Opinion: Before setting up new climate funds, consolidate existing ones

Today there are at least 81 active climate funds and it is unclear how much they commit and disburse, to whom, for what purpose, and with which impact. Given the urgency of scaling up climate change mitigation and adaptation projects in emerging markets, rationalizing and redefining the current messy climate aid architecture is a crucial step for the development community to take. An opaque climate fund landscape At least 94 climate funds have been established since 1991. The Global Environment Facility was the first in 1991 and the most recent is the Climate Finance Partnership Fund. Thirteen of these 94 climate funds have “disappeared” due to formal termination and/or lack of recent information or evidence of an active website. This leaves an estimated 81 climate funds active today. According to a recent consolidation of available data, the multiplication of climate funds peaked during the 2006-2014 period, and the trend picked up again in 2021-22. Of the 81 active funds, 62 are multilateral funds — with 50 housed in multilateral development banks, bilateral agencies, or in United Nations agencies, while the remaining 12 are standalone — and 11 are bilateral funds (eight are housed in bilateral aid agencies with the remaining three standalone). In total, 73 of these funds are partially or entirely financed by public monies. The remaining eight are private. As for whose responsibility it is to undertake this consolidation and push for climate funding efficiency … traditional development assistance donors should spearhead the process. --— Unfortunately, few answers exist on such basic questions as to what the budget, financial flows, allocation, and impact of this wide and diverse universe of climate funds are — this information is simply not available to the public. The difficulty in aggregating annual fund commitments and disbursements arises from the fact that the 81 fund websites have vastly different standards regarding public reporting. The answers we can give are indirect, limited, and sadly disappointing. In 2019-20, the annual average of the estimated disbursements of the 62 publicly funded multilateral climate funds were $4 billion according to the Climate Policy Initiative and $3.1 billion according to the 2022 “Report of the Standing Committee on Finance.” This compares with the average annual disbursement flows financed with the in-house resources of multilateral development finance institutions and of multilateral development banks in 2019-20. According to CPI, the multilateral DFIs disbursed $68 billion on climate projects and, according to the SCF, the MDBs disbursed $38.3 billion on climate projects and programs. This would mean that the disbursements of multilateral climate funds represent only 5.8% of the climate disbursements of multilateral DFIs, and 8% of the MDBs disbursements. A lose-lose system for donors and the recipients of these funds While each new fund may have been set up with a strong rationale when taken individually, when looked at as a system, the plethora of funds has not yet produced the necessary results at scale and may never do so. There is simply no architect to ensure the efficiency, effectiveness, and impact of the climate funds system. As a result, the multiplication of climate funds has added to an already badly fragmented aid architecture as it evolved over the last 30-40 years. Hard questions need to be asked about the knowledge generated by the system of these funds and how it is shared, given the lack of the most basic information, and of any independent body to evaluate, curate, and disseminate the learnings being generated. As a result, successful good practices and possible innovations of this system of 73 publicly financed entities with no common definitions, standards and oversight, cannot be scaled up. In addition to being suboptimal for the efficient allocation of global taxpayers’ monies, the fragmentation of the climate funds system is a tax on capacity for recipients’ governments and/or private sector entities. This capacity tax is a hidden but very real and heavy burden on recipients’ governments that must deal with hundreds of aid institutions and financing channels with their own rules and procedures. This cost of aid fragmentation is well documented, and it is the heaviest for lowest-income countries where administrative and implementation capacity is generally weak. How to reset Despite the lack of evidence around value for money and impact of the current climate funds system, new funds are being contemplated, such as a “loss and damage” fund. Before adding to an already fragmented system, it is urgent to improve transparency, harmonize the reporting and impact measurement standards, and drastically consolidate the existing climate funds landscape. This consolidation can start with the 62 multilateral, official donors’ financed climate funds, and can be grouped or rationalized in many ways, for example: • By hosting institutions (MDBs, the U.N.). • Along key specific functional specializations (e.g., mitigation, adaptation, biodiversity). • By geographies (global or regional). • By type of recipient executing agencies involved (public or private). • By financial instruments (technical assistance, loans, equity, grants, guarantees). • Or even be grouped by a combination of the above. For the surviving consolidated funds, harmonizing definitions and standards, setting up transparent reporting requirements on financial flows and results, as well as improving knowledge management should be a prerequisite before setting up new multilateral donor-funded climate funds. As for whose responsibility it is to undertake this consolidation and push for climate funding efficiency, we believe that at the very least, the traditional development assistance donors should spearhead the process. The Organisation for Economic Co-operation and Development’s Development Assistance Committee members, for example, should try to improve parts of the existing system that is under their purview. The inconvenient truth is that it is politically easier to create yet another climate fund to show that “we are doing something,” rather than making the painstaking effort to ensure efficiency and effectiveness and build on lessons learned from the past 30 years. But given the urgency, climate finance should be an obvious candidate for rationalization within the bigger aid architecture, and one that ultimately benefits development assistance donors and recipients alike.