Establishing clear institutional arrangements for climate finance
An essential step for climate finance management in a more effective, coherent, and transparent manner
As the proportion and scale of climate finance increases in the planning and implementation of climate response actions, identifying green projects (i.e., developing a green taxonomy) and accounting climate-related finance flows become more critical. The UNFCCC established modalities for accounting climate financial flows under the Enhanced Transparency Framework of the Paris Agreement to support countries in reporting climate finance flows on a regular basis. Both developed and developing nations are now encouraged to report and monitor the amount of climate finance commitments and disbursements through the climate finance Measurement, Reporting, and Verification (MRV) system.
Given that climate change is an interlinked issue that poses complex socio-economic and environmental problems across all sectors, a multidisciplinary approach with diverse stakeholders’ engagement is inevitable to mainstream climate change into national development planning. Thus, climate change is no longer solely an agenda item for the Ministry of Environment - all government departments need to include climate change in their policies and strategies. Particularly for climate finance management, where the budget planning body and the implementing body tend to be separated, an explicit and systematic governance structure of climate finance management – i.e., who is doing what within or between different ministries and other stakeholders – is key. Yet, challenges, such as knowledge gaps and lack of communication between ministries and vague division of responsibilities, hinder governments from tackling this cross-cutting issue in an effective and transparent manner.
Therefore, thorough preparatory works and efforts to establish appropriate institutional arrangements are vital in managing the entire cycles of climate finance management from budget planning and execution to reporting and monitoring. A well-established institutional arrangement including the designation of focal points enables a government to facilitate communication and collaboration between different ministries while closing financial gaps by sector through the integration of climate finance into national budget systems.
Depending on national governance structures and circumstances, countries manage climate finance using different institutional arrangements. New department(s) or team(s) are created under the Ministry of Environment or directly under the President’s office to manage specific climate funds or specific international donors. Yet, in most countries, climate finance management is led by the department that organizes and executes the overall national budget (hereinafter MoF) – e.g., National Treasury or Ministry of National Planning, Economy, or Finance. Indeed, case studies show that the MoF can manage climate funds in a holistic and efficient manner while collaborating with implementing entities in Figure 1.
Figure 1. Proposed Institutional Arrangement for Climate Finance Management
The climate budget is managed by the MoF in Colombia, South Africa, and Indonesia, among other countries. The MoF is in charge of reporting and verifying climate finance flows, as well as consolidating overall climate finance data. Other ministries are engaged in providing budget data and sectoral expertise. For instance, Colombia established the Financial Management Committee of the National System for Climate Change (SISCLIMA for its acronym in Spanish) under the National Planning Department to manage the Climate Finance MRV System in a comprehensive manner. In the cases of South Africa and Indonesia, Climate Budget Tagging (CBT) frameworks were established with the support of the UNDP guidelines. The South African government has gone a step further by legislating the climate governance and Ministerial responsibility. The draft bill requires the appointment of a ministerial committee on climate change under the National Treasury for sectoral departments’ coordination.
Case studies show that integrated climate finance management led by one department – the MoF – seems a more appropriate institutional arrangement that can avoid overlapping tasks and achieve the national climate goals efficiently by mainstreaming climate change into national budget practices. The MoF – which has budget management expertise – will be able to process climate-related finance data and the level of details of reporting in line with the existing national budget-management frameworks. Besides, as they consolidate and oversee the budgets of each government department, budget resources can be re-allocated to a specific sector or project in need, aligning with national climate goals such as the Nationally Determined Contribution targets.
Nevertheless, one of the outstanding barriers under this institutional arrangement was identified which is knowledge gaps on climate-relevant activities for MoF. it appears that the staff from the MoF lack the expertise needed to assess the degree of climate mitigation and adaptation relevance. Moving forward, the MoF should build in-house expertise, collaborating with climate or sectoral experts who can evaluate and audit climate relevance and eligibility for funding in order to ensure transparency in climate finance management.
It is up to each government to decide whether it is more appropriate to track climate finance by creating a new institutional organization or by designating a lead department from the existing institutional arrangement. Regardless of the governance structure, high-level leadership from each Ministry should share a common goal to tackle climate change more effectively through collaboration rather than trying to take over the decision-making power through inter-ministerial competition. With this shared vision and goal, the official communication channels, designated focal points from each Ministry, can then contribute to establishing and implementing a comprehensive and consistent climate finance framework. A government should focus on improving the understanding of climate finance, a cross-sectoral issue of focal points in different Ministries and building the capacities and skills they lack. This can be done through frequent internal dialogs between Ministries and institutional capacity building through training or knowledge sharing. Here, a neutral or a third-party organization such as an international organization or a non-governmental organization can play a key role in helping a government mainstream climate issues into the national growth strategy and achieve their climate goals by sharing best practices and identifying and closing knowledge gaps as a facilitator. At the national level, a country could consider establishing an interim committee that could facilitate ministerial collaboration while raising awareness of key knowledge related to climate finance for public staff.
CCAP supports countries in enhancing their capacity and knowledge on climate finance tracking framework and methodology. A workshop on Climate Finance Tracking Tools has been held on March 31, 2022, as part of the community of practices to disseminate knowledge on climate finance to the public and private actors in the Latin American region.
Furthermore, a two-day virtual workshop on the capacity building of climate finance tracking in the energy sector for the Ministry of Finance and the Ministry of Environment in Seychelles has been successfully completed in April 2022.