How the world can deliver on its $100bn climate finance goal
The UN’s wealthiest members are missing their targets for financing green projects in developing nations. What’s more, investment experts believe that far greater – and better managed – sums are required
Saturday 12 December 2015 marked a historic turning point in the global fight against climate change. For decades, members of the United Nations had been deadlocked over how to tackle the problem. But, as France’s then foreign minister, Laurent Fabius, triumphantly banged his gavel, a treaty full of hope and promise was sealed that evening: the Paris climate accord.
Scientists have long warned of the catastrophic impact of global warming, with Oxfam estimating that it’s responsible for 5 million (more than 9%) of human deaths globally each year. The Paris agreement, achieved after a fortnight of tense wrangling and so many failed negotiations before that, was hailed a breakthrough. For the first time, rich and poor nations alike pledged to restrict global warming to less than 2ºC above pre-industrial levels, with a view to keeping it to 1.5ºC.
World leaders agreed to submit plans outlining their intentions to reduce their nations’ greenhouse gas emissions, incorporating a ratchet mechanism under which they would scale up their ambitions every five years.
Crucially, developed nations promised to jointly mobilise $100bn (£72bn) a year in climate finance between 2020 and 2025 to support the efforts of the UN’s poorest member states, many of which had contributed the least to global CO2 emissions but were already bearing the heaviest burdens of climate change. Funding is a key element of the Paris accord. It’s also proving one of the thorniest issues. Developed countries have significantly increased their financial support for emerging economies since 2015, but the money hasn’t flowed at anywhere near the speed required.
The total funds provided in 2019 totalled $79.6bn, according to the Organisation for Economic Co-operation and Development. It takes several months to tally up the numbers, but the latest estimates indicate that the $100bn target was missed in 2020 and it’s unlikely to be achieved this year either.
Despite these probable shortfalls, it’s likely that more than $400bn will have gone to developing nations over the past six years to help them manage the catastrophic impacts of climate change. And huge strides have been made towards a low-carbon economy. Figures from the International Renewable Energy Agency show that more than 80% of all electricity-generation capacity added last year was renewable, for instance.
The Green Climate Fund (GCF), established as one of several financing vehicles under the Paris accord, increased its portfolio of projects under implementation to 75 in 2019. Its largest schemes included the construction of renewable energy plants in Kazakhstan and affordable green housing in Mongolia.
Although the Covid crisis wrought havoc on the world in 2020, efforts to implement more climate-mitigation projects continued mostly unhampered. In Senegal, the GCF announced its intention to support the government to achieve universal energy access by 2025 through solar-powered mini-grids, for instance. Meanwhile, it’s working with the Nordic Environment Finance Corporation in Haiti to build 22 solar- and battery-powered mini-grids for rural communities where no grid power exists. Many more similar projects are at various stages of planning around the world.
Although these schemes are clearly beneficial in several respects, they have also prompted new thinking about what actions may be needed in future. A report published in May by research consortium Climate Action Tracker has projected that the Paris pledges, if achieved, will result in 2.4ºC of global warming by the end of the century – thereby missing the UN’s goal by a potentially disastrous margin.
Bill Hare is CEO and senior scientist at Climate Analytics, a co-founder of the Climate Action Tracker. He believes that the Paris accord is “driving change and spurring nations into adopting stronger targets. But there is still some way to go, especially given that most governments don’t yet have the policies in place that would meet their pledges.”
The abolition of coal-fired energy would help to bring the world within striking distance of the UN’s global warming target. Some countries have seen progress in this respect over the past decade. The amount of electricity generated by coal power stations in the US fell to a 42-year low in 2019, for instance. But most of the world’s coal plants, particularly in the developing countries of south-east Asia, still have no phase-out date.
With this factor in mind, experts agree that more global climate financing will be crucial in enabling coal-reliant countries to move to cleaner energy. Environmental campaigners have also called on developed countries to provide more funding to aid this transition.
“Even if developed countries finally deliver the agreed annual sum of $100bn in 2025, vulnerable nations are facing a shortfall for every year they didn’t hit that target,” notes Oxfam Germany’s senior policy adviser on climate change, Jan Kowalzig.
In any case, several campaign groups deem $100bn a year to be a tiny fraction of what’s actually needed. Estimates by the Climate Policy Initiative think-tank suggest that annual climate funding will need to exceed $4tn by 2030 if there’s to be any realistic shot at achieving the UN’s global warming goal.
Jeremy Lawson, chief economist at investment giant abrdn, explains: “The $100bn was always a drop in the ocean compared with the additional investment necessary to put emerging-market emissions on a trajectory consistent with the aims of the Paris agreement. The fact that actual spending has fallen short of even that meagre commitment is an indictment of the advanced economies’ commitments to the accord. An extra $20bn a year wouldn’t do very much to change this. What’s needed at the COP26 summit is a significant increase in the amount of funding.”
