Climate Finance Matters at COP27

The obligation of developed countries to provide adequate and predictable financial support to developing countries for their climate efforts will once again be front and center at this year’s UN climate conference (COP27) in Egypt. Matters related to climate finance are woven throughout more than a dozen negotiation items. In a year marked by devastating extreme weather and climate events around the world, high energy and food costs following Russia’s invasion in Ukraine, inflationary pressures and the specter of a global economic slowdown amid a growing debt crisis, a trustworthy plan for the overdue fulfillment of the 2020 US$100 billion annual climate finance target and – most important of all – a decision to formalize financing to address loss and damage will be the litmus test for success in Sharm El-Sheikh. 

Credible outcomes for both priorities will be needed to re-establish trust in the international climate process. Rich nations must prove they are willing to hold up their end of the climate bargain of the Paris Agreement, just as developing countries are asked to ratchet up their own climate commitments as part of the collective response to the persistent ambition gap with the window closing to keep global warming to 1.5 degree Celsius.

Calling for new and additional finance to address loss and damage….

A lot has happened in the discourse on loss and damage since COP26 in Glasgow closed with the refusal of developed countries, chiefly the United States and the European Union, to consider the developing countries’ ask for a financing mechanism to address loss and damage, and offering the Glasgow Dialogue as a consolation prize. Derided as a talk shop with no plan nor end goal, the three-year process had a disappointing start at the June climate talks in Bonn. Rich countries argued that humanitarian, disaster risk reduction and development assistance, as well as existing climate funds or insurance-based solutions, were already providing support to countries and communities dealing with the losses and damages brought on by climate impacts and could be adjusted to do so better. Since then, the tone has changed somewhat among developed countries, owing to the combined pressure by developing countries, a unified civil society movement making a loss and damage finance facility their rallying cry for COP27, and intensified media scrutiny that framed the discussion in the context of moral responsibility, solidarity and climate justice, and largely avoided the language of compensation. Even the United States, long adamant about not acknowledging a financial liability for loss and damage and prioritizing investments flows towards finance for emissions reductions, has modulated its stance most recently to sound more cooperative. The enormity of devastation and human suffering brought on by the recent string of climate disasters in the Global South – the most monstrous of them the unprecedented floods in Pakistan that drowned a third of the country, cost the lives of over a thousand people and likely more than US$40 billion in damages – shows the climate injustice and the cost of delay in failing to address the issue. The inadequate humanitarian and emergency funding response to the Pakistan floods (as of mid-October only US$50 million of the UN’s US$800 million humanitarian appeal was received) highlights the need for substantial new additional loss and damage finance. This is why the Climate Vulnerable Forum (CVF) and the Vulnerable Twenty (V20) are starting their own loss and damage funding mechanism, hoping for broad developed country support. Separately, some initial funding commitments to address loss and damage have been made over the past year by Scotland and Wallonia at COP26 and more recently by Denmark as the first UNFCCC member country; although important to break the political ice, pledges have been small, in the low millions, not the billions needed. While they are to be welcomed, they should not serve as a distraction from the demand to establish a comprehensive mechanism under the UNFCCC and accountable to all its parties.

COP27 will quickly show if the perceived change of tone among rich countries is one of substance. With discussions on matters related to funding arrangements to address loss and damage added to the agendas, its adoption by consensus on the first day of the negotiations will be the first indication if a decision to start a funding mechanism to address loss and damage could be hoped for. Such a Loss and Damage Finance Facility (LDFF), while not the sole funding arrangement, should play a central coordinating and accountability role, provide primarily non-debt inducing grant finance additional to other existing climate finance commitments, and be accessible to all developing countries. This is of importance particularly for many small island developing states (SIDS), which due to their classification according to income, not climate vulnerability, often face access constraints to concessional finance outside of the UNFCCC, such as at multilateral development banks (MDBs).

An important corollary to a decision for a funding mechanism to address loss and damage at COP27 will be the speedy operationalization of the Santiago Network on Loss and Damage (SNLD). This network, created in 2019 is supposed to provide technical assistance to developing countries, including to prepare them for implementing eventually larger loss and damage finance flows, for example for actions and priorities detailed under comprehensive loss and damage needs assessments supported by the SNLD. While more than the limited amount pledged so far in support for the Santiago Network is needed, developed countries will not be able to sell additional funding commitments for loss and damage technical assistance as a substitute for failing commitments or continued inaction on an LDFF.

