Climate crisis: in focus
The IBA has created a dedicated page collating content published about the climate crisis.
Our greatest climate challenge
Ensuring flows of finance are sufficient to mitigate and adapt to the climate crisis is a monumental task. Global Insight assesses what’s needed.
The stakes couldn’t be higher. By mid-century, global greenhouse gas (GHG) emissions must have fallen in line with the absorption capacity of carbon sinks if the 1.5°C to 2°C limits of the Paris Agreement on climate change are to be met. Simultaneously, adaptation to unavoidable climate change needs scaling up significantly, particularly in vulnerable developing economies.
Getting climate finance right is, therefore, essential. Accomplishing this task will ultimately depend on both increasing and broadening access to existing and new sources of lower cost finance.
Good COP, bad COP
The 2023 UN Climate Change Conference (COP28) achieved some crucial objectives. The first Global Stocktake of progress was completed, which, while revealing a huge mismatch between action and need across key areas of the Paris Agreement, enabled greater clarity on targets and financing needs and allowed the contentious Warsaw International Mechanism for Loss and Damage under Article 8 of the Paris Agreement to finally be operationalised.
There was an historic agreement to triple renewable power and double energy efficiency by 2030, coupled with a deal to phase down unabated coal power and ‘inefficient’ subsidies for fossil fuels – and to accelerate just transition away from them – and to cut methane emissions. This provided a direction of travel, but the final text – which contained many loopholes – ultimately fell short of many expectations.
There were disappointments too on progress towards the New Collective Quantified Goal (NCQG) in respect of post-2025 climate finance for developing countries as well as on adaptation finance, for example.
Given this, all eyes were on COP29 in Baku, Azerbaijan, which was held in November. Ultimately, an uneasy compromise was reached, offering modestly increased support from existing donors of $300bn annually by 2035, with no widening of funding obligations to emerging economies.
Most agree that the transition to renewables is unstoppable, but that decarbonisation remains too slow to keep to the 1.5°C target. This objective now also faces headwinds, not least from economic slowdown in developed economies. Negotiations were made more challenging still in the wake of Donald Trump’s re-election to the US presidency. Trump has already announced that he’ll take the US out of the Paris Agreement once more. Future US climate finance will probably be curtailed.
At COP29, disgruntled developing countries felt obligated to accept the deal rather than risk further setbacks and damage to the COP process in 2025.
Participants at COP30, to be held in Belém, Brazil, in 2025, will need to tackle both ambition and get into the detail of nationally determined contributions (NDCs) – commitments by countries on GHG emissions – at a sectoral level. That’s in addition to discussions on the need for scaled-up finance for low-carbon, climate-resilient pathways in the ‘Baku to Belém Roadmap to 1.3T’ – a framework launched at COP29 to address the additional financing needed for developing countries.
Sahar Iqbal, Regional Representative for South Asia on the IBA Water Law Committee, warns of the challenges in negotiating the NCQG through 2025 and beyond, not least of which are the setting of far more ambitious climate finance goals and achieving a just balance between the responsibilities of developed and developing countries in this respect. ‘Redirecting existing financial flows, especially from fossil fuel subsidies, towards sustainable alternatives like renewable energy is imperative’, adds Iqbal, who’s also a partner in capital markets and corporate M&A at Akhund Forbes in Karachi and has written extensively on climate issues.
The who, where and how much of finance
The NCQG on climate finance was central to difficult negotiations leading up to COP29. It provides for crucial public and private finance from developed economies and multilateral sources to support developing countries in delivering on their NDC commitments.
Going into COP29, a core figure of $500bn a year – largely consisting of public finance and grants – was seen by developing countries as the minimum needed. However, at the conference, the final figure was agreed at $300bn, which was reluctantly accepted by developing countries. The amount includes loans, and there’s a concern that even at low, concessional rates of interest, this could push more vulnerable developing countries to the brink (see box: Debt spiral). Further, a higher proportion of this money could be private. While again this would be provided at a concessional rate, the fear is that the debt burden of developing countries will be increased. The overall goal is for the finance to come ‘from a wide variety of sources, public and private, bilateral and multilateral, including alternative sources’, according to the COP29 presidency text.
