Deep dive: The most important developments for climate finance at COP27

12 December 2022, Category: All insights, News, Tags: bridgetown initiative, climate change, climate finance, COP27, COP27 Egypt, FAST, NCQG, project design, sustainable development, UNFCCC

Climate finance was a key theme at COP27. Here’s our deep dive into the key takeaways for climate finance that happened during Egypt’s summit this year.

A topic on the minds of many at COP27 was climate finance and who is liable to pay for sustainable development, mitigation and adaptation. For many years, developed nations have been arguably paying lip service towards the infamous USD $100 billion yearly climate finance goal, and that goal has never been reached since its announcement at COP15 in 2009 and its more concrete (yet still softly enforced) placement into environmental legislation within Article 9 of the Paris Agreement in 2015 (UNFCCC, 2015). The most recent data from the OECD shows that we’re still around USD $17 billion short of the target (OECD, 2022).

COP27, Egypt’s climate summit, which ran this year from the 6th to the 18th of November, was seen by many as a potential turning point for securing more finance for developing nations, Small Islands Developing States (SIDS) and vulnerable communities around the world. So, when it comes to climate finance at COP27, what was actually achieved? 

Here’s E Co.’s deep dive into climate finance at COP27. 

• Why was climate finance so important at COP27?
• The New Collective Quantified Goal (NCQG)
• The Bridgetown Initiative
• Food and Agriculture for Sustainable Transformation (FAST)
• The Loss and Damage fund announcement
• The Climate Finance Access Network further expands into the Pacific
• Significant progress on adaptation
• Other key takeaways

Why was climate finance so important at COP27?

Climate finance goals have been, up to this point, vaguely arbitrary. While USD $100 billion is a noble goal, a number that will help a number of vulnerable nations, the goal itself was “a political number. It was pulled out of a hat.”, according to Executive Secretary of the UNFCCC Christiana Figueres. It is, according to many, a tiny sum. If we are to compare this goal with average profits from the oil and gas sector over the last 50 years, it equates to only 37 days ‘worth of profits made by these organisations.

Since 2015, finance flows have been largely split in both form and function in developed and developing countries. The climate finance that has been provided by developed nations has been largely focused on the development of mitigation mechanisms in high-emitting countries, whereas in Lower-Income Countries (LICs), Least Developed Countries (LDCs) and SIDS, more finance went towards adaptation mechanisms (OECD, 2022).

Additionally, the OECD discovered that over the years 2016-2020, the mobilisation of private sources of climate finance was lower than expected. The reasons for this are myriad, with many private sector stakeholders stating that high-risk investment scenarios and complex application processes are off-putting, reasons that were mirrored in the twenty-first edition of our own GCF insight report, which you can read here.

Another issue with climate finance comes from what can be seen as regulatory loopholes in the reporting structure of Nationally Determined Contributions (NDCs). The impact of climate finance is difficult to measure due to the current state of UNFCCC reporting requirements, which are currently both non-mandatory and not standardised. Furthermore, the developing nations in which climate finance is primarily utilised for adaptation projects are more likely to suffer from a lack of capacity to report on such impacts. 

Ultimately, climate finance has three purposes:

1. Adapting to the current and future impacts of global climate change and biodiversity loss;
2. Cutting greenhouse gas (GHG) emissions across the board, with a particular emphasis on reducing the impacts of historical emitters;
3. Ensuring that finance for loss and damage is mobilised to communities that need it. 

While finance for adaptation projects is largely successful in creating adaptation pathways, its efficacy in cutting GHG emissions and mobilising loss and damage funding has yet to be truly successful. This failure leads to an issue of trust for quickly developing nations and rapidly growing economies, such as India and China (whose status as a developing nation is murky at best). 

For example, India’s annual CO2 emissions have skyrocketed over the last twenty years as the country’s development is more and more reliant upon fossil fuels. In 2020, 69% of India’s total energy needs were met through coal and oil usage, compared to 58% in 2000 (IEA, 2021).

