Blog | Understanding the Impact of Climate Finance Transparency

Key Takeaways:

• Enhancing climate finance transparency is essential to achieving mitigation and adaptation goals, especially for vulnerable countries with limited resources.
  

• Transparency can assume two directions: First, an ex-ante perspective, which is forecasting climate finance needed in the future to reach climate goals. Second, an ex-post perspective, which is tracking and reporting historical climate finance flows towards mitigation and adaptation objectives to record and analyze spending and determine climate finance gaps.
  

• Reporting on the financial support received is important because it contributes to global transparency and conveys how much climate finance has been provided from developed countries to developing countries. Additionally, reporting assists in mobilizing funding and managing resources for developing countries from (international) investors and donors.
  

• The guide on climate finance transparency framework is currently being developed by CCAP in collaboration with ICAT and offers step-by-step approaches and a complementary tool for countries to enhance transparency in climate finance. This guide is aimed to be published later this year.  

Addressing the Gap in Climate Finance Mobilization

Originating back to COP15 in Copenhagen (2009), several pledges for climate finance mobilization, including Article 2.1c of the Paris Agreement, were developed to help adaptation and mitigation efforts against climate change. Even though climate finance flows have been gradually increasing since the Paris Agreement, the goal of reaching the $100 billion target has not yet been achieved to date (USD $89.6 billion in 2021). In order to accelerate the implementation of climate-related activities, especially in developing countries, raising both public and private finance is the top priority.

Climate finance flows between 2021 and 2022 were at USD $1.3 trillion, of which 51% came from the public sector, specifically development finance institutions (DFI). Given that USD $4 trillion is needed on an annual basis to maintain the 1.5-degree Celsius pathway, the role of climate finance is becoming increasingly important. COP27 in Sharm El Sheikh, Egypt (2022) established the Loss and Damage Fund, which aims to provide financial assistance to nations most vulnerable and impacted by the effects of climate change, and at COP28 in Dubai, United Arab Emirates (2023), wealthy countries pledged a combined total of just over USD $700 million to the fund.

To fight climate change, many countries have submitted Nationally Determined Contributions (NDCs) – self-defined national climate pledges and have developed national Long-Term Strategies (LTSs) – long-term visions for low-carbon and climate-resilient pathways. Despite implementing NDCs and LTSs, country parties and other stakeholders have acknowledged and expressed concern that financial resources and investments are still insufficient to effectively combat climate change in developing countries. 

Considering these novel goals, frameworks and strategies, it is evident that improving the clarity of climate finance flows is imperative to materialize mitigation and adaptation goals, especially for countries that have limited resources and are the most vulnerable to the impacts of climate change.

Insights into Climate Finance Transparency: A Key Tool for Policy Practitioners to Mobilize Funding for Climate Action

Transparency is central to the Paris Agreement. The Enhanced Transparency Framework (ETF) specifies reporting requirements in order to maximize country parties’ efforts in climate action and to support transparency while tracking the progress towards climate finance goals. This includes reporting on the financial support provided as well as the financial support received through Common Tabular Formats (CTF). Reporting on the financial support received as part of the Biennial Transparency Report (BTR) is important because it contributes to global transparency and conveys how much climate finance has been provided from developed countries to developing countries. Additionally, reporting also aids mobilizing resources from (international) investors and donors, since the need for financial support is clear to these constituents.

Enhanced transparency on national spending and the climate finance and investment flows provided by international sources – both from public and private sectors – is essential for developing countries to effectively manage limited resources and strategically mobilize additional funding for essential areas. The concept of transparency describes the acts of ‘making visible’ and disclosing information and is closely linked to the processes of generating, accessing and analyzing data. Transparency is the foremost element in mobilizing climate finance where mutual trust and integrity are vital. It entails gaining clarity about the size of climate finance flows and sources and recipients of climate finance, as well as targeted sectors and contributions to mitigation or adaptation in the national landscape.

As such, transparency can assume two directions. First, an ex-ante perspective, which is forecasting climate finance needed in the future to achieve climate goals. Second, an ex-post perspective, which is tracking and reporting historical climate finance flows towards mitigation and adaptation objectives to record and analyze spending and determine climate finance gaps. Comparing the ex-ante and the ex-post perspectives serves the following objectives:

• Enabling countries to quantitatively identify gaps between the costs of their NDCs or LTSs and their current climate finance landscape.

