Outcomes of COP26 – and what they mean for climate finance advocacy

The 26th United Nations (UN) Climate Change Conference of the Parties (COP26) was dubbed "the world's best last chance" to manage the climate crisis and “keep  1.5°C alive”, as well as an opportunity for high-income countries to finally live up to their commitment to providing US$100 billion in climate finance per year to low- and middle-income countries. The event, hosted in Glasgow earlier this month, was declared by many a “catastrophic failure”, though others argued that despite its shortcomings, the conference still brought us “one step closer to combating the climate crisis”. Amid the flurry of information emerging from Glasgow during the summit and in its aftermath, some development advocates might find it hard to get the story straight on what happened, what didn’t, and what it all means for climate finance in the months ahead. This Donor Tracker commentary highlights three things development advocates should know after COP26.

1. Donors continue to fall short of their US$100 billion commitment; transparency, accountability, and concessionality of climate finance remain outstanding challenges

Mobilizing the US$100 billion per year committed by donors to support low- and middle-income countries in tackling climate change was among the key goals of COP26. High-income nations originally made this commitment in 2009 (and reaffirmed it in 2015), with the intention to provide financing in full by 2020, sustaining it through 2025; however, the Organisation for Economic Co-operation and Development’s (OECD’s) analysis ahead of COP26 indicated that donors spent US$80 billion in 2019, and the US$100 billion financing target was “unlikely to have been met” in 2020.

Based on the OECD’s figures, in late October of 2021, the UK COP26 Presidency published a ‘Climate Finance Delivery Plan’ led by Canada and Germany, which sets out an estimated trajectory of climate finance from 2021 through to 2025 and principles for improving the delivery of climate finance from donors. In addition to suggesting that 2023 is a more realistic deadline to reach the $100 billion target, in the Delivery Plan, donors recognize the need for accountability and transparency (such as a clearly defined system and criteria for tracking progress toward the goal) and the importance of grant-based climate finance to support the poorest and most vulnerable (especially in the context of COVID-19).

Despite the momentum building up to the conference, there were no major breakthroughs on the US$100 billion question at COP26. The final text of the Glasgow Climate Pact “notes with deep regret that the goal of developed country Parties to mobilize jointly US$100 billion per year by 2020 in the context of meaningful mitigation actions and transparency on implementation has not yet been met”, although it “urges developed country Parties to fully deliver on the US$100 billion goal urgently and through to 2025”. While some countries (such as Italy, the Netherlands, Norway, Spain, and Sweden) did make new climate finance pledges around COP26, donors were unable to confidently assure low- and middle-income countries of their ability to fulfill the long-awaited US$100 billion commitment. (For a full list of climate finance commitments for 2021-2025, see this COP26 Presidency Compilation, though note that not all are new announcements made at the Conference.)

The vague definition of the US$100 billion target and general lack of accountability mechanisms were both left unaddressed in Glasgow, leaving the details murky on whether and how this financing goal will be met. Although the Delivery Plan implies that the financing goal will “likely” be achieved by 2023, observers have pointed out that the OECD estimates upon which this new deadline is based use the “most generous interpretation of the finance target possible”; the OECD counts all public developed finance badged as climate even though half of it is not new and additional and much remains ‘committed’ but not yet disbursed. Oxfam’s estimates suggest that donors will continue to miss the US$100 billion mark even through 2025. It is also important to note, that even when the US$100 billion annual target is met, it will not be enough. The ‘G77 + China' negotiating bloc, a group of 130 nations representing 85% of the world’s population, has called on donor countries to mobilize at least US$1.3 trillion per year by 2030, with an equal 50/50 split between adaptation and mitigation and at least US$100 billion in grant funding.

At COP26, high-income countries didn’t offer any guarantee regarding the quality of climate finance for the years ahead either, despite the Delivery Plan’s (and the Climate Pact’s) emphasis on the need for concessional funding. This means that low- and middle-income countries will likely continue to receive a large share of their climate finance in the form of loans. According to the OECD, loans represented 71% of public climate finance in 2019. Over-reliance on loans increases low- and middle-income countries’ debt vulnerability and overemphasizes the “true value” of climate finance mobilized, since loan repayments and interest should be subtracted from the total financing figures.

The question of what will happen after 2025 was also left open after COP26. Donors, in collaboration with low- and middle-income countries, need to agree on a new, ambitious, and measurable target for climate finance beyond 2025 that accounts for the ever-expanding need for climate finance in the context of the climate crisis. This will likely be an important topic of debate at COP27 in Sharm El-Sheikh, Egypt, next year.

