Financing for resilience: 3 lessons to be learned in climate finance

When it comes to accessing and making best use of climate finance, states in situations of fragility are faced with particular challenges that are largely disregarded in the current aid architecture. If we want to support the most vulnerable nations in building resilience to climate-fragility risks, we need to make sure our resources actually reach those most in need, effectively link climate, peacebuilding and development finance, and apply modalities that fit states with low capacities.

In Paris, developed countries affirmed their intention to mobilise US$100 billion annually by 2020 and to agree on a new, bigger goal by 2025 to support developing countries mitigate and adapt to climate change. This sends an important message, considering that UNEP’s 2014 Adaptation Gap Report estimates the cost of adaptation alone to increase to US$200-300 yearly by 2030 – with much higher costs in Least Developed Countries (LDCs), many of which are experiencing fragility or conflict.

States experiencing situations of fragility are among the countries most heavily affected by climate change, both because of their exposure and their limited ability to cope with these risks. However, simply increasing the overall funding volume does not guarantee that societies, particularly in states in fragile situations, are better prepared to cope with climate change for three reasons: First, in comparison to other developing countries, they experience lower and more volatile aid flows, as the report A New Climate for Peace revealed. Secondly, absorptive capacity is often limited in states that are characterized by poverty, high risk of conflict and weak governance, making it difficult for them to effectively use high aid flows. Andthirdly, climate finance programs are often too narrowly designed and fail to build resilience to the compound risks arising from climate change, conflict and development needs.

In order to address these gaps and build resilience to climate-fragility risks, three insights need to be taken more seriously:

1. Improve access to climate finance for states experiencing fragility

While aid to fragile and conflict-affected states has doubled over the past decade, amounting to 40% of total ODA in 2011, access to climate finance is still limited in fragile situations: In 2013, only 16% of public adaptation finance was disbursed to Sub-Saharan African countries, 57% of which were identified as fragile by the OECD. 43% of adaptation and 65% of mitigation finance was allocated to middle-income countries in 2013, as opposed to 22% and 10% respectively to LDCs. Aid in general is about twice as volatile and unpredictable in states emerging from conflict or political transition than in other developing countries. Poor administrative and financial management capacities make states facing situations of fragility less eligible for climate finance due to high fiduciary risks. Donors are cautious to allocate aid where it could contribute to strengthening misappropriation and elite capture of resources. Unpredictable short-term funding makes it very difficult to sustainably plan budgets and implement long-term programmes – all of which is critical for sustainable adaptation to climate change.

The most recent addition to the climate finance landscape, the Green Climate Fund (GCF) under the UNFCCC, will be used to disburse most of the promised US$100, making it a key mechanism for channelling climate funds to developing countries. The GCF has earmarked half of its adaptation investments to small island developing states, least developed countries and African states – a significant overlap with states in fragile situations. As it just became operational, little can yet be said about its accessibility. Provisions in the fund’s Results Management Framework to address the most vulnerable populations are rather weak.

However, its key provisions include funding for readiness support to developing countries. Among the more than 30 approved programmes is a grant agreement helping the Democratic Republic of the Congo, a state in a situation of fragility and protracted crisis, prepare to access investment funding from GCF for mitigation and adaptation projects. Similarly, a good example of how to support technical staff and decision makers from developing countries in enhancing access to climate funds is the Climate finance readiness training (CliFiT), developed by adelphi with support from GIZ. Its objective is to strengthen the ability of countries to get an overview of financing options, access modalities and spending rules, understand the diverse modes of access and funding priorities, and spend funds in an effective and transparent manner.

2. Use innovative aid modalities and strengthen absorptive capacities

While access to climate finance is a necessary prerequisite, the ‘how’ it is delivered is at least as important as the ‘how much’. The fragmented nature of the climate finance landscape challenges the weak capacities of states in fragile situations, as they struggle with handling the complex requirements resulting from a plethora of bilateral and multilateral climate funds through which resources are channelled. Harmonisation, a key principles of the Paris Declaration on Aid Effectiveness, is often neglected when it comes to financing adaptation and mitigation.

