Climate finance can become significantly more transformative by addressing systemic barriers to low carbon and climate resilient investments, according to a new World Bank report.
Although global climate finance has grown significantly in recent years, there remains a sizable gap between the public resources that are available and the investment needs to address climate change in developing countries.
The report makes the case that while stimulus packages to combat the coronavirus-induced economic slowdown can help countries shape a sustainable recovery, they will only be transformative if the limited public funding for climate action leverages substantially more funding from other sources.
“This is exactly the right time to look at how we can make climate finance more effective and more impactful,” says Marc Sadler, Practice Manager of the World Bank’s Climate Change Fund Management Unit. “The increased realization of economic benefits from clean development pathways allow climate finance spending to be much more catalytic. The critical levers identified in this report can – with strategic allocation of climate finance – unlock greater value for money and help countries build back better.”
The report identifies eight sets of climate levers and analyzes how climate finance can best be deployed to maximize their transformative impact for developing countries to achieve clean development goals. The eight climate levers are: project-based investments, financial sector reform, fiscal policy, sectoral policies, trade policy, innovation, carbon markets and climate intelligence.
The report proposes a set of recommendations for transformative climate finance, including:
- Employ a wider variety of financial instruments: Expanding the use of instruments such as policy-based finance, results-based finance, equity finance and guarantees can enhance the impact of climate finance deployed.
- Enhance leverage on a wider, systemic basis: Public climate finance should maximize leverage from private and government sources. The scope and impact of this leveraging should go beyond project boundaries to achieve economy-wide impacts.
- Link to long-term strategic planning: Financing decisions should be aligned with long-term strategies for low-carbon resilient development, while avoiding spending that is inconsistent.
- Invest in “climate intelligence”: Appropriate knowledge generation can have a powerful effect: include climate impact and vulnerability maps; early warning technologies; models for long-term scenario simulation and planning; and physical and transitional risk assessment tools.
“The climate finance system has made great strides in the past decade, increasing in both volume and impact,” says Jonathan Coony, World Bank Senior Carbon Finance Specialist and report co-author. “But circumstances have changed over that time and reviewing the programming of scarce public finance to deliver transformation at scale will be essential to help our clients shape a sustainable recovery.”
Transformative Climate Finance: A new approach for climate finance to achieve low-carbon resilient development in developing countries is available for download here. The report was launched as part of the Kickstarting the Sustainable Recovery series organized by the World Bank’s Climate Change Group in partnership with Innovate4Climate to shed light on how sustainable finance can be part of the COVID-19 recovery and help countries build back better and stronger.