Climate Finance; Why is Climate Finance and the Loss and Damage Fund so Critical to Bolstering Resilience in Developing Nations?

Introduction to Climate Finance

Climate finance and the loss and damage fund have been some of the most vigorously debated topics linked to climate change in recent years. Climate finance “refers to local, national or transnational financing—drawn from public, private and alternative sources of financing—that seeks to support mitigation and adaptation actions that will address climate change” (United Nations Climate Change, 2023). It is by no means a new topic of discussion or a new idea as it has been part of the international climate discourse since the Kyoto Protocol and the Paris agreement. The climate finance movement has, over the past few decades been championed by those nations who have contributed the least to climate change, whilst experiencing its worst effects without possessing the necessary financial capital to bolster their resilience or rebuild in the wake of disasters (United Nations Climate Change, 2023). Whilst the overall concept of transferring funds to developing nations in order to fund “activities, programmes or projects intended to help address climate change: for both mitigation and adaptation, in all economic sectors, anywhere in the world” (LSE, 2023) may appear relatively simple the climate finance architecture is infinitely more complex and constantly evolving. The funds are channeled through “multilateral channels… as well as through bilateral and regional initiatives and channels” (Climate Funds Update, 2019). Figure 2 exhibits the global climate finance architecture which appears in many forms from grants to concessional loans to guarantees and private equity. The growing number of climate finance mechanisms has brought with new challenges in coordinating, accessing, and monitoring the various initiatives. If we were to take for example the Asia Pacific Climate Finance Fund, established in April 2017, which carries with it the same objectives as many of its counterparts i.e. supporting “the development and implementation of financial risk management products that can help unlock capital for climate investments and improve resilience to the impact of climate change” (Asian Development Bank, 2023), this particular fund focused on increasing investments in climate change mitigation, adaptation and disaster risk management in ADB’s DMC’s. The fund itself is complex in both its framework and in its application as shown in figure 1. Despite the difficulties associated with implementing climate finance it is crucial if we want to keep 1.5°C alive. In order to bring global emissions to net-zero by mid-century we must accelerate the phasing-out of coal, end deforestation and promote reforestation, make the switch to electric vehicles and invest in renewable energy. The shift to a greener planet will require trillions in public and private finance, trillions more in finance for adaptation and mitigation in the interim (IFAD, 2022). To that end the Loss and Damage Fund was established at COP27 (2022) which is dedicated to providing financial assistance to climate-vulnerable nations. This being the most renowned climate finance fund the Loss and Damage Fund is historic in its open recognition of the responsibility of the largest developed emitters to provide financial to aid to low emission vulnerable nations (UN Environment Programme, 2022). Though the Loss and Damage Fund was a breakthrough there are concerns over exactly how successful it will be in light of the lack of commitment shown in meeting the previous climate finance commitment of $100 billion a year by 2030 (Timperley, 2021).

Facts & Figures

The UNFCCC Standing Committee Biennial Assessment… published in October 2022, found that global climate finance flows were US$803 billion per year on average in 2019–2020, a 12% increase from 2017–2018.
The scale of climate-related financial flows is still relatively small compared with other types of flow in the context of the wider financial system. For instance, in 2019 and 2020, an average of US$892 billion per year was invested in fossil fuels, global fossil fuel subsidies were worth US$450 billion, and environmentally harmful subsidies stood at US$1.89 trillion.
The sectors that received the most finance in 2019–2020 were renewable energy (US$336 billion per year on average) and sustainable transport (US$169 billion). By contrast, tracked flows to agriculture, forestry and other land use were only US$16.5 billion, representing less than 2.5% of total climate finance (LSE, 2023).
Since 2009, global climate talks have agreed on mobilizing $100 billion a year for developing countries to take climate action, both to adapt to climate change and cut emissions…So far, the $100 billion goal has not been reached, however, and the distribution of funds has not been equitable. In 2020, based on the latest OECD data, developed countries provided $83.3 billion. Only 8 percent of the total went to low-income countries and about a quarter to Africa, even though both are highly vulnerable to climate change and home to the majority of people living in poverty.
In its first round of resource mobilization, from 2020 to 2023, the Green Climate Fund (GCF), the world’s largest climate fund, raised $12.8 billion to improve the resilience of a billion people in 128 countries. A second round is underway to fund the GCF from 2024 to 2027, a period of urgent action for climate change and the Sustainable Development Goals. (United Nations, 2023)
To keep global warming below 1.5 degrees Celsius, investors must invest between $1.6 to $3.8 trillion annually. Right now, investments total a mere $600 billion annually (Climate Finance Fund, 2023).
In the United Nations Framework Convention on Climate Change’s recent analysis of financing needs, developing countries require at least $6 trillion by 2030 to meet less than half of their existing Nationally Determined Contributions. To put that challenge in perspective, estimates by the Organization for Economic Co-operation and Development and Oxfam suggest that the actual flow of climate finance from developed to developing countries in 2020 was between $21 billion and $83.3 billion (Kozul, 2023).

