Climate finance is at the forefront of the climate change discourse as a critical tool for achieving mitigation and adaptation outcomes. While policy makers in much of the developed world have been tasked with combating climate change, developing nations continue to lack the necessary socioeconomic and geopolitical infrastructure to undertake strong policy measures (Baldwin-Cantello et al. 2020).
Climate finance is expected to bridge this gap, allowing developed nations to fund critical infrastructure and policy interventions that can help mitigate the impacts of climate change in developing countries while facilitating adaptation to adverse climatic conditions. Being multidimensional, it can impact various sectors and areas, including manufacturing, energy generation and management, healthcare, agriculture, and resource scarcity. While this is the vision for climate finance, it is evident that not enough is being done (UNEP 2022).
Figure 1: Total Funding for Climate Change Across Funders, 2013–2021 ($ billion)
Source: OECD (2022).
The Problem at Hand
The issue is multifaceted—put simply, there is not enough funding, and the funds being allocated are highly concentrated, both in terms of sectoral allocation and initiative allocation (mitigation versus adaptation). The instruments that predominantly fund these initiatives (loans) are also not flexible enough to accommodate the evolving needs of climate finance in developing nations.
While funding has increased steadily over the years, it is still short of the intended $100 billion target set out at COP15 (Figure 1). Meanwhile, nearly half of the funding has been directed toward only two sectors—energy and transportation (OECD 2022). As a result, mitigation has the lion’s share of financing, accounting for over 60% of all funding. This concentration can be easily explained by examining the instruments predominantly leveraged to fund climate change initiatives. Debt leads the pack, accounting for 72% of all funding extended for climate change initiatives, with grants accounting for 25%, and only 3% coming through in the form of equity (OECD 2022).
Funding instruments play a significant role in the allocation of funds. With funding primarily being extended in the form of debt, the focus shifts to maximizing cash flow returns on funds allocated. While funding should be directed to initiatives with the greatest returns (with the expectation that these initiatives would have the greatest impact), climate change management is far too complicated to simply adopt standard capital allocation and project management strategies. The effectiveness of initiatives, particularly adaptation initiatives, is strongly influenced by the socioeconomic intricacies and political complexities of developing countries. Policy makers in developing countries may have more pressing issues to address—food security, water and sanitation, healthcare, education, economic inequity, and infrastructure development—that are critical for ensuring the livelihoods of their populations.
Integrating climate change goals into this policy mix makes the task even harder. Developing nations need funds to underwrite the risk of ever-changing economic and climatic conditions while ensuring continual growth and socioeconomic development (which more often than not come at great cost to the environment). This means that funding is primarily channeled into low-hanging endeavors. The energy and transportation sectors enjoy 46% of all funding, which is put toward mitigation strategies, such as deploying infrastructure to tap into renewable energy, modernizing transportation infrastructure, decommissioning inefficient technologies, and so on.
This approach satisfies both the funders (as they can fund large-scale initiatives, with a clear path to the repayment of the funds provided) and the policy makers receiving said funds (as they also have a clear path of implementation in tandem with progressing toward global climate targets). However, this leaves adaptation measures by the wayside, further marginalizing vulnerable stakeholders, such as farmers. Farming communities suffer from asymmetrical climate risk due to their high reliance on climate patterns for their livelihoods, but funding rarely addresses the imminent problems they face (Reddy and Rahut 2025).
The private sector takes a very different approach—capitalist models value optimization and efficiency over everything else. While it is fortuitous that these strategies align with climate change management, not enough is being done in the private space (Barbara and Hadap 2024). While efficiencies are being achieved through improving technologies, driving down costs, and reducing the carbon footprint of production activities, these are more often than not offset by higher production activities to maximize revenues and claw back returns on investments made into efficiencies. More carbon-efficient processes have also shown a significant addition of value to shareholders, indicating the legitimate competitive advantages of adopting more efficient processes while also furthering the fundamental goal of private corporations, which is to maximize shareholder value (Trinks et al. 2020).
The Way Forward
The failure to balance mitigation with adaptation leaves the world vulnerable to collapse (UNEP 2022). The challenge ahead is to ensure we survive long enough to see the benefits of large-scale mitigation initiatives. Not enough is being done to help the most vulnerable sections of the developing world cope with climate change and transition smoothly into a post-climate crisis society. Asia and the Pacific faces a shortfall of nearly $800 billion in climate financing, despite reaching an unprecedented $1.3 trillion in funding (Basu and Lim 2024), indicating the true scale of the financing requirements.
The Asian Development Bank (ADB) encourages more diverse funding and valuation modalities, accounting for policy-specific requirements along with more abstract assessments, such as project readiness and result-based lending. The handling of the LIBOR transition has established ADB’s commitment to sustainable financing by providing robust fallbacks for interest rate calculations and the adoption of rates that are best suited based on the region and working group. ADB also has a robust evaluation framework with multimodal performance indicators, allowing for a more comprehensive evaluation of the financing portfolio.
However, more funding needs to be directed in the form of grants and equity, ensuring there is sufficient flexibility to accommodate the evolving needs of climate adaptation. The reliance on traditional project finance and capital management methodologies must be shed, and newer methodologies such as typology analysis, impact indexing, and expert paneling need to be leveraged to ensure financing is indeed directed toward areas with the greatest socioeconomic impact, contributing to a direct uplift or relief of vulnerable peoples in developing nations.
There is a need for more robust requirement and impact assessment methodologies, especially in the adaptation initiative space. The development and adoption of frameworks such as the Adaptation Policy Credibility framework (Olazabal et al. 2018) provide further leverage to channel funding to adaptation initiatives. The global economy must establish a meaningful balance between adaptation and mitigation initiatives to ensure continued growth and progress.
References
Baldwin-Cantello, W., M. Clark, S. Cornelius, A. Francis, J. Ghazoul, J. Gordon, S. Halevy, N. Matthews, P. Smith, D. Tickner, M. Wright, and L. Young. 2020. The ‘Triple Challenge’ and Tackling Trade-Offs Between Climate, Food and Biodiversity Goals. Global Landscapes Forum and WWF.
Barbarà, L., and A. Hadap. 2024. Private Climate Finance: 4 Things to Consider. 17 April. World Economic Forum.
Basu, R., and C. H. Lim. 2024. Explainer: How Asia Can Unlock $800 Billion of Climate Financing. 29 January. IMF Blog.
Olazabal, M., I. Gallaraga, J. Ford, E. S. De Murieta, and A. Lesnikowski. 2019. Are Local Climate Adaptation Policies Credible? A Conceptual and Operational Assessment Framework. International Journal of Urban Sustainable Development 11(3): 277–296.
Organisation for Economic Co-operation and Development (OECD). 2022. Climate Finance and the USD 100 Billion Goal.
Reddy, V. R., and D. B. Rahut. 2023. Multifunctionality of Rice Production Systems in Asia: A Synoptic Review. Asian Development Bank Institute.
Trinks, A., M. Mulder, and B. Scholtens. 2020. An Efficiency Perspective on Carbon Emissions and Financial Performance. Ecological Economics 175, 106632.
United Nations Environment Programme (UNEP). 2022. Adaptation Gap Report 2022: Too Little, Too Slow – Climate Adaptation Failure Puts World at Risk.
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