The text also agreed to ‘secure efforts of all actors’ towards a scaled-up goal of ‘at least’ $1.3tn annually by 2035 through a variety of sources. This has been widely criticised as merely aspirational and poorly defined, as well as uncertain for investors and vague on timing. Pinning down the details of updated NDCs and National Adaptation Plans will now all be covered in the challenging ‘Baku to Belém Roadmap to 1.3T’ negotiations track en route to COP30.
To put the agreed figures into context, a letter to the UN Framework Convention on Climate Change (UNFCCC) by Johan Rockström, Director of the Potsdam Institute for Climate Impact Research, argues that the $300bn figure and its reliance in part on private finance with interest ‘is completely inconsistent with the Paris Agreement aim and 1.5°C limit’.
The letter adds that the planet is currently heading towards a catastrophic 2.8°C rise above pre-industrial levels and stresses that mitigation is the immediate priority for adaptation and for minimising loss and damage, which will also need substantially more funding. On mitigation in the power sector alone, Rockström says a full ‘inner quantum’ of $256bn per year needs to be delivered from 2025 up to – and not by – 2035.
A major question is also what should be financed. There’s broad consensus on mitigation and adaptation, if not the amounts, but there’s been controversy over whether to include loss and damage. At COP29, there was no agreement on linking loss and damage funding to these overall finance targets.
Another roadblock is whether more countries, including emerging economies, should now contribute to climate finance. For their part, developing countries, most of whom account for a minimal share of emissions, are far more concerned with adaptation, which tends to rely more heavily on state and concessional finance. Developing nations, as well as China and Gulf states, argue that only the 24 Organisation for Economic Cooperation and Development Annex II countries from 1992 – the original signatories to the UNFCCC – are obligated. COP29 saw strong pushback on widening the base of contributors, although China did offer to step up voluntary contributions, and to register existing and new ones.
‘There’s a bigger underlying, structural question that we need to look at and that’s how [to] make climate finance future-proof’, says Matthias Lang, Chair of the IBA Energy, Environment, Natural Resources and Infrastructure Law Section. ‘If there are certain countries that develop as they have over the last 30 years, like China and Saudi Arabia, I think their role in CO2 reduction and climate measures also needs to change.’
There’s a bigger underlying, structural question that we need to look at and that’s how [to] make climate finance future-proof
Matthias Lang
Chair, IBA Energy, Environment, Natural Resources and Infrastructure Law Section
‘I believe that the participation of China and the Gulf states in global climate financing programmes, through various agreements and initiatives, are of high importance as those countries significantly contribute to climate warming’, says Ieva Dosinaitė, Special Projects Officer on the IBA Banking & Financial Law Committee. ‘Thus, their participation would serve, first of all, as a political statement obliging them to act accordingly in line with the goals of such agreements. Secondly, defining “funders” in this way would comply with the key principle of “polluter pays”.’
A stumbling block for agreement on increasing contributions is a continuing lack of transparency and the lack of a formal definition of ‘climate finance’. Many developing countries have called for the latter. ‘Defining climate finance clearly and distinguishing it from other forms of assistance is essential for transparency and trust-building’, says Iqbal. ‘It is essential to have a functional definition of climate finance to address the challenges surrounding its allocation and reporting.’ Trust towards climate finance providers remains low due to unmet promises and overreporting of disbursements, she adds.
The problem continues given the failure to agree on a definition at COP29. ‘A clear delineation between adaptation and mitigation financing’ is needed, says Iqbal, as ‘the problem is not only how much, but that it needs to flow through, to get to where it’s needed’.
