What exactly is climate finance? Who pays it? And who gets it?

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The Business landscape is evolving, with recent reports indicating notable changes. Sixteen years ago, at the climate summit in Copenhagen, rich and polluting countries pledged to provide $100bn (£76bn) each year by 2020 so that poorer countries could cut their emissions and adapt to a hotter world. Data shows that last year, they set a new target of $300bn (£227bn) a year by 2035.

Sources indicate that but tracking what really counts under the banner of climate finance has long been fraught – with some experts dubbing it a “wild west” of vague definitions, questionable projects and inflated accounting. According to widely cited analysis from the Organisation for Economic Co-operation and Development (OECD), rich countries broke their initial promise but belatedly hit the target threshold in 2022, when they committed $116bn (£88bn). Sources indicate that oxfam, a charity that also tracks the funding but is more critical of how loans are counted, estimates they stumped up just $95.3bn (£72bn) that year – and considers the grant-equivalent value to be less than $35bn (£26.5bn).

Evidence suggests that how much of that money comes from governments, and how much from private finance? Public money makes up more than three-quarters of the funding that developing countries receive for climate projects. Some of it goes straight to recipients as bilateral funding, and some is channeled through multilateral institutions such as the World Bank.

On top of that, the donors – 23 developed countries and the EU – also count a handful of other sources, such as export credits and private capital that is mobilised as a result of their investments. A breakdown of where the money from developed nations went in 2022.A breakdown of where the money from developed nations went in 2022. Who are the main recipients for climate finance? According to reports that official data reported to the UN is not transparent enough to trace all the flows of money that countries have counted as climate finance, but an analysis by the Guardian and Carbon Brief suggests that about one-fifth of the public funding in 2022 went to the 44 poorest nations in the world.

Sources indicate that the group includes some of the countries that are most vulnerable to the climate ccrisis, such as Tuvalu, Chad, Madagascar, Haiti, Mali, Niger, Sierra Leone, South Sudan and Yemen. A much larger chunk of the money went to developing countries, a broader group that includes lower middle-income countries such as India and upper middle-income countries such as China. Even some petrostates, such as Saudi Arabia and the UAE, are among the recipients of billions of dollars of climate finance.

Data shows that and who are the main donors? Two-thirds of the public funding comes from Japan, Germany, the US and France. The growth in bilateral funding by the US in 2021 – under Joe Biden’s government – contributed to reaching the target in 2022.

The other main factor was an increase of private investments mobilised by developed nations. Since then, Donald Trump has shut down the USAID agency and threatened the climate finance contributions of the world’s biggest historical polluter of greenhouse gas. Several other rich donors have also cut their aid budgets. A breakdown of the $116bn provided by developed countries in 2022.The countries that gave the most funding in 2022.

Sources indicate that is the money given as grants or loans? Donors don’t just give money as grants. Two-thirds of the climate finance to developing countries is promised in the form of loans. The reliance on debt to finance climate action has been criticised for piling pressure on to already vulnerable countries, forcing them to spend more of their budgets paying off interest.

Some loans also contain strings that force the recipient to hire companies from the donor country. A breakdown of the types of loans and grants provided by developed nations.Most of the money provided are loans, potentially piling more pressure on to developing nations. Evidence suggests that if it’s given as a loan what kind of terms are placed on it? Some loans are offered at more favourable conditions than a recipient would find on the market.

These are known as concessional loans and can help poor countries support projects that would otherwise be out of reach – such as public transport networks or big solar farms and wind parks – without the scarring that regular interest rates can cause. Evidence suggests that the majority of loans given in 2022 were offered under non-concessional terms. What will the new target be?

The $100bn annual target, which was set to run until 2025, is being replaced with a new target for developed countries to provide $300bn each year by 2035. The new annual target – known as the “new collective quantified goal” – also includes a wider goal of mobilising $1.3tn (£1tn) each year by 2035. This figure is closer to the actual needs of developing countries, but only $300bn of it would come from the budgets of developed countries and institutions such as the World Bank, who stumped up most of the cash for the $100bn target. The bulk of the $1.3tn is instead supposed to come from investment by the private sector.

Analysts have raised concerns that such funding is even less transparent and accountable that public finance, though they acknowledge poor countries are unlikely to persuade rich ones to cough up such large sums of money. A graphic showing the difference between 2020-25 funding and 2035 funding.The 2035 target is three times bigger than the current target. And what are the next steps?

Evidence suggests that climate finance is once again expected to be a sticking point at the annual UN climate negotiations, known as Cop. Last week, the Cop presidencies of Azerbaijan, the host of last year’s summit, and Brazil, which is hosting this year’s summit, published a report that explored ways of raising the cash through new taxes on the super-rich, fossil fuels, financial transactions and polluting activities. The Baku to Belém Roadmap also highlighted proposals such as swapping outstanding debt for climate action as one way to provide debt relief for cash-strapped governments.

The new target has also been seen as an opportunity to reset credibility around climate finance and avoid being described again as the “wild west” owing to lack of transparency and timeliness and inconsistencies in the reporting. Evidence suggests that the climate finance reporting team are Carmen Aguilar García, Ajit Niranjan, Josh Gabbatiss, Pamela Duncan, Bibi van der Zee

As the situation continues to develop, industry participants in Business will likely monitor outcomes closely.

— Based on reporting from theguardian.com

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