What is important now?

  • Donors need to continue scaling up their climate finance to meet the US$100 billion annual target and move beyond it, as soon as possible.
  • There needs to be a clearer baseline and greater clarity around how progress toward the US$100 billion is measured to enhance accountability. Suggestions for a more accurate accounting of donors’ commitments to supporting low- and middle-income countries with the climate crisis include counting only disbursed rather than committed funds and subtracting loan repayments and interest from the total financing figures.
  • Donor countries' new climate finance commitments over the next years must not come at the expense of funding to other areas such as global health or education. They must be additional. To prove that, and allow advocates to track it, donors should provide more details on which budget lines they use to finance their climate commitments.

2. Progress on adaptation was among the few successes of COP26; many left disappointed with donors’ response on ‘Loss and Damage’

Despite overall disappointment about the outcomes of COP26, many considered the acceleration of global action on adaptation to be among the limited successes of the event. Funding levels for climate change adaptation have lagged behind mitigation efforts (accounting for only 25% of climate finance in 2019) despite the importance of adaptation to the wellbeing and development of low- and middle-income countries.

At COP26, the Adaptation Fund raised a record-breaking US$356 million in new pledges, the largest of which came from the European Commission; a total of US$450 million in new funding was announced for programs enhancing locally-led approaches to climate change adaptation, and the process for defining the Global Goal on Adaptation was more clearly articulated. Government delegates at COP26 also heeded calls from the Alliance of Small Island States (AOSIS) and the Climate Vulnerable Forum, signing off on text the Glasgow Climate Pact which urged “country Parties to at least double their collective provision of climate finance for adaptation to developing country Parties from 2019 levels by 2025” and reiterating the Paris Agreement aim of “achieving a balance between mitigation and adaptation” finance. Almost all the 14-largest OECD Development Assistance Committee (DAC) donors made explicit reference to adaptation in their pledges, committing to increase adaptation funding or rebalance adaptation within their climate finance portfolios.

Despite low- and middle-income countries’ modest success in pushing wealthier nations to focus more of their attention (and funding) on adaptation at COP26, many challenges remain in terms of the quantity and quality of adaptation finance, and countries’ ability to access it. According to estimates from the UN’s ‘Adaptation Gap Report 2021’, US$250 billion per year is needed to adequately support adaptation in low- and middle-income countries, far more than the approximately US$20.1 billion they received in 2019. As with climate finance overall, donors rely disproportionately on loans to fund climate change adaptation in low- and middle-income countries. This drives vulnerable countries, already feeling the financial losses associated with climate change itself, further into debt. Low- and middle-income countries also report challenges in accessing climate adaptation finance. Despite the immediate need for financing, especially in contexts where climate change is accelerating quickly, the fragmented climate finance landscape and complex bureaucratic application processes can undermine the benefit of adaptation support. These access challenges were addressed at COP26 by the Climate Finance Access Taskforce, which published a set of ‘Principles and Recommendations on Access to Climate Finance’; however, the principles are, unfortunately, not binding.

Related to adaptation, Loss and Damage also became a hot button issue at COP26. 'Loss and damage' refers to the already monumental destruction inflicted by climate change on people’s lives, livelihoods, and infrastructure, which cannot be averted or minimized by adaptation or mitigation efforts. Low- and middle-income countries face the most serious loss and damage from climate change. At COP26, the ‘G77 + China' and AOSIS negotiating blocs pushed for compensation or reparations from richer countries for damage imposed by their climate negligence. The G77 + China put forward the idea of a “Loss and Damage Finance Facility” as a formal delivery body for funding on this issue. The issue was also backed by civil society organizations including the Loss and Damage Collaboration, which ahead of COP26, published an open letter to COP26 President Alok Sharma calling for concrete measures to be taken to address loss and damage in low- and middle-income countries and the injustices and inequalities of climate change.  

At COP26, Scotland became the first government to allocate funds in support of loss and damage, pledging £1 million (US$1 million). However, richer nations, fearing the cost of liability for the impacts of climate change around the world, pushed back against the notion. In the end, the final text of the Glasgow Climate Pact simply “urged” developed countries, NGOs, and private donors to fund loss and damage; however, it lacked specific financial commitments. COP26 did lead to the establishment of some helpful mechanisms, like technical assistance and resource connections for low- and middle-income countries, but the details of how these programs could be funded remain unclear. Wealthy nations including Australia and the US also blocked the formation of a Loss and Damage Finance Facility, instead promising “future dialogue” on the issue.

