Environment, Energy and Nature

Unlocking the future of climate finance: no time to lose in agreeing what makes finance flows climate-consistent  

6 min


Charlene Watson

In a more stable 1.5˚C world, we might just call it ‘finance’. But today, we call it ‘climate finance’. The closer these two definitions become, the better chance we have of a stable, liveable future.

Climate finance is a multifaceted, often under-explained, concept. What can be defined by this term is an increasingly uncomfortable point of contention in climate diplomacy, but it is generally used to describe the flow of any finance to initiatives, programmes, or projects that address climate change and its impacts.

It focuses particularly on finance provided by developed countries to developing countries which are historically less responsible for climate change and more vulnerable to its impacts. But this ‘flow’ of climate finance, in particular, has fallen dramatically short of what is required.

The ongoing shortfall in global finance flows for climate action is partly due to the definition of ‘climate finance’, or lack thereof. It is also due to the differing interpretations of Article 2.1c of the Paris Agreement. This critical third goal of the treaty, after mitigation and adaptation, aims to make “…finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.

Problems with interpreting the scope and objectives of Article 2.1c have hindered an acceleration of much-needed action, while the policy, price and legal incentives to make high-emitting, low climate-resilient investments remain strong.

Yet Article 2.1c remains a pre-requisite for the kind of global economic transformation that we need. The UNFCCC – as a valuable guiding light– needs to both accept the enormity of the transformation required, and the difficulty in facilitating this transition without a concrete understanding of what ‘climate-consistent finance’ actually is. To date, the conversation has been about the billions when we should be talking about the trillions.

Double standards and distractions

So, what is causing the roadblock to healthy flows of climate finance?

Firstly, there is the strong perception of double standards in operationalising Article 2.1(c). As a long-term goal of the Paris Agreement, Article 2.1c is, and should be, viewed as a collective target. Yet climate finance naturally differentiates the roles of developed and developing countries.

The flow of finance from developed countries remains critical for developing countries to undertake climate action. However, there is a sense that developed countries hold power through this finance flow to define what is a ‘climate-consistent’ flow of finance and so dictate what actions need to take place in developing countries, potentially without even lifting a finger themselves. For example, with many developed countries spending far more money on subsidising fossil fuels at home than they do on climate finance abroad,  should developing countries be restricted by conditions for gas infrastructure?

Secondly, there are also concerns that developed countries use Article 2.1c to distract from their obligations around providing and mobilising climate finance for developing countries; too much effort goes to shifting the discussion towards how national frameworks of policies and regulations influence domestic finance flows, rather than how they could increase their direct provision of international climate finance.

This was noted in an April 2022 submission to the UNFCCC from the Independent Alliance of Latin America and the Caribbean (AILAC) which made clear that “…the operationalization of Article 2.1c does not substitute developed country Parties’ obligations of provision and mobilisation of finance to the developing world”. This sentiment was echoed by the Least Developed Countries’ submission which raised concerns that pursuing ‘climate-consistent finance flows’ would distract from the failed $100 billion a year target for climate action.

Of course, it is not just debates over definitions that delay action. The UNFCCC sits in an awkward political position. It plays a pivotal role in offering guidelines, pathways, and direction. However, its remit falls short of providing a formal mandate for the myriad stakeholders involved in delivering Article 2.1c. It is like a government trying to enact policy without a majority: it can urge, implore, and encourage, but ultimately without complete authority.

Tangentially – but of equal importance – non-state actors play a surprisingly near-formal role, as evidenced by groups like the Non-State Actor Zone for Climate Action, Race to Zero, or the Glasgow Financial Alliance for Net Zero. All of this means a largely decentralised system lacking in hierarchical oversight.

Equity and fairness

Article 2.1c needs direction, but it cannot – and should not – mean everyone has to take the same path, at the same time, to a climate stable future. Countries have vastly different needs when it comes to climate finance. Many Small Island Developing States, for example, need greater funds for adaptation and resilience than they do for mitigation. Tracking the ‘consistency‘ of finance flows into adaptation efforts in Antigua is very different to tracking the climate impact of green bonds issuance in France. Nationally Determined Contributions exist for this reason; to allow countries to take a localised approach to meeting their obligations under the Agreement, as they should.

This is why the foundation of any shared understanding of Article 2.1c must be equity and fairness. The tension between developed and developing countries can be seen as a result of failing to address the issue of equity so far. The African Group of Negotiators, for example, made it clear in their 2022 UNFCCC submission on the scope and objectives of Article 2.1c that “…it is unrealistic to expect developing countries to meet the exact timelines as developed countries to transition their economies and entirely shift and divest our economies away from fossil fuels”. Embedding this understanding of each country’s context is a key tenet of equity.

Global financial reform

In fact, the pursuit of a shared understanding of Article 2.1c is an opportunity to redress the systemic imbalances of the global financial system in general. Developing countries face higher borrowing costs and poor access to liquidity in times of crises. The growing indebtedness that results hinders developing countries’ investment in health, education and social protection. For decades, these imbalances have directly led to the kind of environmental breakdown we are now experiencing. Reform is not just a chance to remedy the symptoms of rampant climate change, it’s a chance to kill the virus at the heart of this crisis.

We can already see examples of reform in the global financial system that are bringing together finance and financing climate action more holistically. Attention towards the reliance of a number of oil and gas producing developing countries on fossil fuel extraction for revenues to deliver public services and to repay government debts has led to a wave of action calling for a closer look at debt suspension, debt restructuring, or ‘debt for nature swaps’. These are welcome steps because they acknowledge the interconnectedness of the financial system; nothing happens in isolation. Favourable outcomes for countries burdened by fossil fuel debt are emblematic of a process that respects equity. We need to see more of this.

Climate action is too often portrayed in terms of what we must lose in order to win back our ecological and environmental stasis. But a shared understanding of Article 2.1c – an alignment in vision and strategy – has the power to unlock a sustainable, beneficial, and just economic transition. With this North Star in sight, we must work ever harder to achieve it.

This article is part of a series organized in partnership with the United Nations University Institute for Environment and Human Security,  the Munich Climate Insurance Initiative (MCII) and LUCCC/START. 

Charlene Watson
Senior research associate, ODI