How Do Development Agencies Support Climate Action?

It is widely recognized that climate change presents an acute threat to global development that could push an additional 100 million people into poverty by 2030. Development agencies are called to respond to this threat—which underlies both the Sustainable Development Goals (SDGs) and the Paris Agreement—by incorporating climate objectives into development programs and across portfolios.

This blog undertakes an initial analysis to map the ways that development agencies are integrating climate objectives into their development programs. Using a review of climate-finance data and policy documents from all 30 bilateral members of the Organisation for Economic Cooperation and Development’s Development Assistance Committee (OECD-DAC), we identify trends in concessional climate spending and summarize key instruments used to integrate climate mitigation (preventing climate change) and adaptation (enabling countries to cope with the effects of it) objectives into development programs. Development agencies are currently dealing with COVID-19–but will need to balance this with the ongoing threat of climate change.

DAC members have been (re)committing to aligning aid with climate objectives since the 1970s

Calls for providers to use aid to support environmental protections in developing countries are not new. The need for strategic action and resources to address climate change can be traced to the Stockholm Declaration in 1972, which called on providers to deliver technical and financial support for climate-related issues in developing countries. In 1992, the Rio Declaration reaffirmed the interlinkages between development and the environment, culminating in a “Grand Bargain” where the global North agreed to finance sustainable development in the South. By 2006—and on the heels of the G8 Gleneagles Summit and further calls for progress on climate and development—DAC providers committed to working “to better integrate climate change adaptation in development planning and assistance” as part of the Declaration on Integrating Climate Adaptation into Development Co-operation.

Presently, action to limit climate change and reduce environmental degradation features as a core goal of the SDGs, and in alignment with climate targets outlined in the Paris Agreement. The Paris Agreement, which is supported by all DAC providers except the United States, renewed a commitment from 2009 to scale-up climate-related finance by an additional $100 billion per year by 2020, some of which is financed from aid. The latest OECD estimate shows that $71 billion was mobilized as climate finance in 2017, up 21 percent over the prior year, although it is unclear how much is additional.

How much are DAC providers spending on concessional climate-related development finance?

To calculate total concessional spending on climate-related development finance, we sum bilateral spending on development activities categorized as having either a “principal” and “significant” focus on climate (i.e. climate is either a primary or secondary objective as specified using the Rio climate markers) and imputed multilateral contributions as reported in the OECD’s Climate Finance dataset.

The data shows that in 2017, DAC members provided approximately $36 billion as concessional climate-related development finance, the equivalent of 22 percent of total aid committed by DAC providers that year. Over time, concessional commitments for climate-related development spending increased from $21 billion in 2012 to a high of $36.6 billion in 2016, most of which was driven by rising bilateral allocations for climate objectives (see Figure 1).

Figure 1. Climate-related ODA commitments from DAC providers by channel, 2012-2017

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Source: data compiled from the OECD’s Climate Finance Dataset, provider perspective. Figures report “concessional and developmental” climate commitments for OECD-DAC members only, and include funding coded with either a “principal” or “significant” climate objective. Figures are reported in constant USD, 2016 prices. Data is not reported on a grant equivalent basis.

Over time, the bulk of bilateral climate-related development funding from DAC providers has been allocated for mitigation purposes, yet the share has fallen from 62 percent in 2012 to 54 percent in 2017. The multilateral providers also tend to focus on mitigation. The commensurate rise in spending on bilateral adaptation occurred alongside global calls to deepen support for adaptation and climate resilience, including in the Paris Agreement and the Sendai Framework for Disaster Risk Reduction, both in 2015.

Which DAC providers give the most concessional climate-related development finance?

Between 2015 and 2017, the largest DAC providers of climate-related concessional development finance were Japan, Germany, and EU institutions (excluding the European Investment Bank), which committed an average of $9.7 billion, $6.7 billion, and $4.8 billion on climate per year, respectively (see Table 1). These amounts are measured as commitments and report the face-value of the finance (not grant-equivalent). Together, these providers accounted for almost 60 percent of all concessional climate-related development commitments over this period. Notably, the bulk of climate-related development spending allocated by the largest providers—Japan and Germany—was committed as concessional lending.

