The Rio Declaration recognised that developing countries bear less responsibility for creating climate change, but are often more vulnerable to it. A commitment was made at Copenhagen COP15, 2009 that $100 billion per year of public and private money would be channelled to developing countries to support mitigation and adaptation by 2020. This should be new money and spending should be split equally between mitigation and adaptation.
It took some years to work out how this flow of money should happen and how to measure it. See an excellent overview from IISD on how ideas around climate finance flows to developing countries came together. It seems clear that the aim of achieving $100bn of climate finance to developing countries by 2020 was not met. Nevertheless, a higher target after 2025 is likely to be agreed in 2021 at COP26 in Glasgow.
On this page, we look at how climate finance is channelled to developing countries, specifically:
It took some years to work out how this flow of money should happen and how to measure it. See an excellent overview from IISD on how ideas around climate finance flows to developing countries came together. It seems clear that the aim of achieving $100bn of climate finance to developing countries by 2020 was not met. Nevertheless, a higher target after 2025 is likely to be agreed in 2021 at COP26 in Glasgow.
On this page, we look at how climate finance is channelled to developing countries, specifically:
- UN structures
- Measuring climate finance flows
- Climate finance figures
- Information sources
- Types of climate finance
- Unblocking infrastructure funding
- Explaining blended & mobilised finance
The Financial Mechanism is the UNFCCC mechanism for providing financial resources to developing countries for mitigation and adaptation. In 1992, responsibility for operating the Financial Mechanism was given to the Global Environment Facility (GEF) and also to the Green Climate Fund (GCF) in 2011.
In 2010, Cancun COP16 set up a Standing Committee on Finance (SCF) to support the Financial Mechanism. One of SCF’s tasks is to analyse climate finance flows. See the two yearly report on climate finance flows to developing countries in SCF's 2018 Biennial Assessment summary. The SCF has also been asked to put together a 4-yearly report on the needs of developing countries and the first of these reports will be submitted to COP26 Glasgow in 2021.
In 2010, Cancun COP16 set up a Standing Committee on Finance (SCF) to support the Financial Mechanism. One of SCF’s tasks is to analyse climate finance flows. See the two yearly report on climate finance flows to developing countries in SCF's 2018 Biennial Assessment summary. The SCF has also been asked to put together a 4-yearly report on the needs of developing countries and the first of these reports will be submitted to COP26 Glasgow in 2021.
Measuring climate finance flows to developing countries is complex. This is due to reporting being inconsistent or lacking, the need to avoid double-counting and differences in methodology. For example, organisations can have different classifications for 'developing' and 'developed' countries.
Money to developing countries can be in the form of a grant, loan, equity (a share in the business) or developmental guarantees (US only). The flow of public money is fairly well documented, but private finance flows from banks or international investors are often confidential. Also, more funding comes from domestic sources than international, but this is often not recorded. Aware that only some of its figures are reliable and complete, the UNFCCC provides information on what it knows, rather than focussing on an overall figure. Climate finance figures include spending on capacity building and climate policy development.
There are four main types of funding included in UNFCCC figures for climate finance flows to developing countries. These are:
Money to developing countries can be in the form of a grant, loan, equity (a share in the business) or developmental guarantees (US only). The flow of public money is fairly well documented, but private finance flows from banks or international investors are often confidential. Also, more funding comes from domestic sources than international, but this is often not recorded. Aware that only some of its figures are reliable and complete, the UNFCCC provides information on what it knows, rather than focussing on an overall figure. Climate finance figures include spending on capacity building and climate policy development.
There are four main types of funding included in UNFCCC figures for climate finance flows to developing countries. These are:
- Bilateral flows – direct country-to-country funding
(from developed countries to developing countries or a regional body)
- Climate funds – run by the UN, World Bank or other groups. This funding is mainly from developed countries and businesses.
- UN Climate Funds – GEF, LDCF, SCCF, GCF, AF
- Other UN funds – REDD (forestry)
- World Bank funds – CIF, FCPF, PPCR, FIP, CTF, GCCA
- other funds - Nordic Development Fund
- Multilateral development banks’ (MDBs) ‘own funding’ – this is money raised by the MDB on capital markets and lent out for climate projects, sometimes at low interest rates, more often at market interest rates. Two thirds of this money go to national and local government.
- Private finance – from businesses, investors and philanthropists
- Mobilised finance – investment made viable through co-funding arrangements, which reduce the risk to the investor. This type of co-funding usually comes from climate funds, MDBs ‘own funding’ or philanthropists
- Foreign direct investment (FDI) – normal investment in business opportunities, usually renewable energy, recycling or low carbon manufacturing projects
The UNFCCC estimates that in 2016, $73bn in climate finance to developing countries came from the following sources:
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The OECD also analyses climate finance flows to developing countries. Although its data sources and assumptions are sometimes different to the UNFCCC’s, the climate finance flows follow the same pattern. See below the OECD chart of climate finance flows from developed countries to developing countries.
