Editing IPCC:AR6/WGIII/Chapter-14 (section)

=== 14.4.1 Finance ===

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International cooperation on climate finance is underpinned by various articles of the UNFCCC including Articles 4.3, 4.4, 4.5, 4.7 and 11.5 ( [[#UNFCCC--1992|UNFCCC 1992]] ). This was further amplified through the commitment by developed countries in the Copenhagen Accord and the Cancun Agreements to mobilise jointly through various sources USD100 billion yr –1 by 2020 to meet the needs of the developing countries ( [[#UNFCCC--2010b|UNFCCC 2010b]] ). This commitment was made in the context of meaningful mitigation action and transparency of implementation. As mentioned in [[#14.3.2.8|Section 14.3.2.8]] , in the Paris Agreement the binding obligation on developed country Parties to provide financial resources to assist developing country Parties applies to both mitigation and adaptation ( [[#UNFCCC--2015a|UNFCCC 2015a]] , Art. 9.1). In 2019, climate finance provided and mobilised by developed countries was in the order of USD79.6 billion, coming from different channels including bilateral and multilateral channels, and also through mobilisation of the private sector attributable to these channels ( [[#OECD--2021|OECD 2021]] ). A majority (two-thirds) of these flows targeted mitigation action exclusively (Chapter 15). These estimates, however, have been criticised on various grounds, including that they are an overestimate and do not represent climate-specific net assistance only; that in grant equivalence terms the order of magnitude is lower; and the questionable extent of transparency of information on mobilised private finance, as well as the direction of these flows ( [[#Carty--2020|Carty et al. 2020]] ). On balance, such assessments need to be viewed in the context of the original commitment, the source of the data and the evolving guidance, and modalities and procedures from the UNFCCC processes. As mentioned in Chapter 15, the measurement of climate finance flows continues to face definitional, coverage and reliability issues, despite progress made by various data providers and collators ( [[IPCC:Wg3:Chapter:Chapter-15#15.3.2|Section 15.3.2]] ).

The multiplicity of actors providing financial support has resulted in a fragmented international climate finance architecture as indicated in [[#14.3.2.8|Section 14.3.2.8]] . It is also seen as a system which allows for speed, flexibility and innovation ( [[#Pickering--2017|Pickering et al. 2017]] ). However, the system is not yet delivering adequate flows given the needs of developing countries ( [[#14.3.2.8|Section 14.3.2.8]] ). An early indication of these self-assessed needs is provided in the conditional NDCs. Of the 136 conditional NDCs submitted by June 2019, 110 have components or additional actions conditioned on financing support for mitigation and 79 have components or additional actions for support for adaptation ( [[#Pauw--2020|Pauw et al. 2020]] ). While the Paris Agreement did not explicitly countenance conditionality for actions in developing countries, it is generally understood that the ambition and effectiveness of climate ambition in these countries is dependent on financial support ( [[#Voigt--2016b|Voigt and Ferreira 2016b]] ).

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==== 14.4.1.1 Bilateral Finance ====

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The Paris Agreement and the imperative for sustainable development reinforce the need to forge strong linkages between climate and development ( [[#Fay--2015|Fay et al. 2015]] ). This in turn has highlighted the urgent need for greater attention to the relationship between development assistance and finance, and climate change ( [[#Steele--2015|Steele 2015]] ).

The UNFCCC website cites some 20 bilateral development agencies providing support to climate change programmes in developing countries ( [[#UNFCCC--2020a|UNFCCC 2020a]] ). These agencies provide a mix of development cooperation, policy advice and support and financing for climate change projects. Since the year 2000, the OECD Development Assistance Committee has been tracking trends in climate-related development finance and assistance. The amount of bilateral development finance with climate relevance has increased substantially since 2000 ( [[#OECD--2019a|OECD 2019a]] ). For 2019, it was reported to be USD28.8 billion in direct finance and USD2.6 billion through export credit agencies. Further, another USD34.1 billion of the climate finance provided through multilateral channels is attributable to the developed countries ( [[#OECD--2021|OECD 2021]] ). The OECD methodology has been critiqued as it uses Rio markers, the limitations of which could lead to erroneous reporting and assessment of finance provided as well as of the mitigation outcome ( [[#Michaelowa--2011b|Michaelowa and Michaelowa 2011b]] ; [[#Weikmans--2019|Weikmans and Roberts 2019]] ). This issue is to be addressed through the modalities, procedures and guidance under the Enhanced Transparency Framework of the Paris Agreement ( [[#14.3.2.4|Section 14.3.2.4]] ), through the mandate to the Subsidiary Body for Scientific and Technological Advice (SBSTA) to develop common tabular formats for the reporting of information on, ''inter alia'' , financial support provided, mobilised and received ( [[#UNFCCC--2019k|UNFCCC 2019k]] ). Until then, the Biennial Assessment Report prepared by the Standing Committee on Finance provides the best available information on financial support.