…while tackling the US$100 billion annual climate finance promise….

For COP26, Canada and Germany were tasked to present a climate finance delivery plan, outlining when and how developed countries could finally make good on their 2009 pledge to provide US$100 billion a year in climate finance to developing countries. The plan presented then indicated that this could happen in 2023, but left open a number of questions regarding the quality and focus of climate finance, for example how to deal with improving access to climate finance or how to scale up adaptation finance. Since then, a new OECD assessment has detailed that rich countries fell significantly short and only provided US$83 billion in 2020, two thirds of it for mitigation and more than 70 percent of the public finance provided as loans, including a large share of non-concessional loans channeled through the MDBs. According to a recent Oxfam analysis, the actual amount delivered is even lower, potentially as low as only a third, given substantial mislabeling and over-reporting by developed countries under the OECD tracking system.

Just a week before the climate talks are to begin, Canada and Germany published a progress report on their delivery plan. It focuses on actions by developed countries to double adaptation finance and includes an overview table of such commitments; on reducing bureaucracy and application times, in particular for SIDS and other vulnerable countries, to access finance, including through harmonization efforts among climate funding mechanisms; on addressing how climate finance delivery through MDBs could be improved, in particular with calls to reform the World Bank’s efforts; and, unsurprisingly, on efforts to scale up the mobilization of private sector funds.

At COP27, this self-reporting by developed countries will be contextualized by a progress report towards achieving the US$ 100billion per year goal between 2020 and 2025, which the Standing Committee on Finance (SCF) will deliver as the first official UNFCCC report to track such efforts as mandated by COP26. It will be complemented by another SCF report, its flagship Biennial Assessment Report, which in its 5^th iteration with recommendations to be presented to the COP will detail climate finance flows and trends over the years 2019-2020.

… and focusing on multiplying adaptation finance…

In the Glasgow Climate Pact, developed countries had promised that they would double adaptation financing from the baseline of 2019 by 2025 to US$40 billion. However, this still falls short of the long-promised balance between adaptation and mitigation finance, with the recent OECD assessment just showing US$28.6 billion provided in 2020, let alone of adaptation finance needs. The nationally determined contributions (NDCs) of the 51 African countries cumulatively show a need for an estimated US$579 billion in investment for adaptation through 2030.  The Egyptian COP Presidency has termed COP27 the African COP focused on implementation, with progress on the ongoing Glasgow-Sharm El-Sheikh work program on the Global Goal on Adaptation (GGA), established under the Paris Agreement, as a core deliverable. The pressure will be high on developed countries to announce some new adaptation finance pledges at COP27 to show that the momentum from COP26 is not broken, which saw new commitments of US$356 million to the Adaptation Fund and US$413 million to the Least Developed Country Fund. This included new contributors such as the United States, which for the first time pledged US$50 million to the Adaptation Fund. However, few of these pledges have been delivered so far.  At the same time, the current adaptation finance provision through MDBs needs to be challenged, as it continues to provide the largest share of such finance as loans, with only 15 percent as grants, according to the fifth Biennial Assessment Report.

As many adaptation measures need to be locally focused to provide benefits to affected communities and people, and barriers to accessing climate finance for adaptation remain high for many of the most vulnerable countries, simplifying and enhancing access, must be a focus of discussions both on the GGA and on adaptation finance. This includes providing direct access by devolving funding decision-making to communities and marginalized groups and individuals. It must build on the principles for locally-led adaptation, which were endorsed by the Adaptation Fund and the Global Environment Facility but not the Green Climate Fund, the largest multilateral climate fund.  

… while negotiating a new needs-based finance goal….

Tallying the continued shortcomings of developed countries in fulfilling their 2009 pledge at COP27 comes at the same time as discussions on setting a new collective quantified goal (NCQG) on climate finance to be met from 2025 onward. In Sharm El-Sheikh the process continues with a technical expert dialogue (the fourth overall of what will be twelve scheduled over three years) as well as a high level ministerial meeting. Developing countries are determined to ensure that the NCQG addresses the existing shortcomings in both quantity and quality of the US$100 billion goal, which was politically set as the lowest amount that developed countries in 2009 deemed a feasible number. At COP26, the SCF detailed in its first ever needs determination report funding requirements in the trillions to implement developing countries’ NDCs, many of which are conditioned on financial support, as well as National Adaptation Plans (NAPs). And recent IPCC reports on mitigation and adaptation and loss and damage have stressed the scientific basis of enormous financial needs.  

