Climate change is a whole-economy problem. Tackling it will require looking at every financial decision through a climate lens. Does the decision result in greenhouse gas emissions or will it reduce them? Will it improve resilience to climatic shocks or worsen vulnerability?
As countries move to implement the Paris Agreement on climate change, they need to know the answers to such questions. They need to be able to track and understand domestic flows of finance so they can better align them with their climate goals, identify gaps and unlock the private investment needed for green, resilient development.
Earlier this year, the EU REDD Facility, Climate Policy Initiative (CPI) and the United Nations Development Programme (UNDP) gathered experts from governments, donor agencies, and organisations tracking climate finance to take stock of progress, in an online workshop.
Setting the scene, Chavi Meattle from CPI gave an overview of the various ways dozens of countries are tracking climate finance and mainstreaming climate change into national and sectoral budgets. Padraig Oliver of the UN Framework Convention on Climate Change (UNFCCC) Secretariat explained how climate finance tracking can feed into countries’ national reporting under the Paris Agreement on climate change, as well as the Convention’s periodic global stocktake showing, “where we are, where we are going and what needs to be done”.
There has been considerable growth in climate finance tracking in recent years. While all of this data is great, how can we ensure it leads to policy action? As noted in the workshop, we need greater transparency, we need to ensure tracking approaches are tailored to each country’s context, and we need to better explain the benefits and opportunities for all stakeholders.
Impacts of finance tracking
To get an idea of how national climate finance tracking is helping to increase policy ambition, improve reporting and mobilise new resources, we heard from government representatives in Ecuador, Indonesia, Kenya and South Africa.
For example, Noor Syaifudin of Indonesia’s Fiscal Policy Agency said the country has used climate budget tagging for mitigation action since 2016, and recently included tagging for adaptation actions too. Indonesia used this data for the issuance of green bonds (called Green Sukuk) that have generated more than USD 2 billion for financing climate action.
Sarah McPhail from the National Treasury of South Africa said her country was “late to the party” but was taking a “big bang” approach. Having recently mapped out the landscape of climate finance with GreenCape and The Bertha Centre for Social Innovation and Entrepreneurship, in partnership with CPI, South Africa is now piloting climate budget tagging, which it aims to roll out at national, provincial and local government levels. South Africa is also targeting its whole finance sector to improve climate-related financial disclosure.
In Ecuador, climate finance tracking is evolving to also consider the social justice aspects of spending. As Diego Teca of the Ministry of Environment and Water explained, the country is developing a gender-relevant climate index as part of an ongoing Climate Public Expenditure and Institutional Review.
In terms of building ambition, the speakers said it was necessary to provide the evidence base to inform ambition and implementation, build awareness and capacity at all levels of government, and strengthen climate finance institutional arrangements to increase private sector participation. They also highlighted the need to incorporate equity and ‘just transition’ considerations, extend tracking to adaptation and other sectors, and to strengthen budget effectiveness.
Aligning with Paris
The Paris Agreement calls for all financial flows to be consistent with low-carbon, climate-resilient development. The second half of the workshop focused on how to ensure that countries, institutions and companies are aligning their financial decisions with that goal, and whether climate finance tracking can accelerate progress by public and private actors.
Clifford Polycarp of the Green Climate Fund spoke about how the fund is driving systemic change through both its investments and by helping countries to put in place strategies and frameworks and investment plans and capacities. Francisco Dall’Orso from Chile’s Ministry of Energy explained how the country is using UNDP’s Investment and Financial Flows assessments to identify ways to achieve carbon neutrality by 2050 cost-effectively.
Chris Dodwell of Impax Asset Management said that in many cases, national policy responses to climate change had not focused enough on financing requirements and so lacked baseline information from which to track progress. Citing the UK Committee on Climate Change’s 6th Carbon Budget report as a positive example, he also pointed to a need for credible sectoral roadmaps that clarify where private capital is needed and are supported by ‘investment-grade’ policies to attract that capital.
Dodwell highlighted strong growth in the amount of private capital coming into the climate solutions sector. There is a huge interest in investing in this sector, he said. What is lacking is knowledge about where that capital needs to be deployed.
Nathan Fabian of Principles for Responsible Investment added that private investors want to know their financial flows are, in fact, being invested in ways that make a substantial difference. He said a lack of alignment with climate goals is raising concerns in private markets about greenwashing. This highlighted the importance of harmonised approaches, common metrics and terms that can give private investors confidence that investments will align with stated climate goals.
Panellists also spoke a need to focus not only on decarbonisation of private investment portfolios but on increasing investment in climate solutions, including adaptation and resilience. They highlighted a need to measure both flows of finance and the effectiveness of those flows.
As CPI’s global managing director Barbara Buchner said in her closing remarks, it will not be possible to assess progress under the Paris Agreement without enhanced approaches to benchmark and measure the impact of commitments and finance on climate mitigation and adaptation goals. Enhanced approaches will also be needed to assess the contribution of public and private actors to sector transitions in the real economy across different geographies.
What’s more, the levels of finance currently available are trillions short of the sums needed to mitigate and adapt to climate change.
The workshop also highlighted the need for clear roadmaps for climate action and investment, greater transparency of financial data, harmonised approaches, and standardised criteria and benchmarks.
Fortunately, the number of organisations engaged in climate finance tracking is increasing every year, and they are digging ever deeper into this vital area. As this community of practice continues to grow, we look forward to more opportunities to develop and share methodologies, tools and best practices.
The workshop on domestic finance tracking and planning took place online on 21 January 2021. It was the latest in a series that began with a workshop that took place in 2019 at COP25 in Madrid.
Watch the recording of the workshop, read the summary report or view the presentation slides. For more on tracking the life cycle of climate finance flows, take a look at the Land-use Finance Tool, an open source tool that CPI and the EU REDD Facility have developed.