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==== 14.4.1.2 Multilateral Finance ====

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Multilateral development banks (MDBs) comprise six global development banks: the European Investment Bank, International Fund for Agricultural Development, International Investment Bank, New Development Bank, OPEC Fund for International Development, and the World Bank Group; six regional development banks: the African Development Bank, Asian Development Bank, Asian Infrastructure Investment Bank, European Bank for Reconstruction and Development, Inter-American Development Bank, and the Islamic Development Bank; and 13 sub-regional development banks: the Arab Bank for Economic Development in Africa, Arab Fund for Economic and Social Development, Black Sea Trade and Development Bank, Caribbean Development Bank, Central American Bank for Economic Integration, Development Bank of the Central African States, Development Bank of Latin America, East African Development Bank, Eastern and Southern African Trade and Development Bank, Economic Cooperation Organization Trade and Development Bank, Economic Community of West African States Bank for Investment and Development, Eurasian Development Bank, and the West African Development Bank. Together they play a key role in international cooperation at the global, regional and sub-regional levels because of their growing mandates and proximity to policymakers ( [[#Engen--2018|Engen and Prizzon 2018]] ). For many, climate change is a growing priority and for some, because of the needs of the regions or sub-regions in which they operate, climate change is embedded in many of their operations.

In 2015, 20 representative MDBs and members of the International Development Finance Club unveiled five voluntary principles to mainstream climate action in their investments: commitment to climate strategies, managing climate risks, promoting climate smart objectives, improving climate performance and accounting for their own actions ( [[#World%20Bank--2015a|World Bank 2015a]] ; [[#Institute%20for%20Climate%20Economics--2017|Institute for Climate Economics 2017]] ). The members subscribing to these principles had grown to 44 as of January 2020. Arguably, it is only through closer linkages between climate and development that significant inroads can be made in addressing climate change. MDBs can play a major role through the totality of their portfolios ( [[#Larsen--2018|Larsen et al. 2018]] ).

The MDBs as a cohort have been collaborating and coordinating in reporting on climate financing following a commitment made in 2012 at the UN Conference on Sustainable Development in Rio de Janeiro ( [[#Inter-American%20Development%20Bank--2012|Inter-American Development Bank 2012]] ). This has engendered other forms of collaboration among the MDBs, including, commitments to: collectively total at least USD65 billion annually by 2025 in climate finance, with USD50 billion for low- and middle-income economies; to mobilise a further USD40 billion annually by 2025 from private sector investors, including through the increased provision of technical assistance, use of guarantees, and other de-risking instruments; to help clients deliver on the goals of the Paris Agreement; to build a transparency framework on the impact of MDBs’ activities; and to enable clients to move away from fossil fuels ( [[#Asian%20Development%20Bank--2019|Asian Development Bank 2019]] ). While the share of MDBs in direct climate financing is small, their role in influencing national development banks and local financial institutions, and leveraging and crowding in private investments in financing sustainable infrastructure, is widely recognised ( [[#NCE--2016|NCE 2016]] ). However, with this recognition there is also an exhortation to do more to align with the goals of the Paris Agreement, including a comprehensive examination of their portfolios beyond investments that directly support climate action to also enabling the long-term net zero GHG emissions trajectory ( [[#Larsen--2018|Larsen et al. 2018]] ; [[#Cochran--2019|Cochran and Pauthier 2019]] ). Further, a recent assessment has shown that MDBs perform relatively better in mobilising other public finance than private co-financing ( [[#Thwaites--2020|Thwaites 2020]] ). In addition, the banks have launched or are members of significant initiatives such as the Climate and Clean Air Coalition to reduce emissions of shortlived climate pollutants, the Carbon Pricing Leadership Coalition, the Coalition for Climate Resilient Investment and the Coalition of Finance Ministers for Climate Action. These help to spur action at different levels, from economic analysis to carbon financing, and convenors of finance and development ministers for climate action, with leadership of many of these initiatives led by the World Bank.

The multilateral climate funds also have a role in the international climate finance architecture. This includes, as mentioned in [[#14.3.2.8|Section 14.3.2.8]] , those established under the UNFCCC’s financial mechanism, its operating entities, the Global Environment Facility (GEF), which also manages two special funds, the Special Climate Change Fund and the Least Developed Countries Fund; and the Green Climate Fund (GCF), also an operating entity of the financial mechanism which in 2015, was given a special role in supporting the Paris Agreement. The GCF aims to provide funding at scale, balanced between mitigation and adaptation, using various financial instruments including grants, loans, equity, guarantees or others to activities that are aligned with the priorities of the countries compatible with the principle of country ownership ( [[#GCF--2011|GCF 2011]] ). The GCF faces many challenges. While some see the GCF as an opportunity to transform and rationalise what is now a complex and fragmented climate finance architecture with insufficient resources and overlapping remits ( [[#Nakhooda--2014|Nakhooda et al. 2014]] ), others see it as an opportunity to address the frequent tensions which arise between mitigation-focused transformation and national priorities of countries. This tension is at the heart of the principle of country ownership and the need for transformational change ( [[#Winkler--2016|Winkler and Dubash 2016]] ). Leveraging private funds and investments by the public sector and taking risks to unlock climate action are also expressed strategic aims of the GCF.

