A GCF official says the fund needs new sources of money but campaigners worry the move could undermine climate justice
The UN’s Green Climate Fund (GCF) is considering borrowing money from banks and other investors in order to meet a goal set by governments at COP29 in November to increase spending by a group of funds that support developing countries.
At the talks in Baku, under pressure from small island nations and the Least Developed Countries (LDCs), all governments agreed to “pursue efforts to at least triple annual outflows” between 2022 and 2030 from UN climate funds like the GCF.
But with climate finance from wealthy governments faltering, Alain Beauvillard, the GCF’s director of strategy, policy and innovation, told Climate Home that the fund was considering tapping capital markets to help meet this goal.
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He said the GCF has an “ambitious” goal to manage $50 billion by 2030 – set in 2023 by its executive director – but foreign aid budgets are “not growing fast, some are falling and basically Ukraine is taking the greatest part”, so “we need some other sources of funding”.
The GCF will also look at accessing international financial assets called Special Drawing Rights and benefiting from proposals for global taxes on polluting economic sectors, he added.
Climate justice
But borrowing is controversial. Harjeet Singh, a frequent observer of GCF board meetings and director of the Satat Sampada Climate Foundation in India, told Climate Home that “turning to capital markets to scale up climate finance may address short-term funding gaps but fundamentally undermines the principles of climate justice”.
In his view, it “prioritises profit-driven projects like renewable energy over critical adaptation efforts and addressing loss and damage – both of which are essential for vulnerable communities bearing the brunt of the climate crisis”.
Those lending money to the GCF on financial markets would expect to be paid back with interest. While clean energy projects generally produce revenue which the GCF could use to pay off lenders, it is harder to make profit from rebuilding a hurricane victim’s house or constructing a seawall to defend against rising sea levels.
The COP29 language about tripling outflows from the climate funds was only added into the finance agreement at midnight on the last night of the tense summit, giving governments no time to debate the exact wording. The amounts and details have yet to be worked out.
Michai Robertson, finance negotiator for the Alliance of Small Island States (AOSIS), told Climate Home that its inclusion was a compromise made to them and the LDCs, following a dramatic temporary walk-out on the last afternoon of the talks.
While government aid agencies like USAID and multilateral development banks (MDBs) like the World Bank are at least largely controlled by developed countries, the GCF has a board made up of an equal number of developed and developing country representatives.
Aid agencies and MDBs often favour finance in the form of loans, emissions-cutting projects and big countries as recipients of their money. But the GCF has a mandate to invest half of its money in adapting to climate change, 50% of which goes to LDCs, small island developing states and African governments.
Open to interpretation
Richard Sherman, a South African climate negotiator who was at COP29, told Climate Home that developing countries assumed that tripling outflows from these funds also meant tripling inflows “and definitely not doing three times more with what they are currently getting”.
“Now it seems the Baku language means everything to anyone,” he said. “This will probably be the start of endless negotiations of what we actually agreed to.”
Sherman warned that the GCF’s board and its trustee – the World Bank – would have to agree if the GCF is to enter the capital markets, adding that getting money from SDRs and solidarity levies would also be “complicated”. He called these proposals “stock-standard developing-country treasury approaches”.
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Some UN funds already borrow money. In 2022, the International Fund for Agricultural Development was the first UN agency other than the World Bank to access the capital markets to lend to rural communities in poverty.
Last Tuesday, the Climate Investment Funds (CIF) – one of the world’s largest multilateral climate funds – issued its first bond, borrowing $500 million to lend to clean technology project developers in developing countries. This process was begun by former CIF head Mafalda Duarte, who now leads the GCF.
Current CIF head Tariye Gbadegesin called the bond issue “a historic moment for climate finance” which would “multiply the funds available for scaling up clean technology and infrastructure in developing countries – not in ten years, but now, when it’s most critically needed”.
She noted that demand for the bonds was more than six times higher than supply, describing this as “an enormous vote of confidence and a sign of the keen market interest in backing high-quality clean energy projects”.
Carbon levy for adaptation funding
When it comes to adaptation, the business case for going to the financial markets is far less clear. That leaves the UN climate funds that are focused on supporting projects to help vulnerable communities protect themselves from extreme weather and rising seas with fewer options for meeting the COP29 goal.
The UN’s Adaptation Fund, which has blazed a trail for this type of finance for 17 years, has to go cap in hand to wealthy government donors every year to solicit contributions in a bid to meet an annual target that is now set at $300 million. That is a challenge when national budgets are tight and needs are growing across proliferating climate funds.
For example, the fund garnered contributions of only around $133 million through COP29 last year – and while it’s not living hand to mouth, it has a significant pipeline of projects seeking funding. Given this tough backdrop, its head Mikko Ollikainen told Climate Home it was encouraging to see donor governments commit to tripling outflows, which he took as “a vote of confidence” in the Adaptation Fund’s work.
“The direction of travel is quite clear – that the needs are increasing and the adaptation finance gap is growing, and the decision from Baku would enable us to partly bridge that gap,” he said. “But, of course, this needs to be implemented – and then the finance, the funds would need to materialise to match this target that the (government) parties have set.”
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For the Adaptation Fund, the COP29 decision means increasing its allocations to projects and programmes to $400 million a year by 2030, which translates into an annual growth rate of 25%, Ollikainen said.
There is one other source of finance the Adaptation Fund can look to: countries have agreed it can receive a 5% levy on emissions reductions registered with the new UN carbon market – which could see credits start to change hands this year after its rulebook was finalised at COP29.
But previous experience with a similar levy on an earlier version of a UN offsetting regime, the Clean Development Mechanism, was disappointing. Revenue amounted to only 10% of the Adaptation Fund’s resources due to rock-bottom emissions permit prices.
Ollikainen said “there hasn’t been any sort of authoritative estimate of what we might be expecting” from the new market but welcomed the fact that countries had set a quantitative target for UN climate funds for the first time, signalling they are willing to ensure it is met.
Pressure on funds
Two other multilateral funds that mainly channel money for adaptation projects in poorer countries – the Least Developed Countries Fund and the Special Climate Change Fund – have struggled even more to get what they need, cancelling donor events at COP29 due to a lack of commitments.
Joe Thwaites, senior advocate for international climate finance with the US-based Natural Resources Defense Council, said the COP29 goal amounts to tripling outflows from all the funds combined to an annual $5.2 billion.
Donor governments will need to make new pledges to help them reach the the target, but it also puts pressure on the funds themselves to do more with the money they have in their coffers, he said, noting that “getting the money out of the door… has been one of the challenges”.
“It doesn’t get countries off the hook but if [the funds] can manage their money better, they could leverage that and get greater outflows off the same capital base,” Thwaites said.
(Reporting by Joe Lo; additional reporting by Megan Rowling; editing by Megan Rowling)
