The third day of this year's international climate negotiations — COP26 — focused on finance, headlined by the 4th High Level Ministerial Dialogue on long-term climate finance.

Developed countries are inching closer to achieving the goal agreed in 2009 of mobilizing USD100 billion per year in climate finance to support developing countries, albeit after the 2020 deadline. Most developed country parties have committed to providing additional finance, and the UK COP Presidency released the Climate Finance Delivery Plan: Meeting the US$100 Billion Goal. Negotiations are also ongoing on establishing a new collective climate finance goal.

In parallel, multilateral development banks and the private sector have scaled up their climate finance commitments, established funding mechanisms and increased the alignment of existing commitments to science-based net zero targets. Key initiatives include the Glasgow Financial Alliance for Net Zero, Climate Investment Funds' Capital Market Mechanism, the MCPP One Planet platform (led by the International Finance Corporation, Hong Kong Monetary Authority and Allianz Global Investors) and the Asian Development Bank's Energy Transition Mechanism.

Key takeaways

Scaled-up public finance commitments are critical to building trust between developed and developing countries, and enabling developing countries to deliver on the "conditional" elements of their Nationally Determined Contributions (NDCs). It is important that good progress is made on the negotiations for the new collective finance goal to rapidly accelerate the decarbonization pathways of developing countries.

Ensuring developing countries are able to access to climate finance and increasing finance for adaptation actions remain key issues in the formal negotiations.

New private finance commitments and mechanisms are promising and present real opportunities for the private sector. However, they remain far short of the trillions of dollars of private finance needed to transition to net zero emissions and adapt to a changing climate. A key challenge remains directing a higher percentage of private climate finance into adaptation actions, with innovative finance mechanisms required to generate a return on investment.

In more detail

Public climate finance

In Glasgow, Finance Ministers met on 3 November 2021 for the 4th High Level Ministerial Dialogue on long-term climate finance. The Ministers discussed three key questions:

  • What specific actions can Ministers take to further enhance the scale and effectiveness of climate finance, in particular with regard to developed countries delivering on the agreed goal of mobilizing USD 100 billion per year in climate finance by 2020 to support developing countries?
  • What progress has been made, and will be made in the future, to develop a financial system to support a net zero and climate-resilient future that also delivers sustainable growth for developing countries?
  • How can Governments, Multilateral Development Banks and the private sector significantly scale up private finance mobilization to developing countries for adaptation and mitigation?

This follows the UK COP 26 Presidency's release of the publication of the Climate Finance Delivery Plan last week, which provides a clear roadmap for developed countries to deliver on the USD 100 billion per year goal. While it is estimated that developed countries will deliver on this goal 2 or 3 years later that promised, the achievement of the goal represents an important step in building trust between developed and developing countries.

In the months leading up to Glasgow, developed countries committed to providing significant additional climate finance (captured here). For example:

  • The United States will double its annual public climate finance by 2024 to USD 11.4 billion, including USD 3 billion to support adaptation action.
  • Germany will increase its climate financing from EUR 4 billion to EUR 6 billion per year by 2025.
  • Japan will contribute an additional USD 10 billion in climate finance over the next five years.
  • Denmark will mobilize at least 1% of the collectively promised USD 100 billion by 2023, with 60% to support adaptation actions in the most vulnerable countries.
  • Norway would double its climate finance to USD 1.6 billion by 2026.
  • South Africa, the United Kingdom, the United States, France, Germany and the European Union have formed a partnership to accelerate a just energy transition in South Africa. Over the next 3-5 years, $8.5 billion will be available to ensure South Africa achieved its updated NDC.
  • The Taskforce on Access to Climate Finance was launched by the UK and Fiji, with the aiming of improving access to climate finance.

These commitments will be critical for developing countries to deliver on the "conditional" elements of their Nationally Determined Contributions (NDCs) as well as on adaptation priorities.

In the formal negotiations, parties discussed a new collective quantified goal on climate finance, including key issues such as the quantity, quality, efficiency, speed and access to finance. It is possible that the new goal may provide further detail on the agreed percentages of public and private finance, and the percentages that must be allocated for different purposes (e.g. mitigation, adaptation). It is important that good progress is made on the negotiations for the new collective finance goal to rapidly accelerate the decarbonization pathways of developing countries.

Parties also discusses the compilation and synthesis of biennial communications under Article 9.5 of the Paris Agreement, which relates to ex ante finance transparency. Key these included the predictability of finance, and ways in which the biennial communications could be improved (e.g. to better reflect the priorities of developing countries).

Another key agenda item relating to finance was consideration of the report of the Green Climate Fund, with key issues relating to accessing climate finance, transparency, and the funding arrangements for projects with co-benefits (e.g. adaptation, social, environmental and health co-benefits).

Private sector climate finance

Alongside the formal negotiations, there have been a proliferation of climate finance announcements from the private sector and multi-lateral development banks. We summarize a number of the key initiatives below:

  • Anchored in the UNFCCC's Race to Zero campaign, the Glasgow Financial Alliance for Net Zero (GFANZ) is a private sector-led initiative that aims to align private capital with science-based net zero commitments and near-term decarbonization targets. This initiative currently represents over 450 firms across 45 countries, which control USD 130 trillion of private capital. Members have committed to release plans to support their long-term pledges and annual progress reports.
  • The Climate Investment Funds' Capital Market Mechanism initiative plans to issue bonds in 2022 for clean energy and sustainable infrastructure project in developing countries and emerging economies. It is anticipated that these bonds could mobilize up to USD 700 million annually.
  • The global MCPP One Planet platform was launched by the International Finance Corporation (IFC), Hong Kong Monetary Authority and Allianz Global Investors. The platform will provide up to USD 3 billion to private enterprises implementing climate smart investments that are aligned with the Paris Agreement in developing economies.
  • The Asian Development Bank (ADB) launched the Energy Transition Mechanism, which aims to accelerate the transition from coal to clean energy. The pilot phase will invest USD 2.5 to USD 3.5 billion in Indonesia, the Philippines and Vietnam for the purpose of retiring two to three coal plants in each country before the end of their expected project life.
  • The IFC and Amundi announced the development of a USD 2 billion fund that aim to catalyze private investment in sustainable bonds in emerging markets. Sustainable bonds will have the aim of supporting a "green, resilient and inclusive recovering" from the COVID-19 pandemic, and will "channel capital from institutional investors into anchor investments in sustainable bond issuances from corporates and financials in developing countries", with the aim of mobilizing additional funding and strengthening the asset class.

These new private finance commitments and mechanisms are promising and present real opportunities for the private sector, particularly those engaged in mitigation actions in developing countries and emerging economies.

However, they remain far short of the trillions of dollars of private finance needed to transition to net zero emissions and adapt to a changing climate. A key challenge remains directing a higher percentage of private climate finance into adaptation actions, with innovative finance mechanisms required to generate a return on investment.

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