Global climate financing refers to the financial support provided to address climate change-related challenges and promote sustainable development worldwide. It encompasses a range of financial mechanisms, investments, and funding sources aimed at reducing greenhouse gas emissions, adapting to the impacts of climate change, and transitioning to a low-carbon, climate-resilient global economy.
According to the definition by The UN – “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. The Convention, the Kyoto Protocol, and the Paris Agreement call for financial assistance from Parties with more financial resources to those that are less endowed and more vulnerable. This recognizes that the contribution of countries to climate change and their capacity to prevent it and cope with its consequences vary enormously.”
Total Climate finance has increased steadily over the last few years, and according to the Climate Policy Initiative climate finance reached up to $640B in 2020. Compared to 2019 it was an increase of only 2.6%. Despite this slight positive trend, total finance remains far below the scale necessary to respond to existing and future climate change. Based on various estimates climate financing falls way short and must increase exponentially to meet our climate objectives. According to Climate Policy Initiatives, Climate finance must increase by at least 590% – to USD 4.35 trillion annually by 2030.
Figure 1: Global Climate Finance for years 2019 and 2020 (Source: Climate Policy Initiative)
Table 1: 2020 Global Climate Financing Breakup
Climate financing has emerged from various sources and intermediaries (Table 1). The public sector accounted for 51% (USD 321 billion) of tracked climate finance. Development Finance Institutions (DFIs) continued to provide the majority of public finance at almost 70%. Private actors accounted for the remaining USD 310 billion, with commercial financial institutions and corporations together contributing almost 80% of the total. The climate financing was made available using instruments like Debts, Equity, and Grants. In 2020, the majority of climate finance – 58% (USD 375 billion) — was raised as debt, of which 6% (USD 37 billion) was low-cost or concessional debt.
Our focus for the rest of the article will be Multilateral Climate Funds. Total pledged Multilateral Climate Funds is around $46B and for 2020 it was around $3.4B.
Figure 2: Multilateral CLimate Fund – Pledged vs % Approved
Multilateral climate funds play an important role in supporting countries to adopt low-emission, climate-resilient development trajectories. They have a role in capacity building, research, piloting and demonstrating new approaches and technologies, and removing barriers to other climate finance flows.
Out of $46B of the pledged Multilateral Climate fund, $17B has not been approved i.e. 36% of the total pledged amount by the funds. Out of the approved amount of $29B, only $11B has been disbursed i.e. only 37% of the total approved amount. As seen in the chart above the top 5 funds (Green Climate Fund, Clean Technology Fund, Green Climate Fund IRM, Global Climate Change Alliance, and Least Developed Country Fund) have together pledged $32B of which only $19B have been approved and $5B disbursed.
Figure 3: Contributors to MCF by Countries
UK, US, Germany, Japan, and Norway are the top 5 contributors to the Multilateral Climate Funds together pledged around $30B (65% of total MCF) and deposited around $25B.
Figure 4: MCF recipient countries
The total approved funding allocated to recipient countries amounts to $29 billion (Figure 4) of which India gets the the largest amount at more than $1.5B followed by Brazil, Indonesia, Bangladesh, etc.
Figure 5: India’s MCF distribution split by implementing agency
Figure 6: India’s MCF distribution split by sectors
Taking a closer look at the profiles of the Implementing Agencies responsible for managing the funds (as illustrated in Figures 5 and 6), it’s notable that in 2022, India received a total of $202 million in funding. Remarkably, Macquarie Alternative Assets Management Limited played a significant role by contributing a substantial $200 million to this total. Additionally, other prominent Implementing Agencies operating in India include ADB Bank, IBRD, and NABARD.
Over the years, the allocation of funds in India has predominantly focused on the Energy Generation from the Renewable Sources sector. However, in the year 2022, there was a noteworthy shift as the agricultural sector received a substantial infusion of funds, reaching a remarkable $200 million, primarily due to the substantial contribution from Macquarie Alternative Assets Management Limited.
Conclusion: The Path to Climate Finance Adequacy
Global climate financing is a critical tool in addressing climate change and fostering sustainable development worldwide. It encompasses a broad spectrum of funding sources, mechanisms, and investments designed to mitigate greenhouse gas emissions, adapt to climate change impacts, and transition toward a low-carbon global economy.
While there has been a steady increase in climate finance over the last few years, the scale of funding remains insufficient to effectively combat climate change. Despite a 2.6% increase, climate finance only reached $640 billion in 2020, significantly short of the levels required to meet climate objectives.
Multilateral Climate Funds (MCFs) serve a crucial function in advancing low-emission, climate-resilient development trajectories. However, a significant portion of pledged MCFs remains unapproved, with 36% of the total pledged amount, approximately $17 billion, yet to receive approval. Furthermore, out of the approved amount of $29 billion, only 37%, or $11 billion, has been disbursed. This underscores the need for improved efficiency and effectiveness in the allocation and utilization of climate funds.
The top contributors to MCFs include the UK, US, Germany, Japan, and Norway, who have collectively pledged around $30 billion, representing 65% of the total MCF contributions and have deposited around $25 billion.
Recipient countries, such as India, Brazil, Indonesia, and Bangladesh, have received substantial allocations of approved funding. India, in particular, has received over $1.5 billion in approved funding, signifying its importance as a recipient country.
A closer look at India’s MCF distribution reveals a notable shift in 2022, with a significant infusion of funds into the agricultural sector, primarily due to a substantial contribution from Macquarie Alternative Assets Management Limited. This demonstrates a growing recognition of the importance of addressing climate change in agriculture.
In conclusion, the path to climate finance adequacy demands a significant increase in funding to meet the pressing challenges of climate change. Improved efficiency in fund allocation and a focus on key sectors, including agriculture, will be crucial in advancing global efforts to mitigate and adapt to climate change effectively. As nations and organizations work together, the global community can strive toward a more sustainable and resilient future.
If you are interested in learning more about sustainability markets, we invite you to interact with Calculus IQ. This tool can help you explore different aspects of the market, including project types, retirement volumes, and more.