Categorized | UN, World

Crowdfunding: the Way to Grassroots Climate Governance

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Image by recreahq

Modern crowdfunding—the idea of grassroots fundraising via the internet—officially began in 1997 when the British rock band, Marillion, ran a successful internet fundraising campaign with their adoring fans to finance the band’s North American tour. Since then crowdfunding sites have burgeoned, utilizing dedicated internet platforms to connect entrepreneurs and social-movement-mobilizers with crowds of netizen-investors and supporters to fund a variety of projects, driven by either profit or social good. In the late 00s, following NGOs’ successes in harnessing the synergic benefits of Public-Private-Partnerships (PPP) through crowdfunding, the idea of using the crowdfunding model for financing has been gradually accepted by the international development mainstream.

Recently, a network of climate governance professionals—notably those from environmental IGOs such as United Nations Framework Convention on Climate Change (UNFCCC), eco-financial consulting firms, and the climate science community—have spotlighted crowdfunding as a workable voluntary instrument in answering the question of encouraging effective yet democratic private sector involvement. In 2014, approximately 80% of the private financing for climate change was channeled by institutional actors, such as commercial project developers, financial institutions and corporations. As Nobel laureate and political economist Eleanor Ostrom’s complexity theory teaches us, such one-dimensional, center-directed, authority impedes the ability of local-level climate governance to adapt or innovate new institutions to cope with the changing environment.

Crowdfunding, meanwhile, allows for an alternative, decentralized, shareholder-based climate financing model by lowering the entry hurdle for individuals and small-scale organizations. Crowdfunding’s online features, such as person-to-person lending, efficiently reduces transaction costs, providing a shortcut to shareholder activism by minimizing legal and procedural obstacles. Plus, unlike international Official Development Assistance (ODA), crowdfunding expedites the speed of funding and stimulate risk-tolerant shareholder activism. Process-wise, crowdfunding facilitates the cycle of dynamic ‘creative destruction’. Both the marketability and innovativeness of pitched ideas are verified as funders select the ones they view either as cash cows, with the highest profit potential, or most likely to turn them into a good Samaritan, conferring upon them the highest sense of social responsibility. This innovation cycle allows the will of the people to determine which projects are more timely and workable than others, and will spontaneously galvanize civic participation in climate change issues, thereby resulting in bottom-up democratization in global climate governance.

Despite these advantages, crowdfunding also brings with it the ‘middleman’ problem. Since funders cannot professionally evaluate and monitor the quality of entrepreneurial development projects being carried out at the local level, they are forced to rely on intermediaries who may lack the necessary skills to assess and interpret the quality of the reports. Indeed, the report itself could have been comprised on behalf of influential donors or the intermediaries themselves. Therefore, the potential for intermediaries to make adverse selections and the moral hazards caused by the asymmetry of information between borrowers and investors pose ongoing challenges that require continuous in-depth examination and experimentation. In recent years, new NGOs with alternative microfinancing approaches have started to emerge in response to the criticism that Kiva Microfunds attracted in 2009 regarding how it connected lenders and borrowers. Zidisha, for instance, specifically targets computer-literate borrowers, who are capable of uploading their profile and pitch by themselves, thus bypassing financial intermediaries.

Despite its ongoing structural evolution, crowdfunding has so far made significant contributions to financial democratization around the world. It has gradually encouraged banks to develop ‘transparent’ products and services that can be adapted to suit their increasing numbers of partnerships with crowdfunding companies. It has also led banks to consider lending criteria other than repayment capability, such as social and environmental responsibilities. Reflecting these changes, the extension of shareholder activism to climate governance will, no doubt, provide checks and balances against the undemocratic practices of institutional stakeholders, thereby sustaining a healthy democratic culture.

Nevertheless, the future implications of the institutionalization of shareholder activism must be considered carefully. Organization management lessons from Ostrom, especially her principles for dealing with the tragedy of the commons, again shed some light on this aspect. A polycentric shareholder-based climate financing model would be pivotal in enabling a complex system such as global climate governance to achieve the post-2015 Sustainable Development Goals (SDGs).The model could provide useful guidance for protecting investor rights while also allowing local project participants to determine the governance system most suitable for effective communication. Still, the success of the model’s application essentially depends on regulating the mercenary aspect of crowdfunding, such as the ‘middleman’ problem and speculative investment behaviors. In this regard, the role of the UN Green Climate Fund (GCF)’s Private Sector Facility is especially crucial in developing credible and transparent accreditation mechanisms to secure the continued growth of green crowdfunding platforms.

Image courtesy of recreahq

About Mark Seo

Mark (Won Min) Seo is a freelance journalist who served as an editor for NYU’s Journal of Political Inquiry. He was also a former intern with the United Nations Department of Economic and Social Affairs. He has an MA in Politics from New York University.

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