This article is part of the series — What to Expect from 2021.
In 2009, developed countries came together to make a joint
commitment to disburse US$ 100 billion a year in climate finance to developing countries by 2020. Multilateral development banks (MDBs) have been expected to shoulder a significant portion of this responsibility.
Mobilising and scaling up climate finance globally are formidable challenges primarily due to (i) the lack of consistency and consensus on the definition of the term, and (ii) the absence of standards and norms to ensure transparency in reporting on finances issued.
Several MDBs — the African Development Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, the European Investment Bank, the Inter-American Development Bank Group, the Islamic Development Bank, and the World Bank Group — came together to resolve this by
articulating a well-defined set of activities focused upon climate change mitigation and adaptation. The demarcation criteria are utilised to compose banks’ lending portfolios to track and report climate finance. These criteria are underpinned by the common principles
jointly agreed on by the MDBs and the International Development Finance Club in 2015 to track climate mitigation and adaptation finance.
The demarcation criteria are utilised to compose banks’ lending portfolios to track and report climate finance.
The effectiveness of these principles can be gauged from the levels of climate finance being disbursed, especially to low and middle-income economies. The
2019 Joint Report on Multilateral Development Banks’ Climate Finance provides some answers; in 2019, MDB provision of climate finance to developing countries breached previous levels to touch US$ 46.4 billion. Although aggregate MDBs’ disbursal of climate adaptation finance for developing economies rose to US$ 14 billion in 2019, it accounts for a meagre 23 percent of all MDB climate finance for the year.
Although MDB climate finance to developing countries
increased by 7.7 percent between 2018 and 2019, it is significantly lower than the
22 percent spike between 2017 and 2018, and
28 percent increase between 2016 and 2017. Unless developed countries continue to register sustained increases in their mobilisation of climate finance through concerted efforts, they will likely fail to deliver on their pledge of jointly mobilising US$ 100 billion a year in climate finance by 2020 for developing countries. This year, MDBs have been forced to divert their resources to combat the unprecedented COVID-19 pandemic, which will further dampen the prospect of reaching the US$ 100 billion goal.
The nature and composition of MDB climate finance flows demonstrates several limitations. The share of grant finance is quite dismal and on a decline. Sufficient resources for least developed countries and small island developing states are absent. Hurdles to seamless and swift climate funding to developing countries have been identified in MDB climate finance flows.
The share of grant finance is quite dismal and on a decline. Sufficient resources for least developed countries and small island developing states are absent.
MDBs have
pledged a rise in climate finance to US$ 65 billion by 2025, up 50 percent from the 2018 level, and to double adaptation finance from 2019 levels by 2025. MDBs have also planned to boost investment in energy efficiency, urban infrastructure and hard-to-abate industrial sectors.
MDBs are in a
unique position to achieve the US$ 100 billion goal if their limitations are tackled. MDBs can cooperate with regional and local financial entities on developing a climate finance architecture and share with them lessons learnt while undertaking climate finance operations. A precursor to this architecture is enabling countries to envision nationally determined contributions that are in accordance with the Paris Agreement, support countries in identifying bottlenecks and obstacles to the mobilisation and allocation of investments, and articulate a plan for local capacity building and a transition from a carbon-intensive to a zero-carbon economy. MDBs must align their financing with the commitments of the Paris Agreement. Now is an apt opportunity to innovate mechanisms to deal with the COVID-19 aftermath that also generate green benefits. Given the financing required for both COVID-19 and green commitments, MDB shareholders must inject sufficient capital into these institutions.
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