A basic milestone for climate finance was the Copenhagen Agreement, reached in 2009 at COP15. In the agreement, developed countries were committed to a collective goal of mobilizing USD 100 billion for developing countries to carry out mitigation and adaption activities until 2020. The commitment was reiterated in the Paris Agreement in 2015 extending this aid until 2025. Various agencies are engaging with developing countries on programs that aim to scale up financing for climate change and national development priorities. These efforts are consistent with the need to integrate SDGs into countries’ economic and financial policies, scaling up climate finance and enhancing concessional finance for countries at risk of being left behind.
Climate finance aims to finance the efforts to reduce emissions, vulnerability, and increase the resilience of humans and ecological systems to the impacts of climate change. The landscape of climate finance can be considered from several dimensions including:
The source of finance – whether public, private, or mixed, and whether from national governments, subnational governments, development banks, corporations, financial institutions, multilateral funds, or another type of institution. The type of finance, or instrument used to provide it e.g., development aid, equity, or debt, and whether it comes at market rates or is in some way concessional (lower cost). Where finance flows from and to (whether domestic flows within national borders, or international flows from one country to another ‘bilateral’ or from many countries ‘multilateral’ to another). The sector and purpose of the activity or asset that receives finance (including whether actions are directly or indirectly related to mitigation, adaptation, or compensation for damages). Whether finance is incremental – that is, over and above what would have been provided anyway (“new and additional”).
Countries typically face data limitations when developing project proposals for climate funds and structuring investments for the private sector. Adaptation projects significantly require more data to prove climate vulnerability. Many firms have sufficiently downscaled models necessary for analyzing climate trends. Furthermore, the limited human resources to analyze and interpret data as well as select data and justify appropriate climate rationale poses a hurdle in developing feasibility assessments and convincing funders to approve to projects. These challenges are often compounded by a lack of available historical climatological data, which increases the burden on project developers. Today, companies with limited systems and capacities to gather, manage and analyze information are becoming largely reliant on either a fund’s own evaluations, assessments from independent organizations or hired consultants to produce analyses that inform their negotiation positions and demands to international funds.
Small and narrow economies continuously present challenges to human resources in developing countries. Factors such as low numbers of qualified staff working in key capacities, lengthy project processes has reduced the ability to absorb development aid, climate finance and develop institutional capacity. In addition, the limited availability of trained staff constrains the adoption of climate finance and implementation capacity, resulting to implementation and disbursement delays. Several firms have indicated that the project preparation grants and readiness support are already a burdensome and insufficient step to meet these unique challenges. One way to access climate finance is by addressing the lack of human and technical capacity through training, human resource development, talent retention and additional expert staff placements. A key short term and pragmatic intervention that can help donors increase their impact is investing and scaling embedded support models that focus on capacity building and providing additional human resources. Recently, long-term advisory support has increasingly been recognized as an effective solution to improving access to climate finance and several initiatives have emerged to support organizations in achieving their climate investment objectives. The acquired knowledge should then help in supporting firms to make smart climate decisions while developing climate-relevant policies.
Multiple barriers have impeded the mobilization of private finance to address climate change, particularly for developing countries that have data-constrained environments with small, undiversified economies. Foreign and domestic private sector investment has remained stagnant. Investors often lack quantifiable incentives and are unwilling to internalize environmental externalities unless tangible, financial returns to environmental, social, and governance (ESG)and climate aligned practices are evident. Common and systemic challenges include remoteness, small economies, and limited capacity to mobilize domestic resources. These internal structural factors, combined with challenges in meeting creditor requirements and the burden of existing debt together with vulnerability to environmental, economic, and other external shocks, are typically seen as high risk by financiers. Companies and governments need to have access to technical assistance from knowledgeable and experienced consultants aid in the development of sustainable finance strategies.
The keyway to prevent a full-scale climate catastrophe is to genuinely address the current climate financing accounting holes. All stakeholders have a moral responsibility to provide alternative forms of climate financing, above all grants, to help impacted countries cope and develop in a low carbon way.