The fight against climate change desperately needs money. Despite reaching $653 billion per year in 2020, global climate finance remains far below the estimated $4.3 trillion needed each year by 2030 to avoid devastating impacts. This shortfall is especially evident in emerging markets and developing countries (EMDCs), which receive only 19 per cent of global climate financial flows despite being those disproportionately affected by climate change.
The Summit for a New Global Financing Pact, hosted in Paris in June and spearheaded by France’s President Emmanuel Macron and Barbados’s Prime Minister Mia Mottley, focused on securing funding to close this gap. Pledges included €2.5 billion for Senegal’s Just Energy Transition Partnership and support from the World Bank for climate-vulnerable countries. President Macron has set a follow-up meeting in two years’ time to assess progress, with the Summit launching a roadmap to guide action. These are positive steps towards the clean-energy transition and on easing public-finance pressures in developing countries.
But many will feel disappointed they did not go further. Leaders such as Kenya’s President William Ruto and Prime Minister Mottley – who leads the Bridgetown Agenda efforts to increase climate financing – in particular called for more ambitious reforms, including a global carbon tax on fossil fuels, aviation and maritime transport to fund decarbonisation efforts as well as bold steps to refinance debt. This type of vision and ambition is required, but if global leaders want to further turn talk into action, these four steps are needed:
1. Ensure Project Readiness
For finance to flow, it needs a home. Money needs to be channelled into projects, but the ability to develop strong proposals and a robust pipeline of projects remains a fundamental challenge across EMDCs. Plans that present concrete investable projects will go far in unlocking funding. To create this, countries need the capacity to identify high-quality projects and mitigate risk. However, governments’ ability to do this is often the lowest in countries where investment needs are the greatest.
There have been some attempts to fix this. Multilateral development banks (MDBs) such as the World Bank provide project-preparation support, but they often lack the agility, responsiveness and understanding of domestic political contexts. Those qualities are required to navigate what are often highly complex political environments and put in place the regulations and markets necessary to drive investment. This needs to be addressed quicker. A new generation of more agile Project Preparation Facilities (PPFs), which provide technical and financial support to develop investment-ready projects, needs to be developed to put greater amounts of funds to work faster.
2. Create a Positive Private-Investment Climate
The greentransition will need to be driven by private-sector investment. This is already happening in developed countries, where the bulk of transition funding comes from private-sector sources. However, EMDCs lag significantly behind. In sub-Saharan Africa 88 per cent of funding relies on public sources. Both real and perceived risks – including currency instability, regulatory and governance problems, and a lack of technical capacity, transparency and accountability mechanisms – reduce investor appetite.
Establishing favourable enabling environments – from developing strategic reforms to long-standing regulatory practices to instituting carbon pricing – will be key to boosting investor confidence. Similarly, strategically using public funding to create links between climate risk and development plans and integrating climate commitments into economic-growth plans offers numerous economic opportunities. This includes enhanced markets for low-emission infrastructure, technologies and services; increased market confidence spurred by greater climate-policy clarity; and enhanced incentives for innovation and efficiency – all of which create fertile ground for external investment. Mainstreaming climate change into policies, strategies and programmes can also ensure public and private investment is channelled in line with a country’s climate goals.
Countries must also work to phase out fossil-fuel subsidies. In 2020, the world spent $1 trillion on such subsidies – money that would be much better spent on climate-friendly tech. Phasing out these subsidies would also send strong signals to investors that countries are serious about investing in the green transition. Other steps, such as using budgetary policymaking tools to help achieve environmental and climate goals, tax incentives for green industries and the creation of more transparent markets and procurement processes are also critical. They also come at little cost.
3. Get the Multilateral Climate-Finance System Working
The Bretton Woods system was made to tackle a very different set of challenges at a very different time in history, and MDBs are beset by lagging financial commitments and outdated governance structures. Yet MDBs have a great potential to lead in climate finance, as they have capital at their disposal, can raise additional money through international markets, leverage the private sector and enhance protections for the most vulnerable.
The mission statement signed by 50 countries at the Summit was a first step in calling MDBs to action and providing them with strategic direction. While MDBs must develop a concrete response to this at the World Bank and International Monetary Fund (IMF) annual meetings in October, significant reforms are still needed. Building on the recommendations of the G20 Capital Adequacy Frameworks Review, development banks need to increase risk appetite, drive out blockages and non-decision-making, and integrate climate risks and vulnerabilities into funding strategies. They must also align climate investments and increase grants and concessional support for hard-to-abate and underfunded sectors and technologies. Financial returns must also be adjusted for impact, in terms of both development and emissions.
The World Bank’s evolution roadmap and loosening of the International Bank for Reconstruction and Development’s capital adequacy requirements provide a good start. Other banks should do similar. Many countries have also been calling for the MDBs to set private-investment targets, but so far only the International Finance Corporation has set any explicit mobilisation target.
4. Create Concrete Solutions to Address Debt Distress
Climate action cannot come at the cost of economic development. Up to 72 per cent of climate finance mobilised for EMDCs between 2016 to 2020 took the form of loans, but 60 per cent of low-income countries are already in or near debt distress. This greatly limits countries’ ability to further borrow, but interesting ideas are emerging. For example, leadership from Kenya and Colombia helped set up a new Global Expert Review on Debt, Nature and Climate to assess the impact of debt on EMDC capacity to decarbonise, preserve nature and adapt to climate change.
But developed countries should also expand debt-for-climate and debt-for-nature swaps and restructuring that exchange debt for investments in nature conservation. Zambia and Ghana’s recent debt-restructuring efforts can serve as a roadmap for others.
The Summit also demonstrated progress on allowing EMDCs to access a low-cost source of cash to help stabilise their economies through the IMF. The fund, whose Special Drawing Rights (SDRs) helped struggling governments during Covid, announced it has successfully brokered $100 billion of these SDRs to be reallocated from richer to poorer countries through new trusts such as the Resilience and Sustainability Trust, helping to unlock green public investment.
This $100 billion is a good milestone passed. The next practical steps should be to: 1) encourage richer countries to increase the level being reallocated to poorer countries from 20 to 40 per cent of their initial allocation, something Japan has already committed to, and 2) explore collaboration with MDBs to channel these funds to country governments, helping to build on existing sustainable development programming, and ensuring country programmes are structured effectively.
The advances in the next two years will be evidence on whether we can unlock the trillions of dollars needed to achieve the Paris Agreement. There will be some critical stops along the way, including the Africa Climate Summit in Nairobi in September 2023 and the G20, World Bank and IMF annual meetings later this autumn. Further progress is needed at each stage to ensure COP28 does not take place against a backdrop of mistrust in the multilateral system.