Future of the Funds: Exploring the Architecture of Multilateral Climate Financeby , , and -
Multilateral climate funds play a key role in using public finance to help drive the economic and societal transformation necessary to address climate change. There is growing pressure for policymakers to make the architecture of funds more effective and coherent. This report examines seven key multilateral climate funds and recommends operational and architectural reforms to improve their ability to deliver low-emissions and climate-resilient development.
The next decade will be critical if the world is to prevent the most catastrophic impacts of climate change. The 2015 Paris Agreement on climate change established an ambitious goal to limit the increase in global average temperature to well below 2 degrees Celsius (2°C) above preindustrial levels, while aiming to limit it to 1.5°C. The agreement also has a goal of increasing the ability to adapt to climate change and fostering resilience. The amount of investment needed to achieve these goals lies in the trillions of dollars. By far the largest sums of capital lie in the private sector, and aligning these investment funds with climate and sustainable development goals is key. Although it is smaller in amount, public finance also plays a critical role; it is the source over which policymakers can exert direct control, and it is essential for providing public goods and services that the private sector is unwilling or unable to support. When deployed effectively, public finance can catalyze private investment by stimulating markets, fostering innovation, and reducing risk. A rich and varied architecture of public institutions is involved with raising, channeling, and deploying finance for climate-related activities. These funds and institutions follow bilateral and multilateral channels and use a variety of instruments. Among them, multilateral climate funds play a key role in using international public finance to stimulate the shifts in investments by other public and private finance institutions that are necessary to drive a broader economic and societal transformation. Only transformation at a global scale will be sufficient to reduce emissions and improve climate resilience in order to meet international climate and sustainable development goals. Multilateral climate funds face a number of challenges to realizing their full potential. Over the last two decades, there has been a proliferation of bilateral and multilateral funds providing climate finance, each one responding to needs that emerged at different times. Among the multilateral climate funds, the result has been some overlapping of roles and duplication of effort. Policymakers are now raising questions about how to improve coherence and complementarity and respond to evolving developing country needs in order to enhance effectiveness. Additionally, the future direction and role of some multilateral funds is unclear due to resource constraints, evolving mandates, or unresolved questions pertaining to their continued existence. These issues have led to debate in contributor countries regarding where to allocate public resources, and in recipient countries regarding which funds they prioritize their engagements with. This report focuses on seven multilateral climate funds. Five are explicitly part of the institutional framework of the UN Framework Convention on Climate Change (UNFCCC): the Green Climate Fund (GCF), the Global Environment Facility (GEF), the Least Developed Countries Fund (LDCF), the Special Climate Change Fund (SCCF), and the Adaptation Fund (AF). The two Climate Investment Funds (CIFs)—the Clean Technology Fund (CTF) and the Strategic Climate Fund (SCF)—lie outside this UNFCCC framework. The SCF encompasses three further programs: the Pilot Program for Climate Resilience (PPCR), the Forest Investment Program (FIP) and the Scaling-Up Renewable Energy in Low Income Countries Program (SREP). To underpin our analysis, we identify five key strategies that multilateral climate funds should pursue if they are to be effective in supporting transformative change. These strategies embody both guiding principles for change and goals for action. Achieve impact at scale. Trillions of dollars in investment are needed to address climate change, and multilateral climate funds should play a key role in scaling up climate finance by deploying their resources catalytically to mobilize larger flows of funding that achieve systemic change. Promote country ownership. Funds should ensure that finance is being channeled to support nationally determined priorities (inclusive of broad stakeholder engagement) and strengthen national capacities to plan, coordinate, implement, and monitor climate actions. Improve efficiency. Funds should pursue greater efficiency in minimizing transaction costs, speeding up project delivery, and providing access to money. Support equitable allocation. Funding should be fairly allocated to reach developing countries with the greatest need, for the range of climate actions that will be necessary. Increase accountability. Funds should improve processes to ensure that activities fulfill their mandates and comply with operational policies (including fiduciary standards, safeguards, and grievance processes). Our analysis shows that the existing climate finance architecture needs to be improved to deliver on all aspects of these strategies. Challenges include structural, resource, and operational issues. However, the current architecture is not set in stone. The direction of climate funds will be raised in several policy arenas over the next few years, including discussions on fund replenishments and complementarity/coherence among funds. Policymakers have an opportunity to make changes to the funds to ensure that their impact is positive and responsive to the evolving needs of developing countries. We propose that the multilateral climate funds undertake a set of reforms to improve their effectiveness in catalyzing the transformation to a low-emissions, climate-resilient world. Operational Recommendations Improve Coordination Among Funds and Between Funds and Countries Even without changes to their formal operations, funds could improve their coordination to ensure that they meet countries’ diverse needs, minimize duplications and inefficiencies in their portfolios, and simplify access to funding. This would require funds to think strategically and collaboratively about who is best placed to serve different thematic and geographic areas, who should support which activities, and how needs will evolve over time. Funds could improve coordination by having their secretariats and boards engage with each other more closely. At the country level, programming and planning need to be holistic and not limited to a fund-specific portfolio. One possible solution is for countries to identify one ministry or body that serves as the national focal point or authority for all the climate funds. There is also a need for more coordinated readiness support and capacity building than is being provided by the funds and their readiness partners. There may be value in establishing a broader readiness hub or program that addresses overall planning and pipeline needs. Harmonize Standards, Accreditation Requirements, and Proposal Approval Procedures The funds currently use a multiplicity of rules and procedures to access finance. This results in considerable inefficiencies for implementing entities, particularly national entities with less capacity. Recipient countries must design systems that respond to different demands and different standards. The complex system also makes it harder for stakeholders to track impact and hold funds accountable. Funds could agree on a consistent set of fiduciary standards, environmental and social safeguards, and gender policies that apply across all funds. Standardizing accreditation and funding proposal procedures would also be a significant improvement. In addition to increased efficiency, funds would also see greater complementarity in readiness efforts if rules were harmonized—all readiness and capacity-building programs would support entities’ ability to access any of the funds. Transparency might also improve with such changes. Emphasize Programmatic Approaches That Encourage Systemic Shifts Transformation will not occur if the bulk of financing goes to one-off projects that do not catalyze more systemic change at national, regional, and, ideally, global levels. Funds should support systemic shifts by strategically investing in policy initiatives or actions that have the potential to change behavior in markets and economies beyond the confines of a specific activity. Programmatic approaches, which typically involve bundling or aggregating activities that contribute holistically to a particular outcome, are a useful approach for supporting necessary policy and market shifts. Such programmatic approaches can increase efficiencies and promote country ownership by enabling entities to program larger sums under one proposal, then devolve decision-making to national or regional levels. The GCF and CIFs have a niche in supporting programmatic approaches, and the GEF could play a complementary role through cross-sectoral programming and smaller catalytic interventions. Architectural Recommendations Short Term: Clarify Specialization of Funds Some duplication is beneficial because it provides choice, but it is not efficient for all funds to attempt to fulfill the broad spectrum of needs. A clearer division of labor would help both contributors and recipients to prioritize their engagement. Funds could build on their existing comparative advantages and specialize in different areas, with a view to reducing inefficient duplications and addressing gaps in current provision.