Unlocking climate finance: three priorities for the new UK Government

Low-income countries are facing urgent climate challenges to meet net zero goals and to address growing climate impacts they are experiencing from floods, droughts, changing crop patterns and storms such as Hurricane Beryl. For example, the 2022 floods in Pakistan affected 33 million people and cost 2.2% of GDP.

The new Labour Government has placed ‘unlocking climate finance’ as one of six goals stated by the new International Development Minister, Anneliese Dodds. So what can the new government do to achieve this goal? Our work points to three critical needs:

1. Unlock new sources of finance: aid money will not meet the scale of needs and a new global climate finance goal must be accompanied by new financial flows. 
2. Unlock more private investment: private money is flowing to climate projects but, not those most in need. And a big effort is needed to get private investment into Adaptation.
3. Return authority to country governments: the current international climate finance system disempowers the very governments it is trying to help. This needs reform.

Mobilise new resources

The first need is to mobilise new resources. There has been endless wrangling in climate negotiations to make higher-income countries live up to their promises to deliver $100 billion of climate finance. The next frontier for climate negotiations is to set a snappily-titled “collective quantified goal on climate finance”. But a new goal means little unless new money can be mobilised at scale.

Climate investment cannot be met from Official Development Assistance (ODA), or aid money, alone. New sources of finance are needed. There are plenty of ideas for these such as additional taxes on aviation, shipping, fossil fuel profits, or a global wealth tax being proposed by Brazil and France at the forthcoming G20 in Rio. The political challenges to these proposals are formidable, but the new UK Government could play a pivotal role in ending the impasse and moving to action.

This is in the UK’s self-interest. We have ample evidence that faster investments will avoid the need for much greater costs if we fail to address climate emissions or fail to invest in adapting to climate impacts. As the IPCC put it starkly “The choices and actions implemented in this decade will have impacts now and for thousands of years”.

Help the poorest countries secure private investment for climate goals

Private finance constituted nearly half of climate finance in 2021-22 with the vast majority of this going to low-carbon energy, transport and buildings. With continued effective regulation, private investment can continue to grow rapidly and FCDO has been at the forefront of efforts to mitigate risks to get finance flowing.

But there is a ‘Cinderella in the room’: private investment is barely flowing at all to adaptation.  Our work on private investment in adaptation shows that this is a harder sell to investors because adaptation solutions are very diverse, complex and often unique to a locality. As a result, ticket sizes are small and costs are high. But a few investors are now starting to finance profitable climate-resilient solutions such as regenerative agriculture, crop or disaster insurance and using nature-based solutions to protect towns, cities and coastlines. Governments need to invest in the policies and regulation that grow investible markets for resilience solutions that benefit communities. 

And there is a bigger, more fundamental problem, which is that private climate finance (for mitigation or adaptation) flows fastest to the safest, most stable destinations with large markets and investor-friendly regulation. This means that the poorest countries, which are often highly climate-vulnerable, will lag behind in securing private sector climate finance.

These market fundamentals are not going to change easily. But the UK Government should ensure that the lowest-income countries receive the greatest support to attract private finance for high-priority climate investments. The UK can push international finance institutions to have higher risk appetites in these countries to mitigate risk for private investors to work in riskier contexts.

Restore authority to country governments

And as well as more money, it needs to be used better. This means backing the priorities of country governments. But perversely, the current international climate system disempowers the very country governments it is supposed to benefit.

It wasn’t supposed to be this way. In theory, country governments are in control as they agree all projects before they are submitted to the Green Climate Fund for approval.  But the reality is different. A government cannot automatically apply directly to the Green Climate Fund for the resources it needs to tackle climate change. It needs to encourage project developers to conceive projects. These projects need to be implemented by “accredited entities” who are either international organisations like UN agencies or major NGOs, or local organisations such as banks, NGOs or renewable energy agencies. There are only a few government Ministries as accredited entities currently. There is a gulf between the priorities of country governments and the projects that are proposed to them to be put forward for international funding.

We recently worked, on behalf of the German development agency GIZ to flip this script, working with the provincial governments in Pakistan to identify priority projects, design them and get sign-off within the Government, before identifying accredited entities to implement them. This change has put government back in the driving seat to get projects designed that reflect national priorities.

But more fundamental reform is needed. We need faster, simpler funding bringing finances to meet national needs, not piecemeal funding for whatever projects happen to escape the pinball machine of project development. The UK can make a huge difference here given it is an important shareholder in the Green Climate Fund. And many of the changes needed (speeding up processes, removing unnecessary hurdles, ensuring funds are directed to top priorities and strengthening accountability) mirror the aid effectiveness agenda that Labour governments in the 2000s championed.

The UK Government is right to identify climate finance as an urgent priority. The problems of volume and quality of funding have persisted for too long. There is a valuable opportunity to address these problems to ensure that the finance that is needed to address the climate crisis flows to the right countries in the right way at the right time.

About the author:

Phil Marker is the Team Leader for Climate Policy and Finance. He spent 18 years with DFID leading DFID programmes and policies, including heading a cross-government team driving collaboration on energy and climate change in India.