Enabling investment
China and developed economies continue to dominate investment in climate finance. Investment in the EU and US has been substantial but lags behind China, , which saw a $180bn increase in clean energy investment between 2019 and 2023, compared to approximately $150bn in the EU and nearer to $100bn in the US, according to the International Energy Agency.
The problem is not only how much money is needed, but that it needs to flow through, to get to where it’s needed
Sahar Iqbal
Regional Representative for South Asia, IBA Water Law Committee
‘It is definitely a matter of concern for not just developing countries, but the world at large that major superpowers seem to be unwilling to enable climate finance to the required levels’, says Iqbal. ‘Therefore, incentivising investments into climate finance and related sectors can solve this problem.’
She highlights the US Inflation Reduction Act 2022, which changed the landscape for the country’s clean energy transition, having previously been based on carbon pricing. ‘By incentivising clean energy investments and supporting domestic production, the Act fosters economic growth while addressing climate challenges’, says Iqbal. However, the new Trump administration may imperil the Act’s future.
For Dosinaitė, who’s also a partner at Ellex Valiunas in Vilnius, the focus shouldn’t be the particular amount of climate finance but rather the widely recognised bankability of ‘green’ projects – for example, those attractive to banks and other investors – boosted by special capital markets instruments, with state/public funds being catalysts.
She explains that within the EU’s Green Deal – a set of policy initiatives adopted by the bloc – ‘renewable energy is financed fragmentedly and the real possibility to get external financing depends on each state or region’. This, she believes, results in the relatively slow development of green energy sources and vague climate financing.
The EU’s Green Deal facilitates the growth of renewable supply, says Dosinaitė, but doesn’t specifically address the inadequacy of current transmission infrastructure – both in terms of capacity and the necessity of connections being placed near renewable facilities – and the need to boost uptake of renewable output by industry. ‘This gap diminishes the overall goal of decreasing the use of fossil fuels and replacing them with green energy’, she explains, adding that this highlights a critical need for state and EU stimulus to support the financing of green electricity infrastructure delivering to the manufacturing sector. ‘This’, says Dosinaitė, ‘would naturally create the demand for green energy’.
‘If green projects become acceptable to private financiers from an overall risk perspective – ie, there’s high demand for them, there’s infrastructure in place, an increased usage of green energy, etc – private climate financing would expand quite quickly’, she adds.
Blended finance initiatives – whereby risks are shared by both the public and private sectors – are beginning to substantially boost investment by drawing in private capital. For instance, Peter Damgaard Jensen, Chair of the Climate Investment Coalition (CIC), said in June that ambition had grown, with the CIC launching a goal of $130bn by 2030 from 42 pension funds.
James Alexander, Chief Executive of the UK Sustainable Investment and Finance Association, highlights the pioneering role of the Financial Stability Board’s global Task Force on Climate-related Financial Disclosures (TCFD) in reducing risk for investors by increasing transparency. ‘TCFD has been immensely impactful in sustainable finance, and has paved the way for companies, banks and investors to provide transparent information to shareholders’, says Alexander. ‘It has also accelerated progress in related areas such as climate data and measurement, which has brought greater understanding of the breadth of environmental impacts within the investment ecosystem.’ The Financial Stability Board has now transferred the monitoring of companies who are choosing to, or are obliged to, continue using the TCFD recommendations to the International Financial Reporting Standards Foundation.
A key part of the private sector effort could emerge from developments in screening and the categorisation of investment by green taxonomies – classification systems that highlight sustainable investment options – as well as enhanced transparency, creating the pressure for change. ‘The potential of green taxonomy and enhanced financial reporting with ESG [environmental, social and governance] criteria to redirect financial flows towards climate finance in the EU, UK, and US is acknowledged, yet concerns linger regarding their effectiveness and susceptibility to greenwashing’, says Iqbal.
