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Climate finance: Earning trust through consistent reporting: Chapter 2

Climate finance statistics: The importance of consistency

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Why are accurate climate finance statistics needed?

There is substantial overlap between the types of activities funded by climate finance and development finance. For example, financing for renewable energy is generally counted as climate finance, but the main purpose of such funding is to provide additional energy to low- and middle-income countries, an important development goal. Funding a cash transfer programme is widely cited as being one of the most effective development interventions, but equally, such interventions are frequently being made in climate contexts with the explicit goal of increasing resilience to climate shocks.

This overlap leads to a common refrain, that the total level of climate finance provided is not important, so long as total development finance is increasing. But there are clear benefits in establishing a separate definition for climate finance:

1. We need to know how far we are from meeting global needs

We know that needs for climate finance are huge. These needs will not be met by international support alone – domestic investment and private flows such as foreign direct investment will also be crucial – but if this international support is not measured consistently with how those needs have been estimated, then we cannot know what contribution the support is making to meeting those needs.

The US$100 billion goal was not set in relation to needs, nor was it expected to fully meet them – it was the outcome of a political compromise. Given that the goal had no scientific or technical basis,[1] it placed no constraints on what counted towards it. If the target had been based on a bottom-up estimate of need then constraints would be implicit: if finance is intended to address certain needs, then only financing that addresses these needs should be included. But while estimates suggest that US$115.9 billion was spent on climate finance in 2022,[2] it is difficult to place this number in context given that it is divorced from consideration of need.

This could change as part of discussion on the NCQG. While the details are still to be agreed, one option for determining the total of the mooted new goal is “setting a quantum based on information on the needs and priorities of developing countries, thereby following a bottom-up approach”.[3] This would entail setting the goal according to reports to the UNFCCC on financing needs from individual countries, such as nationally determined contributions (outlining commitments to reduce greenhouse gas emissions and in some cases required financing) and national adaptation plans (identifying adaptation needs). Such an approach would be challenging, given the variety of methods used to compile these reports[4] and their varying quality, but would naturally lead to a definition based on developing countries’ needs. However, the UNFCCC is yet to agree the method for determining the quantum of the NCQG.

A related question is impact: one basic requirement of climate finance might be that it has a greater impact on climate objectives than non-climate finance. This is not a high bar, but nevertheless, the tendency for providers to count different things means that it cannot be guaranteed. Furthermore, this is inadequate for determining what the impact of such finance is, given that the quality of different climate interventions varies widely.[5] In addition, to truly understand the impact that finance has it would also be necessary to understand the negative impacts that projects have.

2. We need to be able to track how much climate finance is increasing

Without consistent measurement, we do not know how much of the reported increase in climate finance is genuine, and how much comes from reporting changes. The purpose of big, eye-catching targets is generally to spur greater action. If countries have made international commitments to provide a certain amount of climate finance, then (in so far as they are concerned with their international standing), there will be political pressure to try and meet these targets. Several submissions to the UNFCCC noted it is highly likely that the US$100 billion goal achieved this. For example, according to a US submission, “The goal served to mobilise more finance than likely would have been the case without the goal”.[6]

This may be true, but for us to understand the extent to which climate finance increased, we would have needed to measure it consistently through time. The lack of a definition when the target was agreed opened the door for countries to adapt their methodologies over time, in line with the growing political pressure to be seen to be increasing climate finance.[7] There is substantial evidence that this is the case, and this obscures the extent to which progress has been made. This does not necessarily reflect attempts to exaggerate the numbers (there may have been relevant activities not previously captured) but that fact remains that climate finance has not been measured consistently over time, and we do not know the real trend.

This lack of consistency also has implications for additionality, which is still a source of tension between Parties. Many developing country submissions to the SCF mention the need for climate finance to be new and additional, and several included the phrase in proposed definitions.[8] However, consistent measurement over time is important regardless of how additionality is defined.

3. We need to be able to compare how much support different countries provide

Without consistent measurement across providers, we cannot tell which are furthest from meeting their responsibilities for delivering climate finance. One of the key principles underlying climate action is “common but differentiated responsibilities and respective capabilities”, which dates to the wording of the Convention.[9] This wording was not explicitly linked to provision of finance in either the Convention or Paris Agreement. However, many see the concept as applicable to climate finance. In fact, the UNFCCC “Introduction to climate finance” website notes that: “In accordance with the principle of ‘common but differentiated responsibility and respective capabilities’ set out in the Convention, developed country Parties are to provide financial resources to assist developing country Parties in implementing the objectives of the UNFCCC”.[10]

This has led to many attempts to divide the collective goals into ‘fair shares’, based on each country’s ability to pay (size of economy) and responsibility to do so (historical emissions).[11] But without a consistent approach to measuring climate finance across countries, we do not know how climate provision measures up against these ‘fair shares’.

