Climake Newsletter #29: Climate finance's year in review
COP28 hits and misses, innovative climate finance mechanisms, and publications we voraciously read, here is Climake's crash course take of climate finance in 2023
The Climake Newsletter offers quick digests and insights around what is happening in climate finance. While Climake’s current focus of work is India-centric, we capture a global perspective of climate finance in this newsletter.
2023 has come to a close with an end dominated by COP28 and mixed feelings that COP28 was landmark in calling for transitions away from fossil fuel, and a let down in certain other regards, such as climate adaptation and carbon markets. But climate action and climate finance is more than just COP28 and in our first newsletter of 2024, we review the year gone past with a deep-dive on what COP28 and the developments around it offered to climate finance, and what we found interesting and useful across the rest of the year.
This is a review of things that we found interesting, a reading list of useful and insightful content on how the world is undertaking climate action, and how 2024 may shape up, or even what we got right in 2023.
The COP28 Climate Finance Update
The seriously impressive dome that welcomed all at COP28 (Source: Bloomberg)
COP is the highlight of the year’s climate calendar, even though most years leave us underwhelmed. COP28 in Dubai was particularly pivotal as it concluded the 2-year Global Stocktake (GST) of the initial 5 years of the Paris Agreement. The world’s progress on climate action, captured in the Synthesis Report of the GST, shows some positives in reducing warming by 2100, but, the lede, undoubtedly, is that we are not doing enough.
The UAE Consensus, the outcome document of COP28 that is supposed to bookend the process by setting declarations that feed into the climate action goals of countries showed some progress, though several members did not agree with the final text. The COP28 outcomes document is expected to influence the upcoming NDCs in 2025, where countries revise and ideally strengthen their actions towards improving Paris Agreement targets. This, of course, does not always happen, but at most the COP outcomes document points to a path we should expect countries, companies, and other stakeholder to mobilize towards.
The document showed several areas of progress:
the first mention of fossil fuel transition in a COP28 final declaration, celebrated (perhaps prematurely) as “the beginning of the end for fossil fuels”;
a commitment to triple renewable energy capacity by 2030. Along with the Oil & Gas Decarbonization Charter - which only focuses on Scope 1 and Scope 2 emissions and misses out on use of oil and gas which accounts for 95% of oil & gas emissions - the International Energy Agency estimates that these pledges would result in a GHG emissions reduction of 4 gigatonnes by 2030; the world needs to reduce emissions by 22 gigatonnes by 2030;
the operationalisation of the Loss and Damage and its mobilization from 18 countries pledging $792 million to the fund, a drop in the ocean to the $580 billion in climate-related damages vulnerable countries may face by 2030;
and on the theme of firsts, recognition of the link between climate and health was also declared, the role of nature-based solutions for biodiversity conservation and climate, and commitments on climate action in food;
And failures:
barely any movement on climate adaptation, which got kicked down the road to the next COP as it stares at a financing gap of up to USD 360 billion by 2030. (If we are being very generous, the L&D fund could be called an adaptation measure, but it should not);
no decisions on carbon market structures at a time when it faces integrity issues leaving major question marks on international carbon trading;
little progress on mobilizing finance, market structures, and technology sharing especially for developing countries to access.
India took a backseat in pronouncements in Dubai, making it one the country’s more passive COPs.
As with most COPs, a lot happened “off-document”, among smaller sets of aligned countries, companies, and other stakeholders to mobilize targeted action. The UNFCCC identified 126 such off-document initiatives, pledges, and declarations, which ranged from funding commitments, to mobilized sector-specific actions, to commitments for inclusive and just involvement of indigenous communities, and a lot more, all of which you can dig in through. The Carbon Brief has as well given a nfity summary of all agreements that were undertaken at COP28 and around it.
Climate Finance in COP28
The organizers claimed that USD 83.4 billion was mobilized as climate finance during the period of COP28, but details of a few of these are scant and some have questions on whether it is a repackaging of prior commitments.
Even as an absolute sum, this level of financing commitment is below what is needed, when we see the gap in mitigation finance (USD 3.4 trillion annually), adaptation financing (up to 366 billion per year). For reference of how small climate finance mobilization still is, oil and gas companies made USD 80 billion in profits in the same 2 weeks spell as COP28. With the expected difficulties in achieving meaningful cuts and reductions to fossil fuels in a heavily petro-COP, we expected a lot more emphasis would be placed on mobilizing and scaling financing for climate transitions but the feeling was one of a lot of financial challenges - such as new instruments, further capital mobilization, and deployment structures - being left unresolved for future COPs.
Catalytic Capital
The major chunk came from the USD 30 billion commitment of the UAE to Alterra, a catalytic capital financing vehicle run by the UAE to scale and back climate transitions, especially in the Global South. Blended and catalytic structures have picked up interest for their concessional capital to make it more viable to back climate solutions, and attract further capital, and this big-ticket fund will definitely have a lot of interest in what it catalyses. There was little by way of subsequent follow-on commitments at COP28 - multilateral development banks (MDBs) just outlined a purpose to scale up finance and enhance climate outcomes, without any specific funding targets other than the World Bank’s commitment to increase their climate finance allocation to 45% from 35% of its total budget, equated to an increase of USD 9 billion - but Alterra could be a catalyst for more climate-focused fund structures to appear.