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Here are the main findings from the latest OECD report and from the summary of the data:
- Climate finance flows to developing countries have increased, but the target of $100bn per year by 2020 was probably not reached.
- Grants were only 20% of climate finance in 2018, so developing countries will have to pay back most of the funds received.
- Loans are increasing as a proportion of climate finance.
- Adaptation gets half of UN climate finance, in line with the target, but only 20% of MDB spending.
- Grants are the main funding for adaptation.
- Grants form a major part of public funding to least developed countries (LDCs) and Small Island Developing States (SIDS), where nearly half of all spending is on adaptation – see the chart below.
And finally, the OECD chart below shows the spending split for Climate Finance by climate focus, type of finance (instrument), sector and geography:
UNFCCC
Each developed country lays out how much climate finance it is providing and to whom in its Biennial Report (BR), along with information on GHG emissions. The developed economies (Annex II countries) are the main source of climate finance and information must be provided in a standardised form (CRTs). See the climate finance data in:
For more information about the reports, see BRs, BURs, NCs.
BRs provide reliable data for climate finance from developed countries, however the majority of climate spending in developing countries appears to come from local funding, rather than international. Also, it is estimated that 15% to 26% of climate finance provided by MDBs comes from Eastern European countries (classified as Economies in Transition - EITs) and developing (non-Annex II) countries. Some EITs voluntarily report on this in CRTs. So, to get a fuller picture of climate finance spending in developing countries, the finance flows from non-Annex countries, as well as from multinational banks and private sources, should be added.
OECD
The OECD reports climate spending in its Creditor Reporting System database. See the OECD’s summary of climate finance data and the report Climate Finance Provided and Mobilised by Developed Countries in 2013-18. The OECD provides data and research on climate finance data to the UNFCCC - this area of work overseen by its Development Assistance Committee (OECD-DAC).
Multilateral Development Bank (MDB)
MDB reports on climate funding are in the Joint Report on MDB Climate Finance.
National and Regional Development Banks
26 organisations have formed The International Development Finance Club, which publishes the IDFC Green Finance Mapping Report 2020
Each developed country lays out how much climate finance it is providing and to whom in its Biennial Report (BR), along with information on GHG emissions. The developed economies (Annex II countries) are the main source of climate finance and information must be provided in a standardised form (CRTs). See the climate finance data in:
- the Biennial Reports (BRs) and National Communications (NCs)
- the Climate Finance Data Portal – this brings together data from all the BRs and NCs, including Climate Fund donations and spending
- the Biennial Assessment of Climate Finance Flows (BA) – an analysis of BR data, plus climate finance information from other sources
For more information about the reports, see BRs, BURs, NCs.
BRs provide reliable data for climate finance from developed countries, however the majority of climate spending in developing countries appears to come from local funding, rather than international. Also, it is estimated that 15% to 26% of climate finance provided by MDBs comes from Eastern European countries (classified as Economies in Transition - EITs) and developing (non-Annex II) countries. Some EITs voluntarily report on this in CRTs. So, to get a fuller picture of climate finance spending in developing countries, the finance flows from non-Annex countries, as well as from multinational banks and private sources, should be added.
OECD
The OECD reports climate spending in its Creditor Reporting System database. See the OECD’s summary of climate finance data and the report Climate Finance Provided and Mobilised by Developed Countries in 2013-18. The OECD provides data and research on climate finance data to the UNFCCC - this area of work overseen by its Development Assistance Committee (OECD-DAC).
Multilateral Development Bank (MDB)
MDB reports on climate funding are in the Joint Report on MDB Climate Finance.
National and Regional Development Banks
26 organisations have formed The International Development Finance Club, which publishes the IDFC Green Finance Mapping Report 2020
- Grant - transfers made in cash, goods or services for which no repayment is required
- Project-level debt – a loan relying on a project’s cash flow for repayment
- Low-cost debt or concessional loan – a loan at lower interest rate than normal market rate
- Market-rate debt - a loan at normal market interest rate
- Project-level equity - investment in a share of the project, relying on the project’s cash flow for repayment
- Balance sheet financing – investment (debt or equity) in a company
So far most infrastructure investment has been by public bodies and has been in developed economies. However, according to the UN, 80% of future investment opportunities lie in building infrastructure in developing countries. The Global Infrastructure Facility (GIF) was set up by the G20 in 2015 to help private finance take advantage of these investment opportunities. GIF provides a platform where MDBs, private sector investors, financiers and governments can pool their resources to fund large infrastructure developments in public-private partnerships (PPPs). If GIF can scale up private sector investment in developing country infrastructure, then some of this will go to climate projects, boosting climate finance flows.
