When public finance shrinks, what are the priorities for climate action?

By Clare Shakya

Cuts to UK overseas development aid raise critical questions for future climate action, not least whether the promised balance of support for adaptation and mitigation can be maintained. We suggest reforms to the climate finance system that could deliver stronger adaptation results for climate-vulnerable people.

Pre-pandemic, aid budgets needed to increase by 770% to deliver the Sustainable Development Goals. Since COVID-19, budgets have shrunk further; even if richer countries maintain the proportion of aid to their Gross National Income (GNI), overall funding could still fall by US$14 billion.

But this isn’t the case: the UK has decreased its commitment from 0.7% GNI to just 0.5% in 2021. The government says it will honour pledges on climate finance, but even if those funds are protected, challenging questions remain.

How is climate finance coming up short?

Bluntly put, there isn’t enough. Richer countries committed to $100 billion of investment annually by 2020 to support climate action in developing countries, but costs solely for adaptation are likely to reach $140-300 billion per year by 2030.

And even the most impressive numbers hide an inequitable reality: wealthy nations reported investments of $78.9 billion in 2018, but the least developed countries (LDCs) seemed to have received only 14%, and small developing island states just 2%.

Accessing these already slim funds is a further challenge. Our analysis of donors’ own reporting of adaptation finance committed to the LDCs (2014-18) revealed that only 15% of bilateral projects provided enough detail for countries to understand whether it would support their priorities. This is a choice: the same study showed 88% of multilateral projects did provide the necessary information.  

Classification is another tricky area. Of $17 billion labelled by donors as ‘primarily’ adaptation investments, only $6 billion stated adaptation as a core objective. So effectively two-thirds of ‘adaptation investment’ could be disputed by the LDCs.

Is climate finance encouraging resilient development pathways?

Again, recent scrutiny raises questions. Bilateral donors’ own reports suggest that only a fifth of funding classified as ‘adaptation finance’ stated a principal climate objective; a third noted it as only a ‘significant’ or secondary objective. 

Where adaptation is a secondary objective, donors are including climate finance within a development project – an approach which can in theory lead to climate-smart sector-based interventions. Our analysis suggests that over 80% of UK adaptation finance provided to LDCs is channelled through projects with primarily development objectives.

However, a recent review of adaptation outcomes found that when climate action is undertaken as part of a development programme, it focuses too often on immediate climate risks in existing development agendas and fails to tackle the underlying drivers of climate vulnerability.

As cuts loom, what can climate finance do better?

In February, we brought together more than 50 non-governmental climate finance experts from across the globe to consider the challenges of accessing climate finance. Their conclusions will inform the UK’s upcoming Climate and Development Ministerial Event; including the group’s proposed definition for the purpose of climate finance:

• Strengthen institutional capabilities
• Enable experimentation, and
• Influence wider finance.

If adopted, this definition would force change: bilaterals and multilaterals would need to reconsider their success criteria and results frameworks.

They would also have to develop greater tolerance for risk; doing so would enable countries to experiment in how their development pathways need to change and develop ways to incentivise change across the whole of society.

The definition challenges climate finance to prioritise direct access to global climate funds and to mandate international intermediaries to mentor national institutions, ultimately to make their own role redundant. More widely, investing behind the principles for locally led adaptation can guide effective climate finance reform.

Importantly, the workshop proposed that at least half of all international public climate finance should prioritise adaptation (PDF), to offset preferences for potentially more profitable mitigation objectives.

And where should funder priorities lie?

Multilaterals

Multilaterals are generally strong on transparency, but the Climate Funds remain strongly risk averse, creating hurdles for applicants and limiting experimentation. On the other hand, the multilateral development banks (MDBs) can largely only provide loans, pushing the risk onto LDC ministries of finance.

We propose that MDBs and climate funds:

• Agree common objectives, accreditation and project documentation to reduce pressure on recipient countries to become experts in multiple funds’ requirements
• Develop an ‘empowerment pathway’ to support countries through each stage of the process, helping them achieve direct access with finance at scale, and
• Offer grant-based early-stage funds to encourage experimentation and capability strengthening, then slowly shift to the less risk-tolerant loans than offer greater scale of funding.

Bilaterals

The danger of donors integrating climate finance into sector-based development is that it will be less visible and flexible while more risk averse. Ultimately, it may fail to influence development pathways towards resilience and low emissions.  

Over the next year or so, bilaterals should focus on using their staff and small flexible support to take more risks and building the architecture for action. This can be achieved by working with partner countries to:

• Develop long-term strategic visions
• Design, test and adjust interventions that can influence and incentivise societal change, and
• Invest in the enabling environment that can influence other investment flows and attract private investors.

Bilateral support – when done well – can be critical to the effectiveness of multilateral support, by providing proven approaches that can be scaled up. The LDCs that have received most adaptation finance – such Ethiopia, Rwanda and Bangladesh – all have patient, risk-tolerant, long-term bilateral support.

Our advice to the UK

As president of this year’s UN climate talks (COP26) and the G7, the UK is in the spotlight. But between aid cuts and ongoing issues with climate finance, this government risks failing to deliver a successful COP26, even before talks have begun. 

The Climate and Development Ministerial is welcomed, but to be a credible leader, the UK must re-establish aid at 0.7% as quickly as possible: climate finance can only influence development pathways if there is investment to influence. 

Commitments to climate finance were to be additional to development investment: the UK can only claim to honour the former if that latter stays steady or grows. 

But the UK can rebuild trust. Staff deployed in developing countries should focus on rebuilding relationships shaken by a decade of climate investments closing at the whim of everchanging DFID (now FCDO) leadership.

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