Climate finance for people in the South or for profit in the North?

Climate investments are flowing from the Global North to the South, but they often leave recipients exposed while benefitting financiers

According to the Climate Policy Initiative, in 2023, international sources accounted for 77% of climate finance in Sub-Saharan Africa. International sources also provided 40% or more of total climate action financing across all Global South regions except East Asia and the Pacific.

International financiers and donors have increasingly expressed interest in advancing adaptation and mitigation in the Global South, buying Southern countries’ external debt, acquiring equity and providing grants.

While Southern countries largely constitute sites of climate finance importation, due to climate vulnerabilities and limited local capacity, Northern countries largely constitute sites of exportation, due to their financial power and majority shares in institutions like the World Bank.

Mainstream financial discourse and institutions welcome this trend, claiming that the best way to tackle climate change is through recipients’ alignment with international finance, voluntary Northern contributions and financial deregulation.

However, critics challenge this blind application of financial imperatives to climatic issues. Drawing on dependency theory, anticolonial and heterodox approaches to political economy, they argue that climate investments often benefit providers without truly helping recipients.

No one disputes the urgency of financing climate action. Critics, however, stress the equal urgency of asking fundamental questions about climate finance itself: Who really benefits, providers or recipients?

Further, they note that while providers often coincide with former colonisers (the neocolonial “core” of North America, Western Europe), recipients often coincide with formerly colonised regions (the “peripheries” of much of Asia, Africa, South and Central America).

This raises the question of whether international climate finance reinforces neocolonial North-South relationships of unequal power and vulnerability more than it effectively advances climate action.

Recent scholarship lends significant weight to critical perspectives. In particular, three mechanisms (here called path dependency, derisking and climate finance curse) highlight how climate finance benefits Northern providers over Southern recipients.

Path dependency

The first mechanism, path dependency, highlights how recipients’ climate investment paths are dependent upon existing conditions. These conditions include macroeconomic capabilities, business environment, climate policy environment, electricity infrastructure and more.

Path dependency frequently leaves needful Southern recipients with limited or denied access to finance, as their conditions are deemed unattractive to external, typically Northern, financiers. 

A recent study finds that developing countries can become locked into or out of renewables financing, as investment attractiveness is significantly associated with past investment. Over two-thirds of public and private climate funds flowed to just eight recipients. Vast areas of Sub-Saharan Africa remain cut off from nearly all external financing, unable to meet the conditions demanded by funders. In contrast, countries like Vietnam, Egypt and South Africa are deemed relatively attractive and draw disproportionate funding.

Similarly, climate financing linked to the World Bank is often criticised for favouring middle-income countries over low-income and least developed ones. As one study concluded, the Bank’s Maximising Finance for Development financing “is flowing towards countries with higher incomes as they are more profitable for investors”. This exposes a funding mechanism that disregards need, leaving the most deprived with insufficient support.

Finally, the predominance of commercial debt over grant and concessional instruments risks exacerbating path dependency. According to the Climate Policy Initiative, of nearly two trillion USD worth of global flows, only 125 billion USD came in the form of low-cost debt and grants. The risk is that as past indebtedness erodes present borrowing terms, increasing number of recipients may be “locked out” of future investment.

Derisking

Another mechanism, derisking, shows how recipients may inadvertently undermine themselves in attracting foreign climate finance. De-risking involves using recipients’ public funds to underwrite foreign, typically debt-based assets, rather than investing those funds in climate action directly.

This relates to how governments are pressured to create favourable investment conditions for foreign finance often at the expense of their own priorities. As stated in a 2024 study, “less developed countries could be pushed to further liberalize their financial sectors and to limit public expenditure” simply to avoid being denied funding.

Derisking is a major criticism of the Just Energy Transition Partnerships (JETPs), signed between Northern G7+ countries and South Africa, Senegal, Vietnam and Indonesia. As one study states, “all partnerships (…) highlight the need for public investments to attract private finance, whether through de-risking, blended finance or creating an enabling environment for private investors”.

As concluded by the authors, “stakeholders question financial de-risking in which concessional funds are mainly used to attract [foreign] private investment instead of financing just transition initiatives that are not viable for private investors but would benefit affected communities”.

Similarly, a report by the Institute for Economic Justice raised concerns about South Africa’s adherence to the partnership. These include rising energy costs due to greater private sector participation, socialisation of risk and privatisation of profit, and underfunding of the “justice” side of the partnership, which should include worker protections and social security.

The climate finance curse

A third mechanism, the climate finance curse, shows how recipients can be undermined by the very inflow of foreign finance. A financial inflow can be destabilising, for example through currency appreciation, and erode local independence, in ways reminiscent of natural resource-linked neocolonialism.

A 2015 study modelled the effect of climate finance on developing countries, finding a significant risk of processes analogous to foreign investments tied to natural resources (“resource curse”). These include the creation of rent-seeking interest groups and “Dutch Disease”, where sectorally specialised investment drives currency appreciation undermining other sectors’ competitiveness.

Similar dynamics have been observed with private investments linked to the Green Climate Fund (GCF), which channels Northern financing to developing countries under the UN Framework Convention on Climate Change. A 2024 study noted that while GCF-linked equity investment reduced the risk of debt trap with Northern partners, it was also more likely to undermine local economic sovereignty and development priorities.

Case studies in Senegal and Zambia revealed particular continuity between colonial and nominally postcolonial status. As stated in the former, “figures on ownership distribution show a French predominance within Senegal’s future energy provisioning (…) in continuity of French power since colonial times”. Domestic policy processes were heavily shaped by international financial institutions, as donors insisted “on private sector participation” and “the provisioning of state guarantees”.

In Zambia, renewables investments sponsored by German and Swedish organisations were found to be a “market-oriented, transnationally orchestrated endeavour”, lacking “a sufficient level of domestic ownership”. As the authors concluded, these investments “tackle post-colonial statehood, prioritize investors’ interests over domestic interests” and potentially exacerbate “Zambia’s dependence” on foreign capital.

A charitable interpretation would conclude that mainstream financial narratives are misguided. A more cynical reading – one arguably supported by the mechanisms discussed – is that these narratives are wilfully misleading and politically useful for financial, Northern interests. Critics do not deny the necessity or potential benefits of climate finance. Rather, they highlight that the politics of climate finance are currently skewed toward the interests of profit over people, and that this dynamic should be inverted for these benefits to be realized.

Photo by Jon Tyson on Unsplash