Far too little international climate finance – less than $1 out of every $10 invested – reaches the communities on the frontline of climate impacts.
Climate finance is a fundamental building block for tackling the emergency we are facing.
It is a driver vital for pushing development and private investment decisions so that the women, children and men who are hit by devastating floods, fires, drought and heatwaves can thrive, in spite of the climate crisis.
But climate finance can only succeed if it is used creatively, for taking risks and experimenting with changing the incentives of hundreds of thousands of decision makers in order to help tackle all the different crises – poverty, nature and climate – coherently.
At the 2015 UN climate summit in Paris, developed countries reaffirmed their commitment to invest US$100 billion a year in climate finance by 2020 and increase the amount thereafter. But, as IIED research shows, only 7% of climate finance is transparent enough to track how it is being used.
For the remaining 93%, none is transparent enough to be able to identify exactly what donor countries are investing their climate finance commitments in. Reporting methods are generally hard to decipher, obscure and often too superficial.
This clearly needs to change.
As leaders converge on New York for the UN Climate Action Summit on 23 September 2019 to raise ambition on climate action, it is essential that donors commit to increasing both the amount they contribute and the reliability of their support, so it is both long term and predictable.
As we know from our work with local partners across Africa and Asia, it is the people on the ground who live with the effects of climate change who know what needs to be done to address its impacts. There are many examples that show local action, such as communities in Kenya negotiating access to grazing and water points with each other during the dry season or a drought, and local people in India taking action to rehabilitate mangroves as flood defences.
More local ownership
Currently, the money committed under the Paris Agreement is over-dependent on institutions such as multilateral banks and UN agencies. Too often it is directed to specific, short-term projects designed by distant experts that miss local priorities and lack the flexibility to respond to rapidly changing needs and new opportunities.
Importantly, this fails to build national and local institutions’ capability to be agile in their response to climate change.
The system emerged because donors are risk averse and require proposals and reports that are set against priorities determined by their headquarters. This includes extensive paperwork, such as receipts for every transaction and for all partners to have a proven track record in managing finance.
This reduces the creativity and flexibility of solutions, creates additional costs and forces financing to go to the usual suspects: UN agencies, multilateral banks and large, corporate consultancies, which also act as intermediaries.
A significant proportion of the money is spent on layers of administration costs. First by the funder or donor, then by the intermediary and then by the project delivery partners, diverting it away from its purpose of enabling communities to adapt to the impact of climate change and develop low-carbon economies.
A new frontier
IIED research found that frontier funds were a solution. These are funds that grew out of social movements and are effective in channelling money to the forefront of climate action. They are locally controlled funding mechanisms, which are place-specific and empower communities to tackle poverty, improve their resilience, protect carbon sinks and reduce emissions.
They aggregate many small investments to finance local priorities, and as a result, reduce transaction costs. Because they are trusted and credible intermediaries between donors and local actors, they increase understanding of what is needed to tackle the underlying drivers of climate vulnerability.
They can provide flexible finance, enable bespoke responses and invest in developing local capabilities ensuring that over time, the funds can absorb large-scale and more risk-averse finance, so more climate finance can reach the local level.
Already there are examples of these sorts of frontier funds. The Dema Fund, Babaçu Fund and Gungano Urban Poor Fund in Brazil and Zimbabwe, for example, demonstrate that there are effective alternatives to the current dependence on multilateral banks and other international bodies.
Other approaches include climate funds devolved to local governments. These work with community representatives and innovation platforms, offering loans to businesses alongside climate and business advice.
Importantly, these approaches involve local people – government, entrepreneurs and a range of community actors – in making decisions about where and how funds are channelled. As a result, they can meet a broad range of communities’ needs instead of being restricted to a particular sector, such as only for energy or agriculture.
Making sure climate finance reaches the people who need it most is fundamental to achieving the Paris Agreement’s targets.
Strengthening local institutions and making sure they are involved at every step is central to making sure climate finance can have the agility, responsiveness and relevance necessary to help communities thrive in the face of climate change and keep temperature rise below 1.5°C above pre-industrial levels.
The 47 least developed countries will set out their commitments to devolving finance and authority for climate action to the local level at the UN Climate Action Summit. But donors need to be prepared to step up, take more risks with climate finance and invest in the range of institutions needed for society to develop as a whole in the face of the climate crisis.
A version of this post was previously published on iied.org and is republished here with permission from the author.
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