There are enormous opportunities for investment in emerging technologies and developing countries. The World Bank estimated that, to meet climate targets, there should be a total of $90 trillion in low-carbon, climate-resilient infrastructure investment mostly in developing countries by 2030.
However, commercial investment is often deterred by risks such as uncertain profits, insufficient infrastructure or lack of the right checks and balances. The input of development money to reduce the risk can make a project more attractive to commercial investors. Money from two or more sources is co-financing - and this particular combination of development and commercial co-financing is ‘blended finance’.
Blended finance
In blended finance, the development money could be a grant or a low-interest loan from a climate fund, government funding or a philanthropist. Commercial finance includes all types of funding that goes into projects in the expectation of making a profit. The following pools of money could be harnessed by blended finance, if the right financial structures were in place:
Blended finance doubled to $50bn in the five years to 2017, but growth must be faster to meet climate targets. New blended finance mechanisms must be employed to divert a lot more commercial funding to developing countries and new technologies. The Blended Finance Taskforce has been set up to work out how this can happen.
Mobilised finance
The commercial funding that becomes available through blended finance is called ‘mobilised finance’. Mobilised funds can come from private finance (investors, commercial businesses, philanthropists) or from public bodies (governments, development banks). Funds can also be mobilised through non-financial means, such as a guarantee or insurance.
However, commercial investment is often deterred by risks such as uncertain profits, insufficient infrastructure or lack of the right checks and balances. The input of development money to reduce the risk can make a project more attractive to commercial investors. Money from two or more sources is co-financing - and this particular combination of development and commercial co-financing is ‘blended finance’.
Blended finance
In blended finance, the development money could be a grant or a low-interest loan from a climate fund, government funding or a philanthropist. Commercial finance includes all types of funding that goes into projects in the expectation of making a profit. The following pools of money could be harnessed by blended finance, if the right financial structures were in place:
- there is $1trn of philanthropic money, plus $143bn of development money and $220bn of funds from multilateral and national development banks, that could be used to reduce the risk for commercial investors
- there are $200trn of global assets and it’s estimated that over $100trn assets are managed by pension funds and institutional investors, but very little is invested in infrastructure in developing countries. If the right financial structures were in place, instead of just $17bn of private climate finance (as in 2106), there could be much more invested in mitigation and adaptation in developing countries.
Blended finance doubled to $50bn in the five years to 2017, but growth must be faster to meet climate targets. New blended finance mechanisms must be employed to divert a lot more commercial funding to developing countries and new technologies. The Blended Finance Taskforce has been set up to work out how this can happen.
Mobilised finance
The commercial funding that becomes available through blended finance is called ‘mobilised finance’. Mobilised funds can come from private finance (investors, commercial businesses, philanthropists) or from public bodies (governments, development banks). Funds can also be mobilised through non-financial means, such as a guarantee or insurance.
FURTHER INFORMATION
an overview of finance and sustainable development
IISD
https://www.iisd.org/system/files/2020-12/still-one-earth-finance-technology.pdf
the Financial Mechanism
https://unfccc.int/topics/climate-finance/the-big-picture/introduction-to-climate-finance
the Standing Committee on Finance
https://unfccc.int/sites/default/files/resource/51904%20-%20UNFCCC%20BA%202018%20-%20Summary%20Final.pdf
summary of the 2018 Biennial Assessment
https://unfccc.int/sites/default/files/resource/51904%20-%20UNFCCC%20BA%202018%20-%20Summary%20Final.pdf
determining the Needs of Developing Countries
https://unfccc.int/topics/climate-finance/workstreams/needs-report
Biennial Assessment 2018
see Annex A for country classifications
https://unfccc.int/sites/default/files/resource/2018%20BA%20Technical%20Report%20Final%20Feb%202019.pdf
