LocationsTheme 8
Climate changing
the financial system
The conversation around climate finance is shifting, from volumes of financing to restructuring the systems that provide it. It was recognized at the UN Climate Conference (COP27) that developing countries exposed to climate change, hit by repeated crises, cannot progress towards sustainable development without a reduction in borrowing costs and more flexible, SDG-directed lending and investment. This is adding urgency to calls for reform of the global financing architecture, which are getting broader support.
Signals
Low-income countries contribute only a fraction of greenhouse gases, yet bear a disproportionate burden of climate change. COP27 finally agreed a “loss and damage” fund [110] for countries most vulnerable. Designing how it will work, though, is still to be decided; its success will depend not just on amounts of financing pledged, but its structure and how well it fits into the broader climate finance system.
With energy markets disrupted by the war in Ukraine and many developing countries facing debt crises, the 2022 Bridgetown Initiative [111], first proposed by Barbados in 2021, was presented with increased urgency at COP27. It proposes $1 trillion in low-interest loans for climate action in developing countries – but also fundamental reforms of the climate finance architecture. The Vulnerable Twenty (V20) group, likewise, called for urgent debt relief [112] and immediate reform of sovereign debt restructuring architecture [113]. The multilateral development banks (MDBs) are responding to the pressure [114]. IMF Director Kristalina Georgieva is broadly supportive [115] of the initiative, while the President of the World Bank welcomed [116] calls to significantly increase the Bank’s climate finance. The US Treasury Secretary called on MDBs [117] to tackle global as well as country challenges and possibly take on more risk.
Trends
Developing countries assert themselves
Climate shocks - more intense, more frequent
New alliances for the global commons
Illustrative Signals
COP27 agrees historic ‘loss and damage’ fund for climate impact in developing countries
Bridgetown Initiative proposes $1 trillion in low-interest loans for climate action - and fundamental reforms of the climate finance architecture
V20 calls for urgent debt relief and immediate reform of sovereign debt restructuring architecture
So what for development
Low income countries and vulnerable states are not able to access the funding they need to manage cumulative shocks and interconnected crises: Covid, the war in Ukraine, increased food and fuel prices, climate impacts and debt. As well as intensifying hardship for the poorest, this delays global action on climate change. Moreover, it is these countries which will be worst hit by climate change (both directly and because of their limited adaptation capacity), and the most vulnerable groups within them will suffer most – compounding inequalities [118] between and within countries.
The loss and damage fund agreed at COP27 is a recognition of responsibility for climate change. While the fund will be designed by a dedicated transitional committee [119], the context of its creation is the wider debate about reform of the multilateral development banks and indeed the global financial system. Discussion at the 2023 spring meetings of the World Bank and the IMF may indicate the prospects of the global financial system becoming fairer to developing countries. That would set the scene for decisions on how the loss and damage fund is governed; whether, for example, it is complemented [120] by other funding mechanisms for climate-vulnerable countries, or is free of the sort of constraints those countries already face in accessing other funds.
Can financing the climate response be integrated into the sustainable finance architecture, not be merely an add-on? How can climate finance providers expand development financing and accept more risk, not just finance the most bankable projects? Can the inherent inequality of the climate crisis be addressed through new models of decision-making, decentralisation and ownership?
Explore more themes