If green projects become acceptable to private financiers from an overall risk perspective, private climate financing would expand quite quickly
Ieva Dosinaitė
Special Projects Officer, IBA Banking & Financial Law Committee
Green bonds have grown significantly, having surpassed $1tn by 2024. Here, China dominates, issuing more than $85bn in bonds in 2022, for example. Greenwashing – whereby a company gives a false impression or misleading information about a product’s environmental sustainability – remains a concern, however, and one that’s drawing the attention of regulators. Social and transition bonds are also emerging, with the latter covering hard-to-decarbonise sectors and, controversially, nuclear energy.
Loss, damage and adaptation
Research by the Potsdam Institute for Climate has confirmed that by far the greatest effects of the climate crisis are on those economies least responsible, or able to afford them. It found that these economies will suffer a 61 per cent greater loss in income than developed economies, which raises important climate justice issues.
For this reason, the Warsaw International Mechanism for Loss and Damage was created under Article 8 of the Paris Agreement in 2015. However, as a result of strong resistance from developed countries, the associated fund was only launched at COP28. Some 15 countries pledged support to the fund, raising $650m – barely enough to begin operations. At COP29, the fund was finalised and became operational, with total pledged support exceeding $730m. However, this was nowhere near the $580bn widely expected to be incurred in climate change-related damages by 2030. Despite this, the operationalisation of the fund was judged an important milestone, and its board will look to finance projects from 2025, as soon as the pledged money becomes available.
Adaptation to the climate crisis, meanwhile, will be crucial to resilience, sustainability and prosperity in the coming decades, particularly in vulnerable developing economies. However, this aspect isn’t given substantial attention, with just seven per cent of global climate finance going into adaptation in 2021, for example. No economy is doing enough, but there are huge disparities between developed and developing countries. A far greater amount of finance and an even playing field are necessary.
Street flooding in Miami, USA
There was minimal progress towards the global goal on adaptation – as established under the Paris Agreement – at COP29, though indicators of progress were narrowed down. Reference was also made to climate-resilient development pathways in the Baku to Belém Roadmap and an agreement reached to continue high-level discussions on adaptation. Together, these provided crumbs of hope.
A huge challenge post-COP29 is to make adaptation as investable as booming renewable energy markets are, while ensuring that projects collectively align with the crucial 1.5–2°C goal and wider sustainability objectives of the Paris Agreement.
‘To prioritise climate adaptation and attract investors, a comprehensive strategy is essential’, says Iqbal. ‘Governments can stimulate investment through policy frameworks, including tax incentives
and mandates for risk disclosure.’ She highlights standardised risk assessments, green bonds and public–private partnerships as facilitating and boosting investment opportunities, and that incentives, strong returns and accountability are essential for attracting climate adaptation investment.
Total adaptation finance reached $46bn in 2019/2020, according to the Climate Policy Initiative, but at COP29, it was agreed that adaptation needs were running far higher, at $215–$387bn a year up to 2030. The need to dramatically scale up was therefore recognised, while it was acknowledged that this money must come from public and grant-based resources and highly concessional finance.
A key source of funding in this area comes from the UNFCCC Adaptation Fund, which receives two per cent of revenues generated by offset projects under the UN Clean Development Mechanism. This will more than double to five per cent per project given that market-based mechanisms under Article 6.4 of the Paris Agreement Crediting Mechanism (PACM) were agreed at COP29. The PACM could now generate some $12bn annually by 2030, according to Guy Turner, Managing Director of MSCI Carbon Markets. This implies potential annual funds of $600m, which is helpful but still doesn’t meet the need.
The Global Environment Facility of the World Bank is an important player, providing a total of $2bn in grant finance to date to many vulnerable lesser developed countries and small island developing states, primarily through the Least Developed Countries Fund and the Special Climate Change Fund. The parallel Green Climate Fund, established under the UNFCCC, raised $12.8bn from donors in 2023 and invests half of its funds in adaptation. Both also boost impact by co-investing with the private sector, while overlapping UN programmes cooperate to increase efficacy.
The final text from COP29 calls for a balance between mitigation and underfunded adaptation. The alignment of adaptation with mitigation and sustainability goals could also boost investment.
