Energy

Let’s Put Enterprise Funds to Work In the Fight Against Climate Change

The COP26 climate conference is over. The challenge of getting more money to developing countries to make the transition to a low-carbon future dominated the conference.

Heading into COP26, we all knew developed countries had fallen far short of their $100 billion annual commitment to help developing countries transition to a low-carbon, resilient future. More than $20 billion short, to be exact. 

It seems unlikely the $100 billion promise would be delivered before 2023. Some new pledges in recent days could mean the goal is met in 2022, but much more detail is needed. Talk about a day late and a dollar short.

While the final COP26 outcome contained both highlights and lowlights, the good news is wealthy countries did agree to increase and accelerate financial support to developing countries, including a doubling of funding for climate adaptation by 2025. Like all commitments coming out of COP26, the hardest part is the implementation. So, what does this mean for the United States?

President Joe Biden has identified the climate crisis as an “essential element” of his administration’s foreign policy. But, despite pledging to quadruple its international climate finance by 2024 compared to Obama-era levels, the United States has yet to meet its “fair share” of contributions to developed countries’ climate finance efforts. The United States — the world’s second largest greenhouse gas emitter today and the largest historically — is responsible for the greatest shortfall.  

It doesn’t have to be this way. The U.S. government has a little-known, innovative finance program — known as enterprise funds — that are now gaining attention in Washington, D.C., policy circles as a way for the administration to not only become a leader in “public climate finance” but to mobilize the private-sector capital needed in the fight against climate change. 

Enterprise funds are nonprofit, privately managed investment funds established by Congress that invest flexible equity capital and debt financing in businesses in developing countries using public-sector funding. Enterprise funds inject capital into undersupplied markets. 

First created under President George H.W. Bush in the 1990s to grow the nascent private sectors in former Soviet satellite countries and later reintroduced under President Barack Obama following the Arab Spring, this is a bipartisan public-private partnership that works. It must now be scaled up in the fight against climate change. 

For an example of how it works, look to Egypt, which happens to be the incoming host of next year’s U.N. COP27 climate conference. 

The Egyptian-American Enterprise Fund has proven that enterprise funds can leverage a small amount of public funding to mobilize larger amounts of private sector capital to help lower-income countries achieve their development priorities.  

Established by Congress in 2011 to support Egypt’s private sector after the country’s revolution, the Egyptian-American Enterprise Fund has invested $300 million in public funding and attracted an additional $600 million in private-sector capital to Egypt. We have invested in 94 companies and reported a compounded annual return of 20 percent over the last six years. Today, the market value of our portfolio is more than $600 million. 

How have we done so well? By leveraging a private equity model that provides funding to investment managers to grow their businesses and in turn, incentivizes them to invest our funds in companies that produce strong financial and development returns. This isn’t an anomaly, however.  

Over the last 20 years, developing countries have benefited from significant human capital, new technologies and capital flows that produced the strong investment returns we see today in Egypt and emerging markets.  

To help close the gap in U.S. climate finance — estimated at between $21 billion and $40 billion per year  the United States should authorize a new wave of enterprise funds with an explicit mandate: invest in low-carbon and climate-resilient projects in developing countries. To be clear, enterprise funds can help make up the United States’ shortfall, but they should be complementary to the other streams of climate finance to which the United States has already committed. There’s no use in robbing Peter to pay Paul.  

Using our model in Egypt as a template, Congress should authorize $10 billion in new enterprise funds and invite the private sector to co-invest with the U.S. government by matching this commitment. Private-sector investors would not only have comfort in investing alongside a U.S. public-private partnership but would likely realize a return on their investment given the structure of the enterprise fund private equity model. Further, if more developed nations created enterprise funds, the world could easily mobilize the trillions of dollars needed for climate finance in the future.  

The Egyptian-American Enterprise Fund’s success in mobilizing private investment is all the more notable when contrasted with that of climate finance. For every dollar that multilateral development banks invested in climate projects in 2020, they reported just $0.29 in co-financing from private sources. We can, and must, do better.   

Biden wants to take a “whole-of-government” approach to the climate crisis. It’s clear that enterprise funds represent a strategic opportunity to turn our commitments into action. Let’s put enterprise funds to work in the fight against climate change. 

 

James A. Harmon is chairman of the Egyptian-American Enterprise Fund and co-chair of the World Resources Institute Global Board of Directors. 

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