For developing countries already battling the disastrous consequences of global warming, there is a further complication. The bulk of finance raised has been poured into so-called mitigation projects that reduce CO2 emissions, such as renewable energy schemes, rather than into projects that will help them adapt to the current and future problems created by climate change.
Although the UN, the UK government and many climate funds agree that half of all climate finance should go into adaptation projects, only a quarter of the total funding raised in 2019 was so allocated. Mitigation projects are often easier to manage and more profitable, which makes them more attractive to private investors. Adaptation projects are vital in helping vulnerable communities build resilience, but the return on investment they offer tends to be comparatively low.
“Given that further significant climate change is guaranteed, additional funds should be made available for adaptation,” Lawson argues. “This should be focused on the poorest countries that are most vulnerable to its physical effects, most of which are in Africa, central America and the Pacific.”
According to the UN Environment Programme, annual adaptation costs in developing countries are expected to increase to $300bn by 2030 and $500bn by 2050. In response to this growing challenge, the GCF has pledged to direct 59% of new funds to adaptation projects. It will allocate more than half of that finance to the “least developed countries, small-island developing states and African states”.
Meanwhile, the UK will allocate £3bn of its £11.6bn climate fund to nature-based solutions, including marine conservation, reforestation and protecting habitats such as mangrove swamps, which offer local communities some protection from problems such as coastal erosion and tidal surges.
Arguably, the most ambitious of adaptation projects to replace lost vegetation is the Great Green Wall initiative. This mammoth reforestation project, winding 5,000 miles across the Sahel region of northern Africa, is designed to halt the Sahara Desert’s southward growth and improve the quality of life of the millions of people who live in that environmentally sensitive tract. Its supporters say that it’s the type of adaptation project to which governments worldwide should be allocating more money.
While policy-makers, financial institutions and environmental campaigners concur that climate funding needs to increase quickly, there remains a question mark over the type of financing that developing countries should be offered. Of the $79.6bn in climate funding raised in 2019 for the developing world, 56% was loan finance. This could leave some of the poorest and most vulnerable nations mired in debt, struggling to honour the capital and interest payments.
“It is about the quality of the finance provided, not just the quantity,” Kowalzig argues. “Last year, Oxfam estimated that the true value of climate finance may be just a third of the amount reported, once loan repayments, interest charges and other forms of over-reporting are stripped out. We also believe that only a fifth of funding went to the least developed countries and just 3% to small-island developing states. This is partly because there are no international standards on what should count as climate finance and how this should be reported.”
It’s clear that, as nations’ needs grow, so too must the level of finance from the private sector, which offers by far the biggest, and largely untapped, pool of capital.
Rebecca Craddock-Taylor is director of sustainable investment at Gresham House, a specialist in alternative asset management. She believes that there is plenty of potential for the private sector to invest more in “long-term areas of growth, such as renewable energy, biodiversity and vital infrastructure. Another area we should be considering is how funding is allocated to developing countries. Projects need to be financed and set up to deliver long-term benefits to local communities so that new investment opportunities and industries can be created.
She continues: “Many developing countries will still be suffering the impacts of the pandemic and will therefore require further funding to encourage economic recovery through the application of environmentally focused initiatives.”
Given the sheer scale of the climate challenge, mobilising more money is only one part of the equation. What will become increasingly important is the adoption of a more systematic funding mechanism. To transform how societies and economies operate and move to a more resilient and regenerative world, it needs to move away from a piecemeal, project-by-project approach and become more holistic, harnessing shared knowledge, new business models and financial innovations.
The new approach would require “much more collaboration and knowledge-sharing among regulators, governments, development banks and the private sector”, says Nick Mabey, co-founder and CEO of climate-change think-tank E3G. “The preference thus far has been towards clean infrastructure projects, but we must now think smarter and invest in driving policy, education and ecosystems to have a far greater, more transformative impact.”
Mabey cites the African Risk Capacity (ARC) as an example of the kind of strategic thinking that’s required. This agency of the African Union provides insurance services to member states and farming organisations, employing innovative financing mechanisms to pool climate-related risks across the continent and transferring these to international insurance markets. In doing so, the ARC says it improves the continent’s response to natural disasters and helps in building resilience.
Mabey also believes that aid payments to developing nations should be allocated with greater consideration. He explains that such funding is “often distributed on an income-per-head level, which is why we see such large flows into Africa. But many countries that would be considered middle-income states, such as tourism-reliant Caribbean islands, can be devastated by the effects of climate change. More must therefore be done to recognise individual countries’ specific circumstances.”
As the UN’s COP26 climate conference progresses in Glasgow, the need for more innovative, ambitious and effective climate action has never been greater. All nations will have to come together again to mobilise their collective resourcefulness and dexterity if they’re to stand any chance of meeting the goals of the Paris accord.