Plugging the finance gap
Ultimately, for developing countries alone, the gap between current flows of finance and need is dire. At COP29, India and several other countries were looking for at least $1tn a year for developing countries, while the High-Level Expert Group on Climate Finance, launched by the COP26 and COP27 presidencies, has estimated that nearer $2.4tn will be needed annually by 2030 and that ultimately, $7tn is required per year.
For perspective, the International Monetary Fund reports that global fossil fuel subsidies alone reached $7tn in 2022, despite a G20 commitment in 2009 at Pittsburgh to phase these out ‘over the medium term’. This suggests that climate finance objectives should be as much about living up to previous commitments and distribution – rebalancing, redirecting current investments and subsidies – as about finding new sources.
‘Priorities for expanding climate finance include addressing debt sustainability, reforming development banks and innovative taxation’, says Iqbal. ‘Success hinges on robust implementation, addressing greenwashing concerns, and fostering international cooperation.’
Equalling China’s domestic green investments will be a major challenge for other nations. The EU Green Deal and UK initiatives are major steps forward, albeit overshadowed by the re-election of Donald Trump and his signing of executive orders that affect funding for the Inflation Reduction Act and withdraw the US from the Paris Agreement.
However, global success requires a level playing field for developing economies. Regulatory and behavioural shifts, with targeted support and fiscal measures, could attract private investment without much greater public spending. Goals that could be key here include the phasing out of fossil fuel subsidies and the restructuring of global financial institutions for sustainable growth.
Paul Hatchwell is a writer, researcher and consultant on policy and practice in energy and climate, sustainability and green finance issues. He can be contacted at paul@hatchwell.net
Debt spiral
The International Monetary Fund reports that 60 per cent of low-income countries and 25 per cent of emerging markets face unsustainable debt, exacerbated by the climate crisis and the Covid-19 pandemic. This hinders their ability to address climate issues and increases vulnerability. António Guterres, the UN Secretary-General, has stated that ‘four out of every 10 people worldwide live in countries where governments spend more on debt interest payments than on education or health’. Future climate finance must therefore be coordinated with debt relief, economic stabilisation and resilience-building through roadmaps and transition plans, while also avoiding high-interest loans and unsustainable compromises.
There are concerns in highly indebted developing countries about the risks of excessive dependence on public-private ‘blended finance’. High interest rates and large upfront costs are barriers to the transition to renewable energy and increase vulnerability to fossil fuel shocks and the climate crisis. The pressure for debt forgiveness for such countries is therefore growing. Other options include debt for nature swaps, such as the deal made by the Maldives with the Nature Conservancy, a US non-governmental organisation. Through such deals, foreign debt is forgiven or restructured in exchange for the debtor nation committing to invest in environmental projects benefitting the climate and nature.
Without debt forgiveness, many developing economies receiving climate finance won’t be able to focus fully on addressing sustainable development, climate crisis resilience and mitigation, a point made by Guterres at the December G20 meeting.
Bruce Macallum is a former Co-Chair of the IBA Poverty and Social Development Committee. ‘International climate finance doesn’t take into account international norms dealing with alleviation of poverty. If it did, we’d be further along in terms of using the funds in accordance with [UN Sustainable Development] Goal 1 [on ending poverty], but they seem to be on different trajectories’, says Macallum, who’s a practitioner in international public law based in Victoria, Canada.
To a certain extent, he says, the Equator Principles – a common baseline and risk management framework for financial institutions to identify, assess and manage environmental and social risks connected to projects – directly link at a consultation level with respect to financial developments that require vulnerable populations to be considered, so it’s implicitly part of the mechanisms. But while there’s UN guidance on human dignity – for example, the Human Rights Council’s Guiding Principles on Extreme Poverty and Human Rights – Macallum highlights that it’s up to nation states to implement these within their borders, so there’s ‘a question of advocacy at national levels’.
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