Pooled funds like multi-donor trust funds (MDTF) are one (although not undisputed) possibility for quickly disbursing funds that are coherent, predictable, aligned with national priorities, and reduce transaction costs for the partner countries. MDTFs like the Cambodian Climate Change Alliance or the Bangladesh Climate Resilience Trust Fund have succeeded in facilitating access to finance, but aid effectiveness principles often continue being neglected. With the GCF the climate finance landscape now disposes of a new and promising pooled funding instrument to deliver harmonised finance in alignment with national priorities.

Given the high costs of and urgent need for action on climate adaptation but limited absorptive capacity, financing climate action through budget support can be another important instrument in fragile situations. Using partner countries’ systems to the largest possible extent does not only enhance the ability to absorb funds but can also strengthen the legitimacy of weak institutions – a crucial factor for addressing the underlying causes of fragility.

The European Union’s Global Climate Change Alliance (GCCA) is already disbursing 26% of its funds through budget support to enhance aid effectiveness in climate finance. Fiduciary risks need to be carefully assessed in contexts with weak civil society supervision of government performance. Coupled with capacity-building, however, budget support can strengthen public financial management, improving the states’ ability to absorb funds, and facilitate the integration of climate action into overall efforts on sustainable development. Examples of EU budget support to states classified as fragile by the OECD (2015) include Rwanda, Solomon Islands, and Lesotho.

3. Integrated financing: be sensitive to country dynamics

2015 has not only been an important year for global action on climate change, but has also seen a major breakthrough in development with the adoption of the Sustainable Development Goals (SDGs). Goal 13 of the SDGs (“Take action to combat climate change and its impacts”) reflects the close link between development and climate action. A study by IIED has found, however, that increasing funds for narrowly-designed climate adaptation and mitigation projects risk crowding out finance for SDG implementation. This points toward the larger challenge that budgets in practice are still managed in isolation. UNDP’s 2014 ‘Financing recovery for resilience’ report even revealed that “current financing practice reinforces rather than bridges a silo approach”.

Building resilience to climate change can only be effective if it is based on a thorough understanding of the intertwined nature of challenges like poverty, conflict, and environmental degradation. For example, as many adaptation measures raise issues of distribution and equity, they need to be conflict sensitive to avoid reinforcing existing social tensions and inadvertently fuelling intergroup competition. At the same time, development measures targeting climate-sensitive sectors like food security, agriculture, employment or water cannot be sustainable unless climate change is taken into account.

The Green Climate Fund offers a unique opportunity for the donor community to systematically consider compound climate-fragility risks. Its mandate includes supporting climate-resilient and low-emission development in developing countries enabling them to achieve the SDGs. Hopes are that the GCF will also play an active role in supporting environmental peacebuilding and conflict prevention efforts. However, when the fund kick-started its first eight investments in November 2015, it had not yet agreed on specific lending criteria, and only Senegal’s and Peru’s project proposals explicitly take conflict risks into consideration. NGO representatives raised concerns that the approved project for restoring wetlands in Peru risked sparking social conflict unless it adequately involved indigenous communities.

Moving forward

Funding is essential to enable states in situations of fragility to adapt and build resilience to the adverse impacts of climate change. The Paris Agreement has reconfirmed a significant increase in climate finance provided by developed and potentially also developing countries – and now it is time to pay more attention to how it can be spent most effectively. Getting allocation and modalities right is an essential step towards ambitious climate action, and developed countries should take the three insights above as a starting point to reconsider not only how much but also how they deliver climate finance. The Green Climate Fund becoming operational opens a possibility for delivering better and more resilient climate finance, but we need to take action now to make sure it does not replicate what is already being done but goes beyond narrowly-focused adaptation and mitigation only projects. The Paris Committee on Capacity-Building that Parties agreed to establish at COP21 can support this process by devoting special attention to the needs of states in fragile situations.