Opinion: These 4 concrete steps will help close the climate finance gap

Diplomats and officials heading to Baku, Azerbaijan, for COP29 — this year’s United Nations climate conference — must be shaken by the latest humanitarian emergencies: Catastrophic floods in Spain, Senegal, and Sri Lanka to name a few in October alone, all with significant human and financial impacts. The human impact — and the imperative to act — escalates each day. At COP29, global attention will turn to the question of funding the climate goals and development needs of lower-income and vulnerable nations. We are faced with a harsh reality: Low and middle-income countries need at least an additional $2.4 trillion annually by 2030 to achieve climate targets and Sustainable Development Goals. However, commitments to provide the needed financing have fallen woefully short, with huge and growing impacts for vulnerable countries grappling with severe climate impacts and lower-income countries struggling to achieve the SDGs. Baku presents a critical opportunity to address this growing crisis — but it will take ambitious commitments to do so. Ironically, the world does not lack the means to bridge this funding gap. In fact, several mechanisms could unlock resources quickly without creating substantial economic costs. Here are four immediate steps to unlock hundreds of billions in climate funding. They are feasible and can be implemented immediately, relying solely on political will to drive them forward without delay. 1. Draw on the potential of existing Special Drawing Rights We must take action to unleash the potential of Special Drawing Rights, or SDRs. In 2021, the International Monetary Fund board took an unprecedented step by issuing $650 billion in SDRs to support global economic recovery. However, this distribution primarily benefited wealthier nations. In May this year, the IMF board approved a mechanism for rechanneling SDRs through the multilateral development banks as hybrid capital — a type of funding that combines features of both debt and equity which can be used long term — that MDBs can then use to raise funds in the capital market. Countries whose domestic financial or legal frameworks would allow them to do so — Brazil, China, Japan, Saudi Arabia, Singapore, Qatar, and the United Arab Emirates — are strongly urged to move this effort forward, unlocking billions in additional MDB lending capacity for climate and development. For others that face challenges with rechanneling SDRs — such as the United Kingdom, the United States, and those in the Eurozone — SDR-denominated bonds, which can help mobilize finance investments for climate and development, should be pursued. While SDR bonds would not provide the same leverage as rechanneling to MDBs, not only is this a tried and tested instrument — a third of World Bank bonds are currently held by central banks and official institutions — but it has a number of other advantages including strengthening the MDBs liability structure. SDRs need not be constrained to just support bonds issued by the largest multilateral development banks, but could fund the balance sheets of the 500 public development banks in the Finance in Common network. This is a global network of public development banks that aims to align financial flows on the 2030 Agenda for Sustainable Development and Paris Agreement. Regardless of option, it is critical that the power of otherwise idle SDRs be unleashed at this critical time. 2. Ensure more SDRs and diversified finance Secondly, the latest iteration of the Bridgetown Initiative urges the IMF board to agree to an additional $650 billion SDR issuance, again with a focus on rechanneling to MDBs. The result could yield significant new lending capacity which, in turn, would enable low- and middle-income countries to make the vital investments needed to build climate resilience and achieve the SDGs. We understand that economic conditions in high-income countries may impact their support for new SDR issuances. However, global stability benefits all, and ensuring low- and middle-income nations' resilience contributes to healthier, more balanced growth worldwide. We encourage these nations to view SDR issuance not as charity but as an investment in a stable, sustainable global economy that serves their own long-term interests. Beyond SDRs, a diversified approach to climate finance is essential. Solidarity levies on high-emission industries, targeted green bonds, universal carbon pricing, and sustainable debt restructuring options can all play a vital role. By combining these tools, we can build a climate finance system that responds to both immediate and long-term needs, helping vulnerable countries achieve greater stability and resilience. 3. Unlock MDB capital by lowering equity-to-loan ratios While MDBs have taken initial steps to boost financing, they have the potential to do more. We need to make further progress on lowering the World Bank’s equity-to-loan ratio — i.e. the bank’s ability to cover its lending activities with its own resources, providing a safety buffer against potential loan losses A small adjustment in the World Bank’s equity-to-loan ratio from 18% to 17% could unlock an additional $30 billion which, when leveraged, could generate up to $120 billion in lending. The World Bank and other MDBs play a crucial role in financing the SDGs and climate action. Given the scale of the climate crisis, optimizing these lending ratios is no longer optional; it is essential. MDBs must maximize their financial reach and implement these impactful changes. 4. Redirect fossil fuel subsidies Lastly, in 2022, fossil fuel subsidies reached a staggering $7 trillion globally, of which $1.3 trillion are direct subsidies from governments — an inexplicable allocation given our simultaneous scramble for climate funds. We cannot claim climate funding is scarce while allocating vast amounts of money to the very cause of the climate crisis. We must not only stop using precious public funds to fuel harm to the planet but also shift resources toward securing a livable future. Redirecting even a quarter of subsidies could free up hundreds of billions to scale investments in renewable energy and climate adaptation. Diverting even a portion of these funds, if not all, toward low-carbon initiatives could unlock vital financing for climate action. The four steps above are immediate and actionable. The staggering impacts of the climate crisis that we are now witnessing on an almost daily basis — storms, deluges, and drought — wreak havoc around the world and demand that we act swiftly. Unlocking trillions in new funding through these measures would empower developing countries to build desperately needed climate resilience. They ultimately require political will. Importantly on both SDRs and the equity-to-loan ratio, we have seen some incremental progress in the last few years. Not enough, but it does demonstrate that political will can produce action and, with it, crucial new funds. If COP29 can set these steps in motion, it could be remembered as a turning point for the climate crisis.