By Caroline Fouvet
At its 16th board meeting earlier this month, the Green Climate Fund (GCF) board allocated $755 million to fund eight new projects aimed to increase recipient countries’ resilience to climate change and to promote a low-carbon development. This is a welcome development, from one of the world’s most significant sources of public climate finance. However, if the world is to mobilise the US$100 billion-a-year promised at COP21, there needs to be a step-change in climate finance delivery.
The GCF, founded under the aegis of the United Nations Framework Convention on Climate Change (UNFCCC), is one of the major climate funds providers, but the international climate finance landscape remains diverse and complex to grasp. A report on current global finance flows by the Climate Policy Initiative (CPI) summarises recent trends and provides insights on how to track and disperse climate funding.
The adaptation gap
The good news is that climate finance flows have increased by 9% between 2012 and 2014, reaching $392 billion. They come from a wide-range of both public (multilateral and bilateral finance institutions, climate funds, governments) and private (project developers, corporate actors, households, private equity, institutional investors) sources. However, when looking closer at the finance flows’ allocation patterns, the report suggests that there is still room for improvement.
There exists an imbalance between the way public and private climate finance flows are invested. In 2013 and 2014, more than 90% of all private finance was spent domestically. On the other hand, most of North-South flows, which amounted to US$41 billion, came from public sector institutions. This trend highlights the importance of a robust domestic environment to ensure continuous private sector investment. It also shows that more needs to be done to stimulate private finance at the international level. Organisations such as the GCF, should consider removing some of the barriers to private sector involvement.
The CPI report also highlights the difference between mitigation and adaptation-related finance flows. The former dominates climate finance flows with US$336 billion raised between 2013 and 2014. Adaptation lagged far behind, only receiving US$27 billion. Renewable energy investments draw most of investors’ attention and account for 70% of total climate finance from 2012 to 2014. Building low-carbon economies is necessary, however it is also vital to close the financial adaptation gap to increase the resilience of countries and economies.
Track and trace
The report also calls for better processes to be put in place to track climate finance flows, to improve the assessment of their impact and effectiveness. This implies reporting on new sectors such as the green bond market (the role played by capital markets in channelling climate finance is currently not captured in CPI’s tracking). Moreover, it seems necessary to better define what falls under the UNFCCC US$100 billion objective. Paradoxically, this goal is used as the primary political benchmark to assess climate finance progress but no definition of which financial flows count towards it is provided. Linking climate finance flows and their contribution to the Sustainable Development Goals (SDGs) is one suggestion that could allow a better design of both climate and development projects.
A better understanding of climate finance flows will be essential in order to foster a more balanced distribution between the public and private sector, and adaptation and mitigation spending. Agreeing on precise definitions of what counts towards the Paris objective is also essential to enhance the assessment of climate finance progress. While the recorded increase in climate finance flows in recent years is something to be applauded, there remains a considerable way to go. The US$100 billion target set at the UNFCCC, is a small proportion of the overall investment finance that will be necessary to build societies that remain resilient in a 2˚C world: in fact estimates suggest that US$5.7 trillion will need to be invested annually in green infrastructure alone before 2030.