The trust issue stems from a lack of credibility seen in developed nations to implement emissions-cutting mechanisms effectively. There is also an equity problem—should the onus of emissions-cutting be thrust upon developing nations while developed nations continue to benefit from their historical use of fossil fuels? On this, Director of the International Centre for Climate Change and Development, Prof Saleemal Huq, stated “It is a simple matter of credibility of the developed countries to fulfil what they say they will do and they failed… So why should developing countries even bother talking to them anymore?”

The presence of climate finance as a theme at COP27 is perhaps the most all-encompassing of issues on the table for attendees. Any climate mitigation or adaptation project has to be paid for, and so the questions of ‘who pays?’ and ‘how much?’ were very much the key ones to find answers for.

New Collective Quantified Goal (NCQG)

COP27 saw talks continue around setting a New Collective Quantified Goal. The NCQG is a development from the original Paris Agreement, where in decision 1/CP, para. 53 it states:

Prior to 2025 the Conference of the Parties serving as the meeting of the Parties to the Paris Agreement shall set a new collective quantified goal from a floor of USD 100 billion per year, taking into account the needs and priorities of developing countries;

In technical expert dialogues held by the Conference of the Parties serving as the meeting of the Parties to the Paris Agreement (CMA), it states that the NCQG has the following objectives (this list is not exhaustive):

• Rebuild confidence in climate finance negotiations;
• Transform the way climate finance is currently mobilised;
• Reflect long-term perspectives;
• Send a message to those engaged in climate finance architecture to make finance fit-for-purpose;
• Provide direct access mechanisms for the ‘most vulnerable and capacity-constrained countries’ (UNFCCC, 2022);
• Take account of the evolving nature of developing countries’ needs, with recourse to potentially adjust the Goal as part of periodic review under the global stocktake.

While deliberations continued at COP27, we haven’t got a formal number decided upon yet and there is a wide variety of data that argues for different annual goals. The Climate Policy Initiative estimates that the overall number for total climate finance flows (including finance coming from national Development Finance Institutions (DFIs), bilateral DFIs, multilateral DFIs, state-owned FIs, commercial FIs and corporations, amongst others) needed is USD 4.5-5 trillion annually, which is an increase on current numbers of 590%. 

While information on the NCQG is currently thin on the ground, we can see what is needed within a new goal. With adaptation being a key theme at COP27, the NCQG should fill the investment gap that exists within adaptation projects. Between 2019/20, total finance flows for mitigation sat around USD $571 billion, while adaptation only received USD $46 billion. The imbalance between public and private finance is also stark, with less than USD $1 billion of adaptation finance coming from the private sector.

To respond to current and future climate impacts, the NCQG needs to massively scale up finance flows allocated for adaptation mechanisms. This will be helped by improved tracking and monitoring capacity, alongside ensuring better utilisation of private sector finance sources. The right NCQG should contain coordinated movements between the public and private sector, with interim goals that align practices and processes and standardise reporting. 

During COP27, the CMA’s fourth technical expert dialogue on the NCQG was held. The objectives included:

• Responding to the landscape of issues within access to climate finance;
• Provide a ‘deep dive’ into elements identified in decision 9/CMA.3;
• Discuss how ongoing challenges can be met by the NCQG;

Unfortunately, NCQG debates at COP27 weren’t universally met with progressive outlooks. Developing nations led by the G77 and China called for a substantive decision on the Goal amount, with a submission by the Africa Group stating “the deliberations on the quantum mobilization target should start from a range of a commitment by developed countries to mobilize jointly at least USD 1.3 trillion per year by 2030, of which 50% for mitigation and 50% for adaptation”. However, developed nations pushed back significantly, expressly rejecting any movement to provide a set goal before 2024, with the US stating that more work needed to be done on determining the contributors. When discussed at ministerial level, representatives from developing countries described the act of expanding the donor base to include developing nations was a “super red line” that should not be crossed.

The final decision made set in motion plans to develop a workplan for 2023, invite stakeholder Parties to provide guiding questions for future technical expert dialogue, facilitate broader participation of multi-lateral development banks (MDBs), non-State actors, the private sector and more and provide information for relevant stakeholders with the view of setting the NCQG in 2023.