Five Solutions & Policies

Much of the difficulties associated with climate finance are linked to mobilising and delivering the funds whilst ensuring that the finance is being used effectively for the nations which are most at risk. The ‘New Collective Quantified Goal’ (NCQG) hopes to begin resolving such issues. “This goal will be ‘collective’ as it will lay out joint efforts from both developing and developed countries to mobilise and deliver the funds, and ‘quantified’ as it will be determined by science-based assessments of the needs and priorities of developing countries” (LSE, 2023). At COP26 the UNFCCC set up a work programme to begin a dialogue with technical experts, conduct annual reports, and set up regular consultations with Party and non-Party stakeholders on the NCQG.
The World Bank and other development banks are in desperate need of reform as the injustice of the international financial system hinders many nations who wish to invest in climate action but cannot afford to do so. “Currently, 52 developing countries are suffering severe debt problems. They are home to 40 per cent of all people living in extreme poverty; half of them are among the world’s most climate-vulnerable nations” (United Nations, 2023). High financing costs play a significant role in unsustainable national debt burdens. Least developed countries who seek to borrow from international capital markets face far higher interest rates than wealthier nations, this has had an impact on climate finance, proven in 2019-2020 when “over 60 per cent of climate finance entailed borrowing funds, or around $384 billion. Only $47 billion came with low cost or concessional interest rates. No-cost grant finance was only $36 billion” (United Nations, 2023). Considering the sheer scale of the climate finance required the current inequality in interest rates and across the international financial system could have serious ramifications for the future of the planet if we fail to reform and produce a more egalitarian system.
Instead of arbitrary targets such as the $100 billion dollar target any new goals “must rigorously quantify and respond to countries’ demonstrated needs and be tracked based on an agreed methodology that can prevent the double-counting and significant overestimations of the past” (Kozul, 2023). In laymans terms international organisations must avoid setting out financial goals and targets which rely solely on numbers which look good and instead they need to set more practical targets. These practical targets must take into consideration exactly how much finance has been attained and how it can be utilised most efficiently.
We need to prioritise grants over loans. The majority of finance currently used to address loss and damage comes in the form of loans for disaster recovery and reconstruction. This system is once again unjust as it forces the victims of the climate crisis to bear the burden of the costs. The loans system also ignores the fiscal realities of those nations who are most vulnerable to climate change that are left in the position of either paying their nations debts or building up their resilience against climate change. This inevitably causes debts to spiral, something which could be avoided if LDC’s and SIDS made financial aid available in the form of grants which are separate from the politics of trade-related favoritism. Grants do not add to the national debt and are a far more risk-tolerant form of finance. This should allow for innovation in loss and damage response whilst improving recovery and rehabilitation from disaster (IIED & ICCCAD, 2022).
One of the most obvious solutions actually renders climate finance obsolete. The loss and damage fund would not be necessary if we were to curb our greenhouse gas emissions (mitigation) whilst we could also take preemptive action to protect communities from the consequences of climate change (adaptation) in the interim (Bhandari et al., 2022).