Sector-specific Climate Finance commitments
Targeted, sectoral commitments saw decent progress such as the following (just 4 out of » funding commitments we identified from COP28:
Doubling of commitments to USD 17 billion to the Agriculture Innovation Mission for Climate program
USD 1 billion to the Global Methane Pledge which say the number of signatories increase to 155 countries (methane action, a favourite of ours at Climake HQ, saw a lot of interest that is sorely needed)
USD 2.5 billion was mobilized to protect and restore nature as part of the United for Nature program
At the COP28 Business & Philanthropy Climate Forum, 20+ initiatives across the four key pillars of COP28 Action Agenda were showcased and $7 billion was formally committed to deliver on climate and biodiversity targets.
The New Collective Quantitative Goal
Global Citizen identified up to USD 8 billion of clear commitments from governments to UN programs, such as operationalizing the Loss & Damage Fund and recapitalizing existing structures such as the USD 3.5 billion for the Green Climate Fund. But this pales in comparison to what is needed for more consistent support.
But the biggest deliberation point for governments is undoubtedly the big ticket USD 100 billion a year target set out in 2009 and how it should evolve. Peak mobilization for this fund was below the target, USD 89 billion in 2021. 14 years on from when it was first set out, COP28 saw intense discussions on how this should evolve, of which just 3 things seem to have been agreed: the name - the New Collective Quantitative Goal (NCQG); it should mobilize more than USD 100 billion; and it should be in place by 2025.
The debates and deliberations on the NCQG at Dubai reflects a different era from 2009, where the lines between developed and developing are a lot more blurred, with developed countries wanting fast-growing developing economies to also be contributors, while the cloud of past responsibilities and consequences borne more by developing countries underpins such conversations. And not to mention, the needs of developing countries, which the UNFCCC places at around USD 5.9 trillion until 2030.
All this has left a lot at stake to be delivered at COP29. In another oil & gas dependent economy, Azerbaijan, do we expect more of the same as in Dubai? But surprises can happen. After all, after 30 years of tension and conflict, including a recent flare up not 4 months ago, Armenia and Azerbaijan have committed to peaceful and civil relations to make COP29 happen. Perhaps Baku has a few more surprises on offer.
What else happened in climate finance in 2023
Climate finance is about more than just making capital available. Often it is the mechanism through which financing / funding is deployed that helps to really make impact happen. Here are 5 key activities that give a perspective on how climate finance shaped up in 2023.
Increased expectation on Multi Development Banks (MDBs) to expand climate finance
Multi Development Banks (MDBs) are important for providing concessional and catalytic capital for impact, and are increasingly more have more expectation to focus on climate action. 2023 saw the G20 declaration for MDBs to raise their ambition on climate action and the COP28 purpose statement mentioned above. The trends seem encouraging, 2022 saw USD 66.1 billion in climate finance deployment by MDBs to developing economies - a record high - with almost 37% towards adaptation finance; MDBs have achieved their USD 50 billion climate finance mobilization target 4 years early by 2021. But as the World Resource Institute outlines, MDBs need to do more than just deploying capital, especially in 3 areas:
MDBs will only be effective as catalytic capital engines if they are able to unlock private capital - in 2022, for every dollar of MDB capital deployed, only $0.28 of private finance was mobilized.
Debt terms should be more concessional and appropriate to the context of countries where capital is being deployed - the critical concessionality element expected of MDBs.
Improved reporting and transparency: around fossil fuel financing - the expectation is on MDBs should ultimately move away from this - and more detail on the quality of climate finance, such as outcomes from spending, and not just how much capital is deployed.
IFC’s first loss equity in Omnivore Capital’s 3rd Fund
Development Finance Institutions (DFIs) are becoming aware of the importance of concessionality in seeding and scaling climate finance, and this one from IFC really caught our eye. IFC has provided a USD 12 million investment to Omnivore Capital’s 3rd fund, as an LP, which is straightforward enough, but includes an interesting first loss equity component of USD 4.6 million to specifically support “the development of digital solutions that will improve productivity, efficiency and competition in the ag-tech sector in India.” In effect, the first loss guarantee (an amount that will be covered as part of the fund’s deployment) is intended to incentivize Omnivore to back and invest in startups in this profile, which they otherwise might not have done, due to the higher risk profile of such solutions. First loss guarantees have been more common in debt and non-dilutive capital to allay the non-payment risk of lenders, but this is one of the first mentions we have seen of an LP providing equity with such an approach.
The first carbon-credit backed loan by a DFI in India
To say that 2023 been a quite difficult year for carbon markets is an understatement, but that does not mean it can still throw surprises. The Asian Development Bank (ADB) has provided what we think is the first loan where carbon credits without a designated fixed price is the security for the loan, i.e. the value of the credits is not definite. The beneficiary is Greenway Grameen, an enterprise that provides improved cookstoves to rural households as a form of cleaner cooking. (Disclaimer: this project is close to home as Simmi led the team advising Greenway for this loan). Climate projects and enterprises continue to face a big issue on the perception that they offer reduced return potential and viability to funders. We believe that lenders and financiers need to also value the impact that such projects create in enabling climate action, either in emission reductions or resilience, that ultimately is necessary for us. Carbon credits prices are famously volatile, and this loan by ADB speaks to a funder that recognizes that climate finance should put more significant weight to climate impact enabled rather than just a pure financial returns lens.