By one estimate, Japan’s ‘fair share’ of climate finance provision is around US$6.0 billion, whereas the UK’s is US$2.9 billion.[12] According to the figure that Japan reported to the UNFCCC,[13] it surpassed this target comfortably, whereas the UK is less than halfway towards providing its share. But this ignores the two countries’ wildly different approaches to measuring climate finance. The UK has in the past been viewed as conservative in what it identifies as climate finance[14] and nearly all of its climate finance is in the form of grants, whereas Japan has been frequently criticised for the breadth of projects it has identified as climate finance, has counted the full value of projects that only partially target climate, and gives this finance mainly as loans.[15] Taking these differences into account gives an entirely different picture for which countries need to step up, and by how much.

4. Countries have additional responsibilities for providing climate finance

While development and climate goals are inextricably linked in practice, the motivation for providing finance for each is different, and the impetus for developed countries to do so comes from different international agreements. The goal of providing 0.7% of GNI as ODA dates to the Pearson Commission on International Development in 1969,[16] and originated from the need to provide capital for economic development (although not all developed countries adopted this goal).

By contrast, the Convention mentions the need for developed countries to provide financial support to developing countries specifically to meet the “agreed full incremental costs” of implementing measures under the Convention (although again, the word “agreed” places limits on the obligations that the Convention itself places on developed countries).[17]

These different histories and mandates give rise to philosophical differences between climate finance (and other provisions for global public goods) and ODA (which aims at poverty reduction and economic growth), and this has been recognised in documents from governments in both developed[18] and developing countries.[19] For example, Kenya has emphasised that climate finance “should not be provided as part of ODA”, despite this being the most common practice. The French Development Agency (AFD) notes that “Neither the principle of reciprocity nor the humanist principle specific to ODA can suffice as a basis for an international policy in the climate field.”[20] For many, the difference in historical emissions creates an additional responsibility for developed countries to provide climate finance,[21] an argument that does not apply to ODA.[22]

However, despite the different motivations, and the many calls from developing countries and civil society that climate finance should be separate from ODA, in practice nearly all climate finance is funded from ODA and there is no agreed-upon way of separating the two. This makes understanding the extent to which climate finance is additional to development budgets impossible to ascertain.[23]

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Consistency in measuring climate finance is fundamental

Whatever our reason for wanting to measure climate finance, consistency is fundamental, whether across providers or time. The most obvious way of ensuring consistency in what is counted as climate finance is by agreeing on a common definition.

This could take the form of a full taxonomy that details every activity that can count towards climate finance, and under what conditions. Examples of this exist already, such as the Climate Bonds Initiative (CBI) taxonomy, which specifies which activities are eligible to be funded by the proceeds from climate bonds,[24] or the ASEAN[25] or EU[26] taxonomies for sustainable finance. These lists may lack nuance, for example, the CBI list precludes any investments in the fossil fuels sector, even though there may be investments in the sector that dramatically reduce emissions from power stations that have no realistic prospect of being closed early. However, the benefit is that we know exactly what ‘climate finance’ refers to.

There is currently a heated debate at the SCF about the need for a common definition. Several definitions have been proposed and discussed, ranging from functional definitions that define climate finance in terms of characteristics it should have[27] to definitions that specify it as separate from ODA.[28] Most developing countries are broadly in favour of a common definition that all providers are beholden to; the views submitted to the SCF from developed countries, so far, suggest they consider a common definition to be unnecessary.[29] Indeed, multiple developed countries have explicitly stated that they would not be prepared to adopt a common definition, as things stand.

The goal of this report is to explore current reporting practices to understand if there are ways in which consistency in reporting can be improved, even without full agreement on a common, actionable definition. In this, we are largely limiting ourselves to consider the difference in how the climate-focus of projects is evaluated.

Read more from DI on the issues arising from the lack of consensus on a climate finance definition. Genuine agreement on a rigorous definition would reduce inflated claims about what is actually being provided and help build trust between Parties.

This is far from the only concern when it comes to climate finance reporting. The SCF discusses numerous dimensions on which there is disagreement, such as modalities or instruments. For example, Kenya counts any climate finance provided in the form of loans as national climate finance (as opposed to international) on the basis that it will ultimately need to pay them back, and so essentially is self-funding projects financed with loans.[30] Moreover, many commitments never actually get disbursed,[31] while much of climate finance is in the form of loans which risks increasing debt burdens in low- and middle-income countries,[32] and there are questions about the extent to which climate finance projects respect the rights of women or indigenous communities. But addressing the inconsistencies in classifying projects is a fundamental step towards understanding what we even mean by climate finance.

Read more from DI on how we can mobilise greater funding for low-income and climate-vulnerable economies, without compromising pathways for prosperity. Given the unsustainable nature of current offerings, reliance on an inequitable global economic architecture and the lack of accountability, we must explore other practical solutions.

The next chapter examines the state of the data on climate finance reported by providers and highlights worrying trends. It shows that climate finance has not been measured consistently across years or providers, and that we know less than we think about how climate finance has changed over time, or who has provided it.