More and better finance: maximising positive climate impacts for a timely transition 

Since the Paris Agreement in 2015, significant strides have been made to foster the commitment of countries and financial institutions to address the climate crisis and ensure that climate risks and opportunities are considered in investments. However, with emissions required to peak before 2025, our window of opportunity is rapidly closing to keep +1.5°C within reach. Financial needs to lower greenhouse gas (GHG) emissions and to address adaptation priorities are increasing rapidly in the meantime. Luis Zamarioli Santos and Diana Cárdenas Monar, from I4CE, argue that commitment must urgently translate into action, and action must bring the urgent change the world needs. Both governments and public financial institutions have a central role to play to deliver more and better finance, maximising positive impacts. This blogpost highlights some opportunities to advance in the path for a systemic transformation, involving key stakeholders with a whole-economy approach.  

“Two years to save the world”. With those words, the Executive Secretary of the United Nations Framework Convention on Climate Change (UNFCCC), Simon Stiell, called for faster action and more finance to face the climate crisis ahead of the Spring Meetings of the World Bank Group and International Monetary Fund. His message stressed how essential these two years will be for the UNFCCC process, with a central role for finance. On the one hand, the new collective quantified goal (NCQG) for climate finance must be defined by the end of 2024, at COP29. On the other, the Parties of the Paris Agreement must deliver their revised Nationally Determined Contributions (NDCs) in 2025, at COP 30. 

Renewed commitment reflected in the NCQG and revised NDCs must urgently translate into action, and this action must bring the urgent change the world needs. Although we have made significant strides fostering commitment to address the climate crisis and ensuring that climate risks and opportunities are considered in decision-making within countries and organisations, we are running out of time. We need to act faster. With emissions required to peak before 2025, our window of opportunity is rapidly closing to keep 1.5°C within reach. Financial needs to lower greenhouse gas (GHG) emissions and to address adaptation priorities are increasing rapidly in the meantime, much faster than the public and private funds currently spent on climate action. 

The discussion on how to mobilise more and better funding has become central for both the development and climate agendas. The current financial gap for implementing domestic adaptation priorities is estimated at US$ 387 billion per year, and mitigation needs are in the order of several trillion US$ a year, according to UNEP’s 2023 Emission Gap Report. The NCQG will replace the previous commitment by developed countries to collectively mobilise USD 100 billion per year for developing countries’ climate efforts. Although still unmet, this value should function as the floor for a new goal that reflects the growing financial needs and priorities of developing countries. While disagreements about what should account towards the NCQG have dominated the debate, they have also exposed some of the limitations of adopting a single quantitative target. 

In fact, however ambitious it may be, a single quantitative target will be insufficient to address all challenges for triggering a context-specific transition of national economies. International climate finance is currently delivered mostly in the form of non-concessional loans, adding to other sources towards over-indebtedness, such as the recent COVID-19 crisis. Higher debt levels progressively limit countries’ ability to invest in climate and development priorities, thereby increasing the need for grants and concessional finance. Meanwhile, sectors and technologies that are key for the transition are reaching commercial maturity and require large volumes of private finance to scale up and help building the sustainable economies of tomorrow. It is thus central to ensure that the trillions of finance flows in the global economy work in benefit rather than in detriment of climate, and that limited public funds are used more efficiently and effectively to deliver verifiable impacts for the transition. 

Both countries and public financial institutions have a central role to play to ensure effective climate finance and action. In this blogpost, we highlight some opportunities to advance in the path for a systemic transformation, involving key stakeholders with a whole-economy approach.    

Country-led financing plans – a powerful tool to ensure more efficient and effective public spending for the transition 

At the national level, financing plans are an essential tool for the climate transition, as they can help reconcile different priorities while fostering an efficient and effective use of public finance. All countries can benefit from such plans, yet they are even more relevant for developing countries that are confronted with limited fiscal space to address development and climate priorities. Although there is widespread recognition that public funds alone will not suffice, public action is essential to unlock funding opportunities to fulfil mounting Sustainable Development Goals (SDG) and climate finance needs. In emerging and developing economies, these needs are now estimated at around USD$ 4.5 and US$ 2.4 trillion per year by 2030, respectively.  

Financing plans can contribute to ensure that all financial flows are directed towards national low-emission and climate-resilient pathways, in line with national climate and development objectives. A country’s strategy – an NDC or a comprehensive Long-Term Strategy (LTS) – should be the starting point to define short- and medium-term public spending targets, within a systemic view. A financing plan helps translate climate goals into an investment roadmap that forms the basis for defining policies needed to trigger those investments while identifying funding options to fill the investment gap. 

With a financing plan at hand, governments can give a clear signal to the private sector and international funders as to where public efforts should be supported and/or supplemented. Conversely, when guided by a financing plan aligned with climate targets, domestic and international finance can ensure the needed impact to achieve climate and development objectives. Yet, this key step must be coupled with policy action to transform the business environment and financial system by putting in place the appropriate regulation and incentives for an effective shift of all economic actors to climate positive practices.  