The Bridgetown Initiative

COP27 also saw the Barbadian PM Mia Mottley propose the Bridgetown Initiative, an overhaul of the global financial system. Inspired by the unhappiness of Global South nations, who are at present experiencing multiple crises related to climate, food, debt, and energy amongst other things, and are not receiving adequate support from the current multilateral financial system. 

The Bridgetown Initiative sets out to address immediate fiscal concerns and work to improve shock resilience within vulnerable countries. It would aim at making access to resources easier for developing countries, access that would guarantee support at both pace and scale.

Here are the key recommendations that the initiative calls for:

• Development of the use of innovative financial mechanisms, such as regional guarantee platforms, debt for equity swaps and state-contingent debt instruments, to provide financing options for applying nations. These would, hopefully, incentivise further private sector engagement.
• Creating a Loss and Damage fund to increase climate equity and resilience. A potential first step is the UNSG proposal that calls for taxing windfall profits on oil and gas exports. 
• Through utilising emergency liquidity of $100 billion (sourced from Special Drawing Rights) via the International Monetary Fund (IMF) and MDBs to create fiscal opportunities within developing nations. 
• Emphasis on resource mobilisation through the creation of new funding mechanisms that target unlocking political capital. For example, a Global Climate Mitigation Trust that is backed by USD $500 billion of Special Drawing Rights. This would be hosted by the IMF, work to better leverage private finance and invest based on mitigation targets.

Mottley’s Initiative is envisioned to be a global coalition and was first made public through a leaders’ retreat held in Barbados’ capital Bridgetown in July. In September, Mottley held a leaders’ roundtable on climate action at the UN general assembly in New York to present the Initiative. Unfortunately, it was poorly attended by wealthy nations and heads of government. 

The point of the Bridgetown Initiative is to circumvent the issues faced by country-by-country commitments, supporting low-income countries through a new form of internationalism. It’s an arguably innovative plan, revolving around three steps;

1. Preventing a debt crisis through emergency IMF aid. (According to the World Bank, 60% of the poorest countries are already either in debt distress or at high risk of it).
2. Increase the lending capacity of MDBs by $1 trillion. This would be earmarked for use within climate resilience projects.
3. Develop financial mechanisms that are long-term in nature and are able to mobilise up to $4 trillion in climate finance for both emissions reduction projects and redevelopment funds to aid countries hit by climate disasters. 

So where would this money come from? The Initiative would be funded by $650 billion given by the IMF, which would come in the form of Special Drawing Rights—which is an international reserve asset created by the IMF to supplement the reserves of any country that is an IMF member. This would be given annually over a period of twenty years (However, the plan currently only asks for a one-time request). The same amount was provided once before, to support countries through the COVID-19 recovery. 

A fundamental part of the Bridgetown Initiative is the call for MDBs to issue USD $1 trillion worth of low-interest loans. This is vitally important for developing nations who are charged up to ten percent more interest than developed countries are when incurring borrowing costs on the international market. 

Mottley’s Initiative has been praised by many, such as French President Emmanuel Macron. It has also made itself into the Sharm El-Sheikh Implementation Plan (Decision -/CP.27), which calls on ‘the shareholders of multilateral development banks and financial institutions to reform multilateral development bank practices and priorities, align and scale up funding, ensure simplified access and mobilize climate finance from various sources…’ (UNFCCC, 2022a).

But a plan like this requires transformational thinking, and a redefining of how we approach national and international fiscal planning in the future. A good starting point would be to view climate disaster and shock as central economic activities, once that are, unfortunately, locked in to affect the future global economy. If we can design an economic system that circumnavigates or, at least, adapts to these scenarios, then we can create international economic relations that are fit for a rapidly changing climate. 

Ultimately, it is an extremely progressive sign that developed nations are taking issues with the Bretton Woods institutions seriously when they are raised by their developing neighbours. 

Food and Agriculture for Sustainable Transformation Initiative (FAST)

Decisions on climate finance at COP27 were also furthered by the launch of the Food and Agriculture for Sustainable Transformation Initiative. FAST, launched jointly by the Egyptian presidency and the FAO, which aims to improve access to climate finance at national and sub-national levels, particularly for farms and the agricultural sector at large. 

