

The problem of additionality

The three definitions of additionality

The key role of development finance institutions

Distribution of PSIs by country groups (based on income)

SIFEM: Switzerland's development finance institution

Amounts mobilised from the private sector

Private sector instruments for whom?

A new El Dorado for commodity traders

CO2 certificates – the commodity of the future

Dubai as referee

Activism is fraught with danger

I’m finding it difficult to make out
a clear Swiss position.

CO₂ certificates – the commodity of the future