The UN system is also supporting climate action through much-needed technical assistance and capacity building, which is complementary to the financial flows insofar as it enables countries with relevant tools and methodologies to assess their needs, develop national climate finance roadmaps, establish relevant institutional mechanisms to receive support and track it, enhance readiness to access financing, and include climate action across relevant national financial planning and budgeting processes ( [[#UN--2017a|UN 2017a]] ). The United Nations Development Programme (UNDP) is the largest implementer of climate action among the UN Agencies, with others, such as the Food and Agriculture Organization (FAO), United Nations Environment Programme (UNEP), United Nations Industrial Development Organisation (UNIDO), and United Nations Office for South-South Cooperation (UNOSSC), providing relevant support.

The current architecture of climate finance is one that is primarily based on north-south, developed-developing country dichotomies. The Paris Agreement, however, has clearly recognised the role of climate finance flows across developing countries, thereby enhancing the scope of international cooperation ( [[#Voigt--2016b|Voigt and Ferreira 2016b]] ). Estimates of such flows, though, are not readily available. According to one estimate in 2020 the flows among non-OECD countries were of the order of USD29 billion ( [[#CPI--2021|CPI 2021]] ).

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==== 14.4.1.3 Private Sector Financing ====

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There is a growing recognition of the importance of mobilising private sector financing including for climate action ( [[#World%20Bank--2015b|World Bank 2015b]] ; [[#Michaelowa--2020b|Michaelowa et al. 2020b]] ). An early example of the mobilisation of the private sector in a cooperative mode for mitigation outcomes is evidenced from the Clean Development Mechanism of the Kyoto Protocol and the linking with the European Union’s Emissions Trading System, both triggered by relevant provisions in the Kyoto Protocol ( [[#14.4.4|Section 14.4.4]] ) and lessons learned from this are relevant for development of market mechanisms in the post Paris Agreement period ( [[#Michaelowa--2019b|Michaelowa et al. 2019b]] ). In 2019 and 2020, on average for the two years, public and private climate financing was on the order of USD632 billion, of which USD310 billion originated from the private sector. However, as much as 76% of the (overall) finance stayed in the country of origin. This trends holds true also for private finance ( [[#CPI--2021|CPI 2021]] ). Figure 14.4 depicts the international climate finance flows totalling USD161 billion reported in 2020, about 19% of which were private flows. For (international) mitigation financing flows of USD116 billion, the share provided by private sources was 24%.

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[[File:405398cd66d5c2c8753191963e521953 IPCC_AR6_WGIII_Figure_14_4.png]]

'''Figure 14.4 | International finance flows.''' Total international climate financial flows for 2020 were USD161 billion. By comparison, public sector bilateral and multilateral finance in 2017 for fossil fuel development, including gas pipelines, was roughly USD4 billion. Part (a) disaggregates total financial flows according to public and private sources, and indicates the breakdown between mitigation on the one hand, and adaptation and multiple objectives on the other, within each source. Part (b) disaggregates total financial flows according to intended purpose, namely mitigation or adaptation and multiple objectives, and disaggregates each type according to source. Part (c) provides additional detail on the relative contributions of different public and private sources. Sources: data from [[#CPI--2021|CPI 2021]] ; [[#OECD--2021|OECD 2021]] .

Foreign direct investments and their greening are seen as a channel for increasing cooperation. An assessment of the greenfield foreign direct investment in different sectors shows the growing share of renewable energy at USD92.2 billion (12% of the volume and 38% of the number of projects) ( [[#FDI%20Intelligence--2020|FDI Intelligence 2020]] ). Coal, oil and gas sectors maintain the top spot for capital investments globally. Over the last decade there is growing issuance of green bonds with non-financial private sector issuance gaining ground ( [[#Almeida--2020|Almeida 2020]] ). While it is questionable if green bonds have a significant impact on shifting capital from non-sustainable to sustainable investments, they do incentivise the issuing organisations to enhance their green ambition and have led to an appreciation within capital markets of green frameworks and guidelines and signalled new expectations ( [[#Maltais--2020|Maltais and Nykvist 2020]] ). In parallel, institutional investors including pension funds are seeking investments that align with the Paris Agreement ( [[#IIGCC--2020|IIGCC 2020]] ). However, the readiness of institutional investors to make this transition is arguable ( [[#OECD--2019b|OECD 2019b]] ; [[#Ameli--2020|Ameli et al. 2020]] ). This evidence suggests that international private financing could play an important role but this potential is yet to be realised (Chapter 15).

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