• Supporting countries report their financial support needed from international donors and to the UNFCCC to comply with the ETF.

• Supporting countries to use these transparency insights to facilitate mobilization of additional resources from international, public and private sources.

• Enabling countries to use transparency insights to manage domestic resources effectively.
  

To put climate finance transparency into practice, multiple tracking methodologies and definitions for classification have been developed to better monitor climate finance flows, both nationally and internationally. There are multiple systems in place that attempt to track accurate inflows and outflows of resources at many different levels within a country. Yet, the lack of an internationally-agreed-upon definition of climate finance has been a barrier to countries tracking climate finance flows in a more accurate and harmonized manner.

CCAP Partners with ICAT to Develop a Climate Finance Transparency Guidance for Developing Countries

CCAP has aligned with the project implementation partner Gauss International to develop a guidance on climate finance transparency for the Initiative for Climate Action Transparency (ICAT). The guide provides user-friendly instructions and recommendations for countries to establish a climate finance transparency framework. It comes with practical step-by-step approaches and actionable tasks that countries can follow. By providing methodologies and tools with consideration of a broader range of applicability from basic to advanced levels, the guidance aims to support as many countries as possible in their efforts to estimate and track climate finance for NDC implementation, contributing to strengthening their climate finance transparency framework.

The application of the guide will help countries to achieve following objectives:

1. Improve public resource management for climate finance

2. Mobilize additional climate finance resources

3. Report domestically and internationally, in particular under ETF.

The core section of the guide presents a step-by-step approach to accompany countries through a five-phase process in establishing and operating a climate finance transparency framework.

The step-by-step approach  starts with an inception stage (Phase 1 and 2) that guides the country in setting up the climate finance transparency framework and establishing definitions, parameters and institutional responsibilities. The inception stage is followed by an operational stage (Phases 3-5) that includes the ex-ante estimation of finance needs for NDC implementation, and the ex-post monitoring and verification of climate finance flows, as well as the sharing of results for policy making.

Figure 1. The 5 Phases of Climate Finance Transparency Framework

Source: CCAP based on the review of international methodologies and the Integrated National Financing Framework (INFF) framework

This framework is a tool for countries to be used to target Articles 2.1c, 9 and 13 of the Paris Agreement. It could also be useful for stakeholders ranging from policymakers, policy practitioners and climate finance transparency experts to advocate—during climate negotiations—for specific actions to mobilize additional funding for mitigation and adaptation initiatives.

CCAP Endorses Knowledge Sharing and Advocacy for Climate Finance Transparency

As part of the knowledge sharing criteria for the project, CCAP co-organized an Official Side Event during COP28, collaborating with ICAT and the Government of Ivory Coast. The event provided a platform for fruitful conversation on countries’ current climate finance transparency challenges, while giving them a chance to discuss best practices learned from their unique experiences.

To ensure practical applicability of the guidance, Gauss International is starting to implement the guide in four countries – Senegal, Ivory Coast, Belize and Morocco. As a result, this initiative has enabled CCAP to collect feedback from the countries’ practitioners to adapt and reflect on challenges and best practices experienced by them. CCAP and ICAT are organizing a workshop to congregate climate finance and transparency experts to comment and discuss the guide for plausible implementation and usage in more countries. The workshop will take place in Bonn, Germany, from February 28-29, 2024.  

Stay tuned!

Climate finance tracking and transparency is a highly pertinent topic, and these discussions will continue to be a major focus at COP29 in Azerbaijan. CCAP is excited to be hosting related events and to continue sharing information with interested actors to foster conversations and sustain the momentum with countries and practitioners. In the meantime, please follow along our blog series to discover the intricacies of the five phases of the Climate Finance Transparency Guide!

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CCAP’s mission is to support every step of climate action, from ambition to implementation. A recognized world leader in climate policy and action, CCAP creates innovative, replicable climate solutions, strengthens capacities, and promotes best practices across the local, national, and international levels to accelerate the transition to a net-zero, climate resilient future. CCAP was founded in 1985 and is based in Washington, DC.