Recommendations by the Standing Committee on Finance, 2016
https://unfccc.int/files/cooperation_and_support/financial_mechanism/standing_committee/application/pdf/presentation_of_2016_ba_summary_and_recommendations.pdf
the OECD's Development Assistance Committee (DAC)
http://www.oecd.org/dac/dac-global-relations/joining-the-development-assistance-committee.htm#What
Climate Finance Provided and Mobilised by Developed Countriesin 2013-18
OECD
https://www.oecd-ilibrary.org/docserver/f0773d55-en.pdf?expires=1616603639&id=id&accname=guest&checksum=255B443F522CCAB98C706D3F744C88D5
Fourth Biennial Reports
https://unfccc.int/BRs
National Communications
https://unfccc.int/non-annex-I-NCs & https://unfccc.int/NC7
Climate Finance Data Portal
UNFCCC
https://unfccc.int/climatefinance?home
summary of Climate-related Development Finance Data
OECD
http://www.oecd.org/dac/financing-sustainable-development/development-finance-topics/Climate-related-development-finance-in-2018.pdf
Joint Report on MDB Climate Finance
https://www.euneighbours.eu/en/south/stay-informed/publications/2019-joint-report-multilateral-development-banks-climate-finance
International Development Finance Club (IDFC) Green Finance MappingReport 2020
https://www.idfc.org/wp-content/uploads/2020/11/idfc-2020-gfm-full-report_final-1.pdf
Delivering on the $100bn Climate Finance Commitment 7 Transforming Climate Finance
Climate Finance Independent Expert Group on Climate Finance
https://www.un.org/sites/un2.un.org/files/100_billion_climate_finance_report.pdf
The Global Infrastructure Facility (GIF)
https://www.globalinfrafacility.org/
Climate Change Action Plan 2016–2020
World Bank
https://openknowledge.worldbank.org/bitstream/handle/10986/24451/K8860.pdf?sequence=2&isAllowed=y
Better Finance Better World
http://s3.amazonaws.com/aws-bsdc/BFT_BetterFinance_final_01192018.pdf#asset:614:url
about the Blended Finance Taskforce
https://www.blendedfinance.earth/about
an overview of finance and sustainable development
IISD
https://www.iisd.org/system/files/2020-12/still-one-earth-finance-technology.pdf
the Financial Mechanism
https://unfccc.int/topics/climate-finance/the-big-picture/introduction-to-climate-finance
the Standing Committee on Finance
https://unfccc.int/sites/default/files/resource/51904%20-%20UNFCCC%20BA%202018%20-%20Summary%20Final.pdf
summary of the 2018 Biennial Assessment
https://unfccc.int/sites/default/files/resource/51904%20-%20UNFCCC%20BA%202018%20-%20Summary%20Final.pdf
determining the Needs of Developing Countries
https://unfccc.int/topics/climate-finance/workstreams/needs-report
Biennial Assessment 2018
see Annex A for country classifications
https://unfccc.int/sites/default/files/resource/2018%20BA%20Technical%20Report%20Final%20Feb%202019.pdf
Recommendations by the Standing Committee on Finance, 2016
https://unfccc.int/files/cooperation_and_support/financial_mechanism/standing_committee/application/pdf/presentation_of_2016_ba_summary_and_recommendations.pdf
the OECD's Development Assistance Committee (DAC)
http://www.oecd.org/dac/dac-global-relations/joining-the-development-assistance-committee.htm#What
Climate Finance Provided and Mobilised by Developed Countriesin 2013-18
OECD
https://www.oecd-ilibrary.org/docserver/f0773d55-en.pdf?expires=1616603639&id=id&accname=guest&checksum=255B443F522CCAB98C706D3F744C88D5
Fourth Biennial Reports
https://unfccc.int/BRs
National Communications
https://unfccc.int/non-annex-I-NCs & https://unfccc.int/NC7
Climate Finance Data Portal
UNFCCC
https://unfccc.int/climatefinance?home
summary of Climate-related Development Finance Data
OECD
http://www.oecd.org/dac/financing-sustainable-development/development-finance-topics/Climate-related-development-finance-in-2018.pdf
Joint Report on MDB Climate Finance
https://www.euneighbours.eu/en/south/stay-informed/publications/2019-joint-report-multilateral-development-banks-climate-finance
International Development Finance Club (IDFC) Green Finance MappingReport 2020
https://www.idfc.org/wp-content/uploads/2020/11/idfc-2020-gfm-full-report_final-1.pdf
Delivering on the $100bn Climate Finance Commitment 7 Transforming Climate Finance
Climate Finance Independent Expert Group on Climate Finance
https://www.un.org/sites/un2.un.org/files/100_billion_climate_finance_report.pdf
The Global Infrastructure Facility (GIF)
https://www.globalinfrafacility.org/
Climate Change Action Plan 2016–2020
World Bank
https://openknowledge.worldbank.org/bitstream/handle/10986/24451/K8860.pdf?sequence=2&isAllowed=y
Better Finance Better World
http://s3.amazonaws.com/aws-bsdc/BFT_BetterFinance_final_01192018.pdf#asset:614:url
about the Blended Finance Taskforce
https://www.blendedfinance.earth/about