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The effectiveness of climate finance

Written by Smita Nakhooda


While there is consensus over the need to maximise the effectiveness of international climate-change finance, there is little agreement on what that entails in reality. Two years into the commitments made at the Copenhagen COP to scale up fast-start climate finance to developing countries to $30 billion by 2012, a growing community of governments, researchers and civil-society organisations is working to understand how well these funds have been spent, and how we can continue to improve our use of climate finance into the future. Leading members of this community met in London last week to participate in a series of workshops that ODI hosted on the effectiveness of climate finance.

How do we do the best we can with the (limited) public resources that are being mobilised to help developing countries respond to the challenges of climate change?

Efforts to respond to climate change in developing countries must be compatible with their development aspirations. The imperatives of low-carbon and climate-change-resilient development require both environmental and developmental priorities to be addressed. However, it may be difficult for the same intervention to achieve such a myriad of objectives.

Public climate finance should not be overloaded with too many metrics that seek to measure progress against an overwhelming suite of objectives that prove excessively costly and cumbersome to apply in practice. There is a real – and justified – concern on the part of those entrusted with programming climate finance quickly and efficiently, that donor agendas and development fads will slow down the urgent task of getting finance to projects that can deliver immediate climate benefits. Simple and manageable systems are needed that incentivise and facilitate the various actors involved in the use of climate finance to design more creative projects and programs that deliver ambitious results. 

But simplicity is elusive.

For climate finance to deliver real and lasting benefits, we must navigate the complexities of transforming investment paradigms in sectors such as energy, forests, agriculture, water, and infrastructure. These sectors are, after all, central to development, and the political economy of their change is difficult. Changing the incentives for the private sector in particular, and harnessing both their capacity and capital in pursuit of low-carbon development, is a challenging proposition. But the availability of well-targeted concessional public finance may be able to help reshape some of this political economy, by offering new incentives to pursue different – and better – paths to development.  

Reform is a slow and often difficult process, however, that comes up against issues of national sovereignty. Realigning institutional frameworks and priorities to support climate-compatible development requires the involvement of multiple government agencies, whose cooperation requires political will and leadership. The inclusion of stakeholders outside of government – particularly the private sector and civil society – can be an important motivator for change.

Strengthening national institutions and capacity – particularly the capacity to spend money well-- is centrally important to the effectiveness of climate-change finance. This is particularly the case for adaptation finance, given its close links to development activities, albeit under conditions of growing uncertainty.

Nevertheless, it is not realistic to wait for underlying conditions to be perfect, before making investments that can deliver real results in the immediate term.

Furthermore, the functions and objectives of channelling institutions shape outcomes, and some institutions and financial products may be better suited to certain kinds of interventions than others. For example, organisations such as United Nations Development Programme and GIZ have programs focused on capacity building; whereas the multilateral development banks have immense project and programme finance experience. Both have engaged around questions of institutional and policy reform from different angles, using different instruments, such as grants, technical assistance, and development policy lending. The challenge therefore becomes one of identifying strategic investments that can inform and reinforce longerterm change, and creating effective feedback loops between these complementary interventions.

There is a general consensus on the need to identify a small number of strategic outcomes that link to and are well-aligned with national systems.

This will be particularly relevant as the global Green Climate Fund (GCF) agreed at Durban gets to work this year. For our part at ODI, understanding the effectiveness of existing public climate-finance initiatives is a central part of our work program that will build on our ongoing collaboration with the Heinrich Böll Foundation on Climate Funds Update, to track and monitor dedicated concessional climate-change finance. There is much to learn from the experience with development assistance and ongoing efforts to enhance the effectiveness of conventional aid. There seems a real need to develop and sustain a community of practice around climate change finance, with a focus on sharing lessons about what works in practice, given that a growing number of bilateral, multilateral, research and civil-society institutions are increasingly active in this space. ODI will seek to facilitate continued information exchange – both virtually and in person – to advance understanding of different aspects of effectiveness in more precise and concrete terms.