The world’s biggest climate fund wants to get bigger

Developing countries need cheap, long-term, and easily accessible financing to decarbonize and develop their economies. Duarte gets it. But her efforts, and those of the GCF, won’t be enough on their own — not by a long shot.

The GCF is the world’s largest dedicated climate fund, a pillar of the grand bargain between rich and poorer nations which underpins the 2015 Paris Agreement: Developing countries agreed to cut emissions in exchange for financial support from their wealthier peers. The replenishment of the GCF is critical for vulnerable nations to access affordable funding for climate investments, and Duarte is seeking fresh contributions at a pledging conference next week.

On its own, however, the GCF is too small to move the needle. Duarte acknowledged last week in remarks to the U.N. that even $50 billion was “a drop in the bucket” when compared to the additional climate finance needs of developing and emerging economies other than China, estimated at around $1.8 trillion a year by 2030.

But the GCF stands out for its ability to focus on the most vulnerable, and take more risks than most investors because it doesn’t have to worry about credit ratings. To scale financial flows, the GCF will “double down on mobilizing domestic private capital,” Duarte told CSIS, a Washington-based think-tank, on Monday.

Yet still more is required, and Duarte’s is one of multiple efforts aiming to bolster funding for developing nations. The Bridgetown Agenda — a blueprint for reforming the financial system championed by Mottley — is the most advanced diplomatic initiative responding to that scaling challenge. It calls on multilateral development banks to triple their lending from $100 billion a year currently to $300 billion, urges the banks’ shareholders to increase their capitalization, and demands developed countries rechannel about $130 billion of International Monetary Fund financing as additional lending for vulnerable nations.

A group of countries recently agreed to increase multilateral development bank lending by an extra $20 billion annually by optimizing the banks’ balance sheets. But Mottley warned leaders last week the ambition shouldn’t be below $100 billion. An influential recent report for the G20 concluded that the MDBs could increase their lending by “several hundreds of billions of dollars over the medium term” if they followed a series of recommendations, including on risk tolerance.

The issue is poised to be a major talking point at World Bank and International Monetary Fund meetings next month in Marrakech, where Barbados and its allies will “push for higher numbers,” Avinash Persaud, Mottley’s special envoy on investments, told me.

Other efforts are underway, too. There are calls on multilateral development banks to loosen their insistence on maintaining AAA ratings and increase lending; momentum is building behind debt-for-climate swaps, which can free up capital for heavily indebted nations; while the World Bank is increasing its lending capacity by loosening its equity-to-lending ratio to take on a bit more risk.

Developing countries’ climate and development finance needs are acute and growing. But ideas for financing mitigation and adaptation efforts are on the table. The question remains whether they can be seriously implemented.

“We have a broken financial system that rewards and incentivizes bad behavior rather than … activities that are conducive to the survival of humanity.”

— Selwin Hart, special adviser on climate action to the U.N. chief, reflecting on last week’s Climate Ambition Summit.

Not all politicians and financial experts believe that simply making the existing system bigger and bolder will be sufficient to meet the needs of developing economies. “The current, traditional financial architecture cannot solve climate change. It is not wired for it, it has no capacity,” Kenyan President William Ruto told the Financial Times. Instead, Ruto proposed the creation of a new Green Development Bank funded by carbon taxes and climate levies.

The UAE, which is hosting COP28 in December, is considering creating a multibillion-dollar fund to spur clean energy investments across the world. It could amount to tens of billions of dollars of lending at market rates, Politico reported. The proposal has raised concern among developing countries, which need below-market-rate finance to leapfrog to cleaner energy sources, invest in resilience, and unlock private capital.

The lending body the UAE envisions may complement the existing architecture but cannot substitute for it, Joe Thwaites, senior advocate on international climate finance at the Natural Resources Defense Council, told me. Thwaites said a more urgent question was whether the UAE, which got rich on oil and gas and has some of the world’s highest per capita emissions, will contribute concessional finance to global funds, such as the GCF.