The problem today is that only a very small amount of the total funds given as climate finance is going towards farming, especially small-scale farmers. These farmers who operate on less than five hectares of land represent a massive 95% of all the world’s farms. According to the Climate Policy Initiative (CPI), the total climate finance that targets small-scale agriculture represents only 1.7% of total finance tracked, around USD $10 billion. The total financing needed is in order of hundreds of billions each year. 

FAST will be a multi-stakeholder partnership, with the FAO acting as a neutral facilitator to pursue three pillars:

1. Access to finance: ‘Enhancing country capacities to identify and access climate finance and investment’.
2. Knowledge and capacity: ‘Provide necessary analyses, developing voluntary guidelines and supporting capacity development across stakeholders’.
3. Policy supports and dialogues: ‘Ensure agrifood systems are fully embedded, and given the needed priority and importance, in climate change policies’. (FAO, 2022)

You can read more about the FAST Initiative here.

The Loss and Damage fund announcement

Within the conversation and debate surrounding climate finance at COP27, one of the most important and also most controversial, was the call for the establishment of a loss and damage fund.

Throughout the last several years, developed nations commitments to a loss and damage fund have either been historically lacking or wilfully critical, providing outright rejections to any notion of a fund. While the calls for a Loss and Damage fund have been felt since the 1990s, the first concrete move was made at COP26, with Scotland’s First Minister, Nicola Sturgeon, promising £2 million.

Loss and damage itself refers to a financial mechanism provided by the largest historical emitters of greenhouses gases to give adequate compensation for these actions to developing nations that are the most vulnerable to changes of climate. 

The establishment of a Loss and Damage Fund represents another necessary step in an ongoing conversation, one that revolves around equity and responsibility. Antonio Guterres, the UN  Secretary-General stated in October that “Wealthier countries bear a moral responsibility” and “80 per cent of emissions driving this type of climate destruction are from the G20”. The Chief executive of the European Climate, Laurence Tubiana, stated that without this movement, the “legitimacy of [the UN process] will be challenged.”

Talks regarding loss and damage have long been controversial in the eyes of developed nations. They’ve long sought to avoid these talks and have given little time towards recognising the creation of a loss and damage fund as a legitimate talking point. Commitment to the loss and damage cause from voices of developing nations changed that at COP27.

Unfortunately, it was also recent climate disasters that have forced the hands of developed countries. The flooding this year in Pakistan, estimated to have displaced 33 million people, is a frightening example of how lower-income nations are the first ones to suffer from climate change. The establishment of a Loss and Damage Fund came alongside several agreements:

• The establishment of a Fund as well as new funding arrangements to provide fiscal support for developing countries;
• The creation of a ‘transnational committee’ which will make recommendations on how to operationalise these new arrangements at COP28 next year.
• An agreement to operationalise the Santiago Network for Loss and Damage, a network established to connect developing nations with those parties that can ‘provide technical assistance, knowledge and resources.’

E Co. senior analyst, Marcus Arcanjo, who attended the conference said: “The loss and damage agreement was definitely the big ‘win’ of the conference. The most vulnerable countries have been pushing for such a facility since before I was born so this decision was, understandably, met with enthusiasm. This breakthrough is especially impressive given the hard stance taken by the EU and US prior to the conference, until a deal was struck late in the second week. However, the devil will be in the details as countries now work to flesh out exactly how this mechanism will work with the goal of having rules established by COP 28.”

Climate Finance Access Network further expands into the Pacific

In early 2022, the RMI’s Climate Finance Access Network (CFAN) expanded into the Pacific with the creation of a cohort of dedicated and experienced climate finance advisors in the Pacific. These experts work in eight island nations, targeting improving adaptation goals and climate resilience across those nations and in the wider area.

COP27 saw CFAN receive new support from the Government of Canada and the Open Society Foundations, as well as an anonymous philanthropic donor. Through this, CFAN is creating a second cohort within the Pacific to support four additional countries, alongside now piloting their advisory support in the Caribbean. 