What is important now?

  • Donors should ensure that they follow through on their joint commitment to double adaptation finance by 2025 and present more concrete plans on how to achieve that at COP27 in Egypt next year.
  • Donors should enhance the concessionality and accessibility of their climate change adaptation finance. This might include exploring how to better use their ODA to support adaptation goals.
  • Donors should provide financing for Loss and Damage, on top of their cumulative US$100 billion annual investment in adaptation and mitigation and should include a target for Loss and Damage financing in the post-2025 climate finance goal.

3. Given broad recognition that public finance will not be sufficient, there was a strong emphasis on private finance at COP26

Despite donor countries’ continued struggle with mobilizing US$100 billion, it is widely recognized that these funds alone will not be sufficient in meeting the growing needs of low-and middle-income countries facing the climate crisis. At COP26, leaders increasingly looked to private finance to fill the gap. In total, private actors (including commercial finance institutions, corporations, funds, households/individuals, and institutional investors) provided US$310 billion per year in climate finance during 2019/2020 (a 13% increase from the 2017/2018 average), according to the Climate Policy Initiative’s ‘Global Landscape of Climate Finance 2021’.

The final text of the Glasgow Climate Pact reiterates this call to “multilateral development banks, other financial institutions, and the private sector” to mobilize greater resources for low- and middle-income countries — in particular for adaptation and loss and damage — and “encourages Parties to continue exploring innovative approaches and instruments for mobilizing finance for adaptation from private sources”.

Approximately 2% of tracked adaptation finance comes from the private sector, indicating a need for private financers to prioritize adaptation. Analysis by the World Bank points to three reasons why private sector actors tend to steer clear of adaptation finance: Private financers 1) lack the country-level data on climate risk and vulnerability they need to guide investment decision-making; 2) have limited information on current funding gaps; and 3) are unable to capture the full environmental and social benefits generated by adaptation investments and perceive returns on investment to be low. Donors have a role to play in supporting the private sector in overcoming these challenges in order to maximize the benefit of private sector investments in tackling climate change in low- and middle-income countries.

Against this backdrop, we saw major moves by private sector actors to scale up efforts to support low- and middle-income countries at COP26, including for climate change adaptation. The Climate Investment Funds’ (CIF) Clean Technology Fund (CTF) launched the CIF Capital Market Mechanism which is expected to mobilize US$500 million in additional concessional funding every year to support clean energy and sustainable infrastructure project in low- and middle-income countries. The International Finance Corporation (IFC), Hong Kong Monetary Authority, and Allianz Global Investors announced MCPP One Planet, a new US$3.0 billion program that will provide Paris Agreement-aligned loans to private companies in emerging markets. The Asian Development Bank (ADB) established the Energy Transition Mechanism (ETM) for Asia and the Pacific which is comprised of two multibillion-dollar funds, focused on 1) accelerating the timeline for shutting down or repurposing coal-fired power plants, and 2) investing in new clean energy projects. The International Finance Corporation (IFC) and Amundi (Europe's largest asset manager) announced a Build-Back-Better Emerging Markets Sustainable Transaction ("BEST") strategy which will mobilize US$2.0 billion in sustainable bonds in emerging markets to support a green recovery from COVID-19.

Although we saw the private sector step up at COP26, their commitments still fell far short of the trillions of dollars needed to support low- and middle-income countries through the climate crisis, and the imbalance between adaptation and mitigation financing remains a challenge. It is also worth remembering that while private climate finance has an important role to play in tackling climate-related challenges, private sector commitments — which usually depend on bankable projects that favor emerging economies rather than the poorest and most vulnerable, are generally not very concessional, and tend to focus more strongly on mitigation rather than adaptation — should not be seen as a replacement for the concessional financing that donors have a responsibility to provide to low- and middle-income countries.

What is important now?

  • Donors need to support low- and middle-income countries in addressing institutional barriers to private investment at the country level (e.g., by strengthening their policy and regulatory frameworks and raising industry standards) so that those countries most in need can attract investors and benefit from these new programs.
  • Donors have a role to play in developing practical approaches to unlocking and enabling private capital to flow to adaptation, and in knowledge sharing with the private sector to avoid investments in counterproductive measures.
  • There is a need for clearer mechanisms for tracking private climate finance and for estimating private finance mobilized by public interventions.

 


Read more about donors' commitments to tackling climate change in low- and middle-income counties: