On November 4, 2016, the Paris Agreement entered into force. To date, 190 countries have submitted 164 nationally determined contributions (NDCs) outlining their own goals and methods to reduce emissions in common effort to limit global temperature increases this century.
In maintaining momentum after Paris and NDC implementation, more onus will be placed on international public finance actors – bilateral aid agencies, export credit agencies, bilateral development banks, multilateral climate funds, and multilateral development bank – scaling up their own flows while using money most effectively to leverage others; coordinating and collaborating on approaches and avoiding duplication; as well as reconciling mandates on climate finance delivery with other mandates on poverty alleviation and the Sustainable Development Goals (SDGs).
Optimizing the use of international sources of public climate finance requires recognition of existing and emerging actors’ inherent constraints, the capacity and needs of developing country systems to absorb finance, and a long-term view of how circumstances change in uncertain economic and political environments.
Systems thinking approaches provide the potential to identify and measure how international public climate finance actors can interact:
- With each other, given their own perspectives and constraints on what they can do, their future direction of travel, and direction of their peers.
- With developing country financial systems, given emerging trends in green finance across the developing world, potentially unlocking new sources of finance.
The systems approach frameworks developed in this project offer methods to enhance coordination and collaboration among actors both within the international public climate finance system, and during design of interventions within developing country contexts.
- While specific systems and needs are best evaluated on a country by country basis, short-termism, growing risks and volatility are prevalent across developing country financial systems, impacting currency risk evaluation and potential public support for climate policies.
- Access to finance, the costs of and suitability of current financial products, and lack of tools and methods to enact low carbon and climate resilient projects remain the key barriers to climate finance growth. Political and policy risks in the domestic environment are also cited as a key barrier to address in supporting private finance solutions.
- The most prevalent instruments and solutions identified include blended or structured finance vehicles, utilising concessional finance; de-risking instruments such as guarantees or insurance; the provision of data and tools to manage uncertain risks; and policy support and technical assistance to reduce or manage political risks.
However, while such solutions are commonly called for, delivering them at scale require some of the major public finance actors in climate finance to adapt and change business models.
International Public Actors have been constrained by:
- Perceived trade-offs in meeting multiple mandates on poverty alleviation, development and climate change, creating silo effects within organisations and budget lines.
- Over-prudence in leveraging capital against healthy balance sheets. While recent efforts have leveraged greater amounts of capital, current risk ratios by some actors, particularly some bilateral development banks, are over-prudent.
- Lack of linkages on use of grant capital in combination with domestic policy or enabling environment risk reduction due to lengthy procedures, political pressures or lack of innovation culture in some institutions. This constraint may be reinforced by sources of concessional capital being bottlenecked in key ‘connector’ institutions such as the GCF.
International Public Actors are best positioned to:
- Scale up blended finance and risk mitigation instrument offerings in line with a more flexible capital raising strategy.
- Harmonize existing procedures and standards, including through coordination with new institutions. AIIB and NDB, as well as sub-regional and smaller national development banks, can learn from MDBs to set targets, harmonize accounting, and mainstream climate into their existing product lines.
- Shift climate finance modes from project finance focus to financial system development focus. So far, there is little effort to support mainstreaming of climate change into financial system development activities; most climate activities have focused on project finance. Our analysis has shown that broader system actors may impact the effectiveness public climate finance flows through:
- New regulatory actions for banks and the domestic institutional investments,
- Increased information flows through disclosure on ESG risks from service providers, and
- New mandates for green debt and equity investments by investors
In light of not only the scale of climate finance needs, but also the type of public finance instruments needed to leverage private flows, the importance of more connected coordination and collaboration by international public climate finance actors is crucial. Systems thinking approaches support the recognition of the effects of existing and new actors on scaling overall flows and their direction of travel, as well as support the collective optimisation of public finance interventions to achieve the scale needed – helping to understand not only the specific niche of each actor, but also how actors can most effectively coordinate and collaborate to achieve enduring impact.