Three steps to decolonise climate finance

New directions are needed for a climate finance that serves people in the Global South

“It is about power politics, and the rich and the powerful never, ever voluntarily give up their power and their wealth. And so it has to be extracted like teeth in a dentist chair.”

This is how Saleemul Huq, Director of the International Centre for Climate Change and Development, reportedly described climate investments for the Global South in 2014.

The “rich and powerful” mentioned by the late scientist are none other than the financiers and investors, from Northern countries or aligned with their interests, who are presently investing heavily towards climate action in Southern countries.

In contrast to mainstream narratives, Huq was one of many voices recognising the politicisation of Northern climate financing in the South. Critics drawing on anticolonial or heterodox frameworks like dependency theory further highlight the often neocolonial character of these investments, arguing that the real beneficiaries are investors rather than recipient countries.

Providers benefit through direct financial profit, expanded influence in recipients’ internal affairs or simply by exercising discretion over fund allocation. At the same time, for many developing countries, external funding is often insufficient where it is most needed, it can exacerbate debt burdens and undermine financial independence, local priorities and domestic economic actors.

While it is essential to rapidly increase climate financing, it is politically unacceptable to allow financial and Northern interests to exploit this desperate need to reinforce the South’s financial dependency on the North. Further, there is a strong case that a system claiming to tackle the climate crisis while fomenting a financial one is ultimately doomed to exacerbate both.

Moving towards a radical climate finance alternative  is imperative. Such an alternative should centre the needs of recipients and the South, enhancing rather than undermining its position vis-à-vis the North as it navigates climatic and financial hardships.

While there is no one-size-fits-all solution, the following three broad measures offer a useful starting point: external debt cancellation, limits on foreign currency bonds, and limits on foreign direct investment (FDI).

External Debt Cancellation

External debt owed by Southern countries to Northern lenders is a major driver of the South’s financial dependence on the North – one that climate finance risks deepening. Debt servicing drains capital from the South as interest payments, as well as providing Northern lenders with unprecedented political leverage in North-South relations.

Much of the literature already calls for debt relief and the expansion of grants over loans, since commercial debt still constitutes the vast majority of international climate finance. This is a promising starting point for broader debt cancellation. Unlike relief or restructuring, cancellation would be designed to not penalise future borrowing terms and therefore would be more comprehensive and less conditional.

The case for climate debt and climate reparations to the South offer a powerful political rationale for cancellation. This framework aims to quantify the climate damage driven by the North’s historical emissions and suffered disproportionately by the South, holding the former financially accountable.

This would operate as a large-scale debt swap, where financial debt owed by the South to the North is offset against historical climate debt owed by the North to the South. Debt-for-climate swaps, where external debt is reduced in exchange for equivalent domestic climate investment, offer a small-scale blueprint.

Foreign Currency Bonds

A related issue is the reliance on bonds issued by Southern countries in “hard” foreign currency, typically US dollars (foreign currency denominated bonds). Borrowing in foreign currency often offers lower upfront costs, making it attractive for developing countries needing to raise capital quickly, as with the climate crisis.

However, these bonds expose national budgets to volatile exchange rates and external interest rate hikes, causing debt repayments to swell unpredictably. This dynamic is playing out acutely across several Sub-Saharan African states, which exhibit a “vicious cycle” of climatic and debt vulnerability.

Therefore, heavily limiting foreign-currency bonds, while expanding local-currency borrowing, appears like a promising option for financing climate action without undermining long-term debt sustainability.

This comes with drawbacks: shifting away from foreign-currency debt may dampen external capital inflows and raise short-term borrowing costs. Yet the long-term benefits arguably outweigh these limitations, since they provide Southern states with greater financial stability, keeping repayments within domestic economies and strengthening local capital markets.

Foreign Direct Investment

A third way climate finance can reinforce the South’s dependence on the North is through FDI, which often grants Northern investors ownership or control over domestic companies and infrastructure.

Foreign-owned equity, for example, involves “managerial control exercised by shareholders”, raising “the danger that substantial parts of sustainable industries in the Global South (…) end up under the control of foreign investors”. Even more directly than debt, FDI can undermine financial sovereignty and distort local development strategies. Because profits are frequently repatriated rather than reinvested locally, FDI can suppress the development of local capital.

Hence, limiting climate-related FDI and prioritising domestic capital wherever possible appears like a promising direction. Should FDI be unavoidable, agreements may be designed to enhance rather than undermine local sovereignty. This could include favouring “patient” over “hot” capital through minimum holding periods and requiring technology transfer to boost domestic productivity.

Admittedly, restricting FDI will reduce capital inflows and could slow the pace of transition in the short term. However, these costs should be weighed against the longer-term benefits of building a more sustainable, independent and stable transition pathway.

These three measures can be seen as necessary, though by no means sufficient, steps toward a decolonised climate finance that puts people in the Global South first. Tireless political work is needed for these measures to be mainstreamed, so that Southern climatic and financial vulnerabilities become understood as inextricable and dealt with accordingly.

Photo by Jon Tyson on Unsplash