Public Development Banks should lead the way in doing more and doing better 

Since COP 27, the call for a reform of the international financial architecture has been getting louder. Bretton Woods institutions created after the second World War, such as the World Bank and the International Monetary Fund (IMF) are not fit to tackle the polycrisis the world is facing today. There is an urgent need to rethink this architecture and international cooperation, with the aim of advancing innovative solutions while transforming existing organisations.   

Public development banks (PDBs) have a central role to play to make all finance flows consistent with a pathway towards a low-emission and climate-resilient development, one of the objectives of the Paris Agreement. As the financing arm of governments, they must lead the way in translating strategies and financing plans into tangible action. Given the scarcity of public funds, PDBs are expected ‘to do more’ and to ‘do better’ with thoses they channel.  Although there is no commonly agreed definition of what being ‘transformational’ should entail, it is clear that PDBs can play a unique role in shifting entire systems, sectors and value chains towards a low-emissions and climate-resilient economy.  

First, by committing to align with the Paris Agreement, PDBs can reduce negative climate impacts from all their activities, while increasing positive co-benefits and fostering transformative outcomes in the real economy. This implies the development of more systemic investment and engagement strategies to identify opportunities at every level and ensure that these continuously inform country dialogue and programmatic work. 

Second, there is an opportunity for PDBs to make better use of the unique mix of financial instruments they have at their disposal. Significant efforts are being deployed to develop innovative financial instruments, appropriate to developing countries’ context-specific challenges such as high-indebtedness, poor access to liquidity and increasing costs to deal with extreme whether events. In parallel, more conventional instruments, such as public policy loans and financial intermediation, have been largely adopted by PDBs to address both development and climate needs at scale. The reform of the international financial architecture offers the opportunity to question the ability of these instruments to deliver verifiable positive results for the climate transition and to function as a credible channel for shifting from billions to trillions.  

Using existing instruments to foster economy-wide transformations: the case of financial intermediation 

Financial intermediation is one of the potential channels for PDBs to shift the broader financial system – the trillions – towards alignment with the Paris Agreement. These operations are already used extensively to deliver development-related results, representing more than 60 percent of International Finance Corporation (IFC) commitments and about a third of all commitments of the European Bank for Reconstruction and Development (EBRD) and the European Investment Bank (EIB).  

By partnering with a financial intermediary, projects can become larger in size and more relevant in terms of potential results, since they can benefit from the tools and expertise of intermediating institutions. For example, a resilience-building operation implemented through a micro-insurer might benefit from its local knowledge, its customer base, and from its ability to add its own financing to the project, making the products or services more readily available to a larger number of beneficiaries. A similar multiplying effect might be achieved with the use of a local credit cooperative or a national bank as an intermediary partner to offer credit lines for residential solar panels.  

Beside project-specific benefits, such as the scaling-up examples above, financial intermediation allows the promotion of best practices across the market. International PDBs have been developing assessment methodologies to ensure that funds allocated through financial intermediation are aligned with the Paris Agreement. By posing certain requirements from intermediating financial institutions, PDBs end up steering those intermediaries towards the development of internal capacities and procedures to minimise negative impacts while maximising positive impacts to climate and the environment. Once developed, these capacities and procedures help financial institutions to identify risks and opportunities, and communicate impacts, providing both the incentives for applying them consistently across their entire portfolios.  

However, engagement may deliver different impacts according to the various types of institutions, asset classes and national contexts. To fully tap the potential of financial intermediation, significant work is still needed to provide clarity on whether funds allocated through intermediated finance are not only capable of delivering but also of demonstrating appropriate impacts for the transition to a low-emissions and climate-resilient economy.  

First, it is critical for PDBs to understand how they can best leverage their grants and concessional funds to engage with different types of financial intermediaries. This can help to steer the market by helping financial intermediaries to develop and implement climate strategies, thus speeding up their alignment with the Paris Agreement. Yet there is also a need for PDBs to build on their value-added and provide support where it is needed most and as efficiently as possible – through technical assistance, financial support, derisking instruments etc.  

Second, more clarity on the linkages between engagement with financial intermediaries and positive impact will be key to better understand financial intermediation’s relevance for transformative action. Further defining impact metrics for financial intermediation will support PDBs and their shareholders in making informed decisions on how to prioritise the use of scarce public funds.  

And last, but not least, engagement and support must be tailored to specific contexts, addressing countries’ needs and financial intermediaries’ specificities, while ensuring accountability. This is one of the main challenges PDBs face today.  Similarly to their use at country level, national financing plans for the transition will also be key to adapt, drive, and guide financial institutions’ action. This will play a central role in avoiding inefficient and ineffective allocations of public funds by ensuring increased and verifiable impacts.