A new NCQG will have to be substantially higher and also address questions of scope, quality, and accountability of and increased access to climate finance, not the least by incorporating finance to address loss and damage as the third distinct financing pillar besides mitigation and adaptation and ideally setting thematic sub-goals. Developing countries want to discuss the scale rather sooner than later. In this context, the lack of a uniformly accepted multilateral definition of climate finance is a shortcoming that developing countries wish to be addressed, while developed countries feel that a bottom-up approach to defining climate finance is acceptable, as long as its parameters are transparently disclosed. At COP27, the SCF will present its continued work on operational definitions of climate finance, integrating submissions it received from countries. While discussing the scale of the new finance goal in Sharm El-Sheikh, developing countries will hone in on the obligation of developed countries under Article 9 of the Paris Agreement to provide public financial support. Developed countries aim to frame the NCQG discussion in the wider context of the mandate under Article 2.1(c) of the Paris Agreement. This puts the focus on making all financial flows consistent with a pathway towards low greenhouse gas emissions and climate resilient development, and thus would minimize the relevance (and presumably the scale) of developed countries’ own finance contributions for the new climate finance target to be set in 2024. A mandated report by the SCF to be presented at COP27 maps and updates information previously compiled and presented in Glasgow on relevant initiatives, which have proliferated since 2015 when the Paris Agreement was adopted, especially for emission-reduction efforts, although noting that “assessing the real-economy impact of financial sector initiatives and the risk of greenwashing remain a challenge.” It also finds that there are few initiatives focusing on aligning investment flows with climate-resilient development approaches.

…and demanding Glasgow pledges must be fulfilled…

COP26 made headlines for some significant financing pledges, including on ending international financing for fossil fuels and on aligning the finance sector with net-zero by 2050. With the Russian invasion of Ukraine, those climate commitments are now on much shakier ground. A number of European countries, including Germany, have gone on a shopping spree in Africa and the Middle East for new gas supplies, while delaying their exit from coal at home. According to some estimates, European governments plan some EUR50 billion in new fossil fuel infrastructure spending, undermining their climate commitments. And several of the largest banks among the group of roughly 500 financial sector entities organized as the Glasgow Financial Alliance for Net Zero (GFANZ), including JP Morgan Chase and Bank of America, seem to have quit on their commitment in light of the resurgence of oil and gas financing. According to data compiled by Bloomberg, global bank lending to fossil fuel companies was up 15 percent compared to 2021, to over US$300 billion in the first nine months of 2022. Providing transparency and accountability for the fulfillment of net-zero pledges by non-state actors, including from the financial sector, by setting clear comparable standards is the goal of a High Level Expert Group on Net-zero Emissions, appointed by the UN Secretary-General, which could share some recommendations at COP27.

….as the Global Stocktake continues

Lastly, at COP27, the first Global Stocktake, the collective assessment for the implementation of the Paris Agreement and its long-term goals, continues with a second technical assessment round that brings countries, experts, and non-state actors together. Means of implementation, especially the provision of finance, is an important topic, intersecting with assessments of what has been achieved in mitigation, adaptation, and on loss and damage, and central to ensure that the conclusions delivered at COP27 also have political potency to redirect ambitious climate action over the next five-year review period. Mitigation and adaptation finance needs ambition in the scale, scope, accessibility, quality, and accountability of climate finance provided by developed countries to developing countries. Thus, the Global Stocktake must consider important synergies with other relevant finance discussions and potential decisions at COP27 on the fulfillment of the US$100 billion target, the new collective finance goal, the scaling up of adaptation finance and providing a mechanism for funding to address loss and damage.  Only then, and with core climate finance decisions taken at COP27 without further delay or obfuscation, can the international community stay on the right trajectory towards low-carbon and climate-resilient development in line with a 1.5 degree Celsius global warming limit.