Significant progress on adaptation

Climate finance at COP27 saw a lot of good progress, in particular concerning adaptation. An agreement was made to move forward with the Global Goal on Adaptation, consisting of new pledges of more than USD $230 million given to the Adaptation Fund. The Global Goal on Adaptation will inform the first Global Stocktake—a key function of the Paris Agreement—which will be undertaken in 2023.

Additionally, COP27 President, Sameh Shoukry, announced the establishment of the Sharm El-Sheikh Adaptation Agenda to enhance resilience for climate-vulnerable communities by 2030 and the UN Climate Change’s Standing Committee on Finance was asked to prepare a report for COP28 on doubling adaptation finance.

Furthermore, the cover decision made at COP27, known as the Sharm El-Sheikh Implementation Plan, delves into the finance needs of adaptation going forward, estimating that at least USD 4-6 trillion is needed for adaptation projects annually. It goes on to state that this can only be done with a dedicated effort from governments, central banks, commercial banks, investors and other stakeholders, alongside updating our current financial system.

Other key takeaways

These were not the only developments for climate finance at COP27. Smaller announcements include:

• USD $135 million was given to fertilisation and soil-health programmes in Sub-Saharan Africa by the US, the EU and Norway. This was given as part of US President Joe Biden’s ‘Global Fertilizer Challenge’ launched to combat fertiliser shortages.
• The Agricultural Innovation Mission for Climate (AIM4C) announced it would be boosting investments by USD $8 million over the next five years. This will go towards ‘climate smart agriculture and food-systems’.
• The CCFLA release a new policy brief, titled ‘How to Increase Financing for Urban Climate Adaptation and Resilience’. This identifies seven vital actions for scaling finance for urban climate adaptation and resilience. 
• The World Resources Institute (WRI) announced the launch of the African Cities Water Adaptation Fund (ACWA Fund). This fund aims to channel USD 5 billion to urban water resilience projects in 100 cities across Africa by 2032. 
• At least USD $20 billion was promised to be raised by the US, Canada, Japan and six European countries for Indonesia’s Just Energy Transition Partnership (JETP). This is being done to aid Indonesia’s transition away from coal and reach carbon neutrality by 2050. 
• A new white paper, titled ‘Investment Protocol: Unlocking financial flows for coastal cities adaptation to climate change and resilience building’ was released by the ICLEI, the Resilient Cities Network, the Ocean and Climate Platform, and the High-Level Climate Champions. It offers insight and advice on how investors can finance coastal cities’ resilience.
• EUR 1 billion was announced by the EU Commission through their Team Europe Initiative for building adaptation routes and resilience in Africa. This EUR 1 billion will include reinforcing early warning systems, enhancing climate data collection and analysis and working to better mobilise private sector funding for climate finance.

We’ve tried to include all the major developments in climate finance at COP27, but we realise that there’s no way of accurately covering them all. Do you have any insights into key developments we’ve missed? If so, let us know in the comments below.

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References

FAO, 2022. Food and Agriculture for Sustainable Transformation Initiative (FAST). Available online at: <https://cop27.eg/assets/files/initiatives/FAST-BR-01-EGY-10-22-EN.pdf>.
IEA, 2021. Energy in India today. Available online at: <https://www.iea.org/reports/india-energy-outlook-2021/energy-in-india-today>.
OECD, 2022. Climate Finance and the USD 100 Billion Goal. Available online at: <https://www.oecd.org/climate-change/finance-usd-100-billion-goal/>.
UNFCCC, 2015. Paris Agreement. Available online at: <https://unfccc.int/sites/default/files/english_paris_agreement.pdf> 
UNFCCC, 2022. Ad hoc work programme on the new collective quantified goal on climate finance. Available online at: <https://unfccc.int/sites/default/files/resource/cma2022_05.pdf>.
UNFCCC, 2022a. Sharm El-Sheikh Implementation Plan. Available online at: <https://unfccc.int/sites/default/files/resource/cop27_auv_2_cover%20decision.pdf>.