Conclusion

Climate finance will be a crucial tool to help minimise the worst impacts of climate change over the coming years. Where we must be careful is in not treating climate finance and the loss and damage fund as a long-term solution. In the short-term, climate finance must be equally distributed and channeled in such a way that ensures the most climate vulnerable nations and communities are furnished with the necessary financial aid as a preemptive measure to reduce the potential and ongoing damage done by extreme environmental events, whilst also avoiding more vulnerable nations being trapped in a spiral of debt linked to climate finance loans. In the long-term climate finance can be a tool used to bolster vulnerable communities continued access to greener forms of energy and to secure sustainable development projects which coincide with SDG 13 - climate action. In all climate finance spaces it should be those worst affected who are leading the conversations surrounding how funding is utilised and on which projects. We are already seeing glimpses of this through the Prime minister of Barbados, Mia Mottley’s strong leadership and unswerving commitment to serve those nations who have been continually swept under the rug. The prime ministers approach of addressing the climate crisis through both public and private investments has already proven successfully and could make a tremendous difference on a worldwide scale if we can bridge the gap between the two (Feingold, 2023) whilst also adopting a more localised approach to this global problem. Meanwhile, those nations which either have the financial capacity or are classed as one of the greatest emitters must take a greater financial responsibility towards those nations which are currently paying the cost of climate change. These nations should be doing so, not solely by making empty promises to please the baying crowds of journalists but by making a real and lasting impact through committing to a climate finance contribution which is both deliverable and useful. To achieve this may require an overhaul of the existing international financial institutions whose current risk averse policies are no longer applicable in a world where risk has become an everyday part of life. Finally, our top priority should not in fact be delivering climate finance but in achieving an overall reduction in emissions and transformation to a greener, more sustainable world. To continue focusing solely on climate finance is to reside ourselves to an unstable future.

References

Asian Development Bank. (2023). All Funds - Asia-Pacific Climate Finance Fund. Asian Development Bank. https://www.adb.org/what-we-do/funds/asia-pacific-climate-finance-fund

Bhandari, P., Warszawski, N., & Thangata, C. (2022, December 28). The Current State of Play on Financing Loss and Damage. World Resources Institute. https://www.wri.org/technical-perspectives/current-state-play-financing-loss-and-damage

Climate Finance Fund. (2023). Mobilizing Capital for Climate Solutions. Climate Finance Fund | Mobilizing Capital for Climate Solutions. https://climatefinance.fund/

Climate Funds Update. (2019). Global Climate Finance Architecture - Climate Funds Update. Climate Funds Update -. https://climatefundsupdate.org/about-climate-finance/global-climate-finance-architecture/

Climate Policy Initiative. (2021, December 14). Global Landscape of Climate Finance 2021 - CPI. Climate Policy Initiative. https://www.climatepolicyinitiative.org/publication/global-landscape-of-climate-finance-2021/

Feingold, S. (2023, June 27). AMNC 2023: Prime Minister of Barbados calls for 'urgent action' on climate crisis. The World Economic Forum. https://www.weforum.org/agenda/2023/06/amnc-2023-mia-mottley-prime-minister-of-barbados-call-for-urgent-action-on-the-climate-crisis/

IFAD. (2022, November 11). Why climate finance matters: Your questions answered. International Fund for Agricultural Development. https://www.ifad.org/en/web/latest/-/why-climate-finance-matters-your-questions-answered

IIED & ICCCAD. (2022, 10). Financing loss and damage: four key challenges. https://www.iied.org/sites/default/files/pdfs/2022-10/21141iied.pdf

Kozul, R. (2023, June 14). A climate finance goal that works for developing countries. unctad. https://unctad.org/news/climate-finance-goal-works-developing-countries

LSE. (2023, February 22). What is climate finance? - Grantham Research Institute on climate change and the environment. LSE. https://www.lse.ac.uk/granthaminstitute/explainers/what-is-climate-finance-and-where-will-it-come-from/

Timperley, J. (2021, 10 20). The broken $100-billion promise of climate finance — and how to fix it. nature. https://www.nature.com/articles/d41586-021-02846-3

UN Environment Programme. (2022, November 29). What you need to know about the COP27 Loss and Damage Fund. UNEP. https://www.unep.org/news-and-stories/story/what-you-need-know-about-cop27-loss-and-damage-fund

United Nations. (2023). Finance & Justice | United Nations. the United Nations. https://www.un.org/en/climatechange/raising-ambition/climate-finance

United Nations Climate Change. (2023). Introduction to Climate Finance. UNFCCC. https://unfccc.int/topics/introduction-to-climate-finance