“Coal-to-clean” transition credits
On the continuing theme of how carbon credits can be leveraged, is this interesting nugget from among the raft of announced COP28 declarations. The Coal to Clean Credits Initiative (CCCI) focuses on supporting coal plants to be decommisioned and be replaced by renewable energy with “transition” credits introduced to incentivize coal plant operators to shut down and be financially incentivized to switch. In an era where the cost of renewables is cheaper than coal, a need is not just installing more renewable energy, but also to increase the pace of shutting down coal and fossil fuel plants. This switch and pace is exactly what CCCI’s coal-to-clean transition credits look to offer. With a methodology published at COP and the first pilot facility for transitioning lined up in the Philippines, the success of this initiative can have a transformative impact in how we move away from this dirtiest of dirty fuels. Failure or a tepid response will likely mean a look back at the drawing board of how we driver our energy transition to a cleaner outlook.
Blended finance as a climate finance gamechanger
Blended finance in 2023 started off on the back of its lowest capitalization in 10 years, at around USD 5 billion in 2022 - according to data from Convergence - with limited private sector involvement. But if we go by its prominence in dialogues, policy steps, and institutional actions - such as the ADB and IFC examples above - and even the set up of a dedicated institution to support blended finance in India; we do expect numbers to pick up in 2023, or at least be foundational for developments in 2024. Philanthropic and institutions and funders alike are increasingly coming to the notion that grants and philanthropic capital has tended to be too focused on benefitting individual, singular initiatives, rather than being used to catalyse and crowd in risk capital creating more widespread systemic change (we of course do not call for all grant and philanthropic to end up blending risk capital.)
Category-Defining Publications and Tools for Climate Finance
There are a lot of publications and tools around the climate action and climate finance, and not much time to go through them all. For a good perspective, we enjoyed the following reports (capped to 6, it could have been more) in providing effective insights and knowledge on the direction of where things may go.
Global Landscape of Climate Finance 2023, Climate Policy Initiative: We are big fans of the Climate Policy Initiative’s Landscape of Climate Finance series that so comprehensively details climate finance trends in 2021, 2022 from a comprehensive public and private sector perspective. The 2023 report does juxtapose finance flows with what we need to be mobilizing (the gap is huge) and also raises the warning of the cost of inaction. We do feel CPI’s global landscape should be required reading for anyone in the climate finance space, and the 2023 report is no different.
The State of Climate Action, Systems Change Lab: As part of the raft of publications published ahead of COP28 to provide direction was this one which is a roadmap of how to close the gap in climate action across sectors to limit global warming to 1.5°C, and it is comprehensive. The report takes stock of trends and our measures of progress across 8 core areas correlated to how off or on track we are and subsequently how we correct actions towards limiting warming. It was perhaps too hopeful for much more of this to be picked up in the COP28 deliberations but the weight of information and analysis makes for very good viewing.
AR6 Synthesis Report: Climate Change 2023 | IPCC: Published in March, this was the final publication of the Intergovernmental Panel on Climate Change’s (IPCC) Sixth Assessment Report (AR6), bringing to an end an 8-year process to provide as clear and accurate scientific information on our action on climate change. As the bookend, it does not disappoint, even if our progress and the impacts of climate change identified are disappointing, especially the gap that we have to overcome. But unlike a stock take of the reality, the AR6 publication also does take its own perspective on pathways for corrective action, with calls for climate finance featuring heavily as a reminder for all of us to mobilize, mobilize, and mobilize.
Adaptation Gap Report 2023, UNEP: This report series is becoming a regular feature because it is that good in throwing light on what we need to do better. Adaptation is sorely lacking in direction and action, and, of course, finance. Beyond the forecasting on our financing need and mobilization, the report also identifies seven ways to increase financing, including through domestic expenditure and international and private sector finance.
Public Profit and Emissions Database, Robert Höglund: This might be a dataset, and not a publication, but it did offer a pretty interesting take on the emission contribution of corporations, towards setting up a potential carbon tax. Putting a price on negative externalities is often touted as a way to incentivize companies to adopt and shift towards a climate-friendly transition and this stands as a quite fascinating thought experiment. However, such steps do live and die on the ability to factor in Scope 3 emissions, which as can be seen from the dataset, is not always available.
ENCORE (Exploring Natural Capital Opportunities, Risks and Exposure) Tool: We spent hours gazing through this tool which might be the most comprehensive look at how the economy – sectors, subsectors and production processes – depends and impacts on nature. ENCORE is a free, online tool that helps organisations explore their exposure to nature-related risk and take the first steps to understand their dependencies and impacts on nature.
That’s it for Edition #29 of our newsletter, taking a look back at 2023.
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Best,
Simmi Sareen and Shravan Shankar