A Global Collaboration Tackles the ‘Missing Middle’ in Climate Finance

Todd Cort, senior lecturer in sustainability, and Clint Bartlett ’17 have collaborated for years on addressing a major barrier preventing developing countries from meeting sustainability and climate adaptation goals: a chronic lack of capital available to small and medium enterprises (SMEs) that are uniquely poised to protect their societies from climate shocks and economic volatility.

That partnership began when Bartlett enrolled in the Master of Advanced Management program through the Global Network of Advanced Management (GNAM), a consortium of top global business schools that includes both SOM and the University of Cape Town Graduate School of Business, where he earned his MBA. After connecting with sustainability-focused faculty like Cort, Bartlett went on to work at organizations that mobilize private capital for climate-focused investments, including at the United Nations Development Programme (UNDP). Through this work, he began to focus on the “missing middle” problem facing SMEs in search of capital. In developing countries, businesses that are too large for microfinancing often struggle to find capital due to a perception that doing business with them is inherently risky. Private investors such as banks, asset managers, and funds often charge such enterprises high interest rates that put capital, and thus development, out of reach.

“Most of the environmental and social factors that are a drag on the macroeconomy today are exacerbated or completely dependent on this missing middle finance gap,” Cort says. “So it’s not just about flowing money into the Global South; it’s about addressing the fundamental harms of the economy as we have it right now.”

To tackle the problem, Bartlett and Cort worked with the UNDP-Adaptation Fund Climate Innovation Accelerator and the Global Resilience Partnership to launch an MBA collaboration that pairs students from GNAM member schools with grassroots organizations to scale climate adaptation solutions. Contributing their knowledge of economic markets, product development, business management, and innovative financing strategies, students help SMEs convey their work in ways that appeal to private investors. Meanwhile, the fellows themselves get to see firsthand the immense potential of locally led climate adaptation.

“The students realize that these NGOs and SMEs are incredibly resilient because they’re able to actually manage these systems,” Bartlett says. “Then, as MBA graduates, they enter banks or big funds with a much more nuanced view vis-à-vis the kinds of entities that are seeking funding, a better grasp of the real risk they represent, and an enhanced appetite to fund them.”

Camino de Paz, associate dean of global affairs at SOM, said that the initiative exemplifies GNAM’s mission of connecting leading business school faculty and students. “It is a strong example of how GNAM can use its global reach to enrich the student experience while advancing new thinking on one of the most important barriers to climate finance,” she said.

Bartlett and Cort are also part of a wider team at UNDP and the Institute for Economics and Peace (IEP) investigating methods to more fairly price capital for SMEs engaged in climate resilience or adaptation work. In a new white paper co-authored with Juliane Reinecke of Oxford’s Saïd Business School, along with senior members of UNDP and UNCDF, they argue that blended finance, which combines private and public capital, can promote the correct pricing of capital. In the long term, access to financing at fair prices can help SMEs expand critical work and create more resilient financial ecosystems that attract more private financing.

“The data that’s coming out of GNAM and SOM efforts says that SMEs are not as risky as you think,” Cort says. “They’re actually creating resilience to massive climate risks; they don’t default on their loans; and they’re savvy businesspeople, so you should lend at a lower rate. That lower rate changes everything for these people or for these businesses.”

During Climate Week in New York City this week, Bartlett and Cort, along with IEP and UNCDF, will hold a session for banks, rating agencies, pension funds, and other development funders to learn about and critique their model. They hope that their work will change the way private investors think about the risks and rewards of investing in much-needed climate resilience projects.

“The intention is for this information to become a public good used by any allocator of capital, so that the missing middle has better access to appropriately priced finance,” Bartlett says. “They can access money at cheaper rates, not because someone is subsidizing a rate, but because they can show that they’re of a lower risk than what the market has perceived them to be. Ultimately, this will enable them to create the very resilience that our societies need.”