7 Opportunities for Making the Most of Development Finance after COP26
While the outcome of COP26 was far from meeting shared climate goals, there are abundant opportunities to drive change and advance development and climate goals in the coming year. Governments, development finance institutions and civil society must use the achievements in Glasgow as a launch pad for concrete actions in seven key areas.
1. Close the real financing gap
The global community needs to make sure every region and nation achieves a just transition. Meeting the $100 billion climate finance commitment is yesterday’s target. Moving forward, leaders must move to a needs-based approach to finance the true need. Realistically, this means putting all financing options on the table, and considering the full range of policy tools available, such as allocating International Monetary Fund (IMF) Special Drawing Rights (SDRs), debt restructuring and extremely concessional financing, to avoid warming above 1.5C. It also means sourcing more sustainable and effective financing modalities: through grants and extremely concessional financing, additional to Official Development Assistance and routed through national climate funds (NCFs) to scale implementation and build nationally-owned plans.
2. Design and operationalize the Resilience and Sustainability Trust
The IMF’s new Resilience and Sustainability Trust (RST) needs to help reinforce national climate pledges. If designed to allow accessibility to low- and middle-income countries, the RST has the potential to fulfill an important role in the international climate finance architecture, one existing global climate funds are unable to play. The Glasgow Climate Pact is clear in underscoring the need to incorporate climate vulnerability in the ‘provision and mobilization’ of concessional financial resources. The RST should heed this call and incorporate climate vulnerability when determining eligibility to concessional resources. It is also vital that the RST be designed so that its resources are widely accessible and does not undermine country ownership. Countries with and without pre-existing IMF programs need to have access to the RST. Similarly, the RST must reflect the spirit of national determination that is so central to the Paris Agreement.
Furthermore, as the only multilateral, rules-based institution charged with promoting the stability of the international financial and monetary system in order to enable longer-run growth, the IMF has a central role to play in the transition to a low-carbon and resilient global economy and should grasp the opportunity to establish a development-centered approach to climate change.
3. Debt-for-climate swaps
While the much-awaited IMF proposal on climate debt swaps did not materialize at this COP, the pandemic has left many developing countries severely indebted. Unless the strain of indebtedness is reduced, countries will not have the fiscal space to scale up investments to help address climate change. To this end, the Vulnerable Group of 20 (V20) released a pre-COP statement calling for debt restructuring for climate vulnerable nations. As countries have been asked to revisit their 2030 pledges before the next COP, the IMF should use this opportunity to craft a package that will allow countries to attain fiscal stability and increase their ambition. This would necessarily be available to both low- and middle-income countries, compel private creditor participation (including many of the actors who promised to align activities with net-zero by joining the Glasgow Financial Alliance for Net Zero (GFANZ)) and ensure fiscal space for nationally-determined green recoveries.
4. Scaling up multilateral development banks
The Glasgow Climate Pact urges multilateral development banks (MDBs) to scale up climate finance. With the Group of 20’s ongoing work on capital adequacy frameworks of MDBs, leaders have the opportunity to ensure MDBs scale up their investments and ensure climate mitigation and adaptation are one of the beneficiary areas. Increasing the investment capacity of the MDBs must also happen with the full alignment of MDBs and the goals of the Paris Agreement, surpassing the light-touch commitments made at COP26 to become critical drivers of green transitions.
5. Bringing clean energy and just transition together
The climate finance conversation at COP26 heavily revolved around accelerating clean energy or adaptation finance. Phasing down fossil fuel use and aiding communities dependent on those industries for their livelihoods received less attention, despite a Just Transition statement from major advanced economies. The South Africa Energy Transition Partnership is poised to be a breakthrough, as it provides specific finance commitments for transition, demonstrating the importance of supporting affected communities by bringing clean energy and just transition under the same umbrella.
The Partnership is being hailed a major success and a template for others to follow to support affected communities. As the initiative develops, it will be important to assess the scalability of the model across different affected communities and the impact of such bilateral transition approach on multilateral climate diplomacy.
6. Loss and damage facility
The commitment to double adaptation finance is a step forward, however, there needs to be a dedicated effort to help the most vulnerable communities cope with loss and damage. One of the major disappointments for COP26 was the resistance to establishing a mechanism to channel resources to countries facing devastating losses as a consequence of a global climate catastrophe they did little to cause. Since countries are poised to revisit loss and damage via a dialogue at COP27, the international community has an opportunity to sharpen the objectives of the Group of 77’s proposed loss and damage facility, so its niche within the larger climate finance architecture is clear and compelling. Currently, in the climate finance regime, the support available for countries to address loss and damage exists in the form of the Santiago Network, which aims to connect countries with technical assistance providers. The goal of a loss and damage facility would be to help countries go beyond technical assistance and actually obtain the resources necessary to avert and minimize loss and damage.
7. Accountability for private finance pledges
Ambitious commitments from global finance to align with net-zero were met with mixed messages: on the one hand, leaders recognized the critical role private finance can play in increasing green investment, but on the other hand, these same financiers are the biggest investors in high-emitting industries. If GFANZ is to be more than another greenwashing exercise, it must be met with robust government regulation to make high-emitting investment prohibitively expensive. The UN Secretary General Antonio Guterres’ proposed expert panel to ‘measure and analyze’ net-zero commitments of non-state actors is a welcome dose of accountability that will hopefully raise the ambitions of a more coordinated regulatory approach across global economic governance.
The tireless work of negotiators, experts and activists meant vital steps forward, but the final COP26 outcome has left more questions than answers for the future of global economic governance. Moving forward, it is crucial to take action in these seven key areas and align development finance to the realities of a climate-changed world to keep 1.5C alive.