Across DAC providers, there is variation in how climate spending is split between mitigation and adaptation priorities (Figure 2). Norway committed the largest average share of its bilateral climate-related development finance for mitigation at 84 percent; Norway’s International Climate and Forest Initiative, its main climate funding instrument, works to reduce emissions from deforestation in developing countries, with Brazil as its largest recipient. Yet the majority of DAC providers prioritize adaptation (18/30) or have an almost even split between objectives (another 5/30).

Figure 2. Average percentage of climate-related development finance by provider and objective, 2015-2017

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Source: data compiled from the OECD’s Climate Finance Dataset, provider perspective. Figures report “concessional and developmental” climate commitments for OECD-DAC members only, and include funding coded with either a “principal” or “significant” climate objective. Figures are reported in constant USD, 2016 prices. Spending that address both mitigation and adaptation priorities (or “overlap”) is split evenly between the objectives. Hungary is excluded as it only reports climate finance through multilateral institutions for 2015-2017.

Four ways development agencies are integrating climate spending in development programs

In light of the continued calls to scale-up climate action as part of the broader development agenda, we reviewed the policy and strategy documents for all 30 DAC members to understand how climate objectives were being integrated into their portfolios, including in the 78 percent of aid not linked to climate.

Our review showed that all DAC providers include climate action as a priority of their development activities, while half of the DAC members produce separate “climate and development” strategies. Development agencies have also adopted a range of tools to include climate action across their activities. Some of the main approaches used are:

• Climate screenings and assessments: At least two-thirds of DAC providers have guidance and processes in place to screen activities for climate-related risks and opportunities, and to mainstream climate objectives throughout the lifecycle of development engagements. For example, Switzerland’s Climate, Environment and Disaster Risk Reduction Integration Guidance is used to consider whether program sustainability could be impacted by ongoing climate change, as well as whether planned interventions could exacerbate greenhouse gas emissions. Development agencies vary, however, in terms of how systematically the guidance is applied (across all projects versus a subset) and the degree of transparency around the assessment criteria (from fully published to only being referenced in strategy documents).  
• Climate-focused funding mechanisms: Some providers—notably the UK, Norway, Germany and Denmark—have created separate funds for managing climate-related development spending. These mechanisms tend to be co-managed by environmental ministries and development agencies, and essentially earmark part of the development budget for climate-related activities. Examples include the UK’s International Climate Finance and Germany’s International Climate Initiative.
• Forward targets on climate: Most DAC providers (17/30) use forward spending targets to indicate either the share or volume of aid budgets that will support climate objectives. For instance, in 2017, Sweden pledged to increase funding to climate change to 28 percent of aid by 2020, while Canada committed to spending $2.65 billion on climate finance between 2015-16 and 2020-21. Notably, Luxembourg’s recent strategy committed to making its international climate finance “additional” and will not count climate funding as part of its aid spend.
• Contributions to multilateral agencies: All DAC providers allocate at least a portion of their climate-related aid via multilateral institutions. Between 2012-2017, climate commitments to multilateral institutions—both “climate verticals” (multilateral financing mechanisms that focus exclusively on climate) and multilaterals that support climate as part of their portfolio—increased from $1.5 billion to $5.8 billion (see imputed multilateral contributions reported in Figure 1). Since 2015, the Green Climate Fund, established in 2010, has been the single largest multilateral for climate, with cumulative contributions totalling $8.2 billion from all providers as of February, 2020.
• Measuring and valuing climate spill-over: Beyond these, development agencies have begun using other novel approaches to integrating concessional climate spending. The UK’s Green Finance Strategy, for instance, announced plans to use an “appropriate carbon price in relevant bilateral programme appraisals” as part of its commitment to align UK aid with the Paris Agreement, while Japan’s International Cooperation Agency (JICA) estimates GHG reductions across climate mitigation projects, using guidance specified to key sectors including energy, forestry, transportation, and waste management.

A more coherent climate approach

It’s clear that climate is receiving significant attention and resources from OECD providers with over a fifth of aid provided with climate as a principle or significant objective. There’s also a wide variation in the extent to which this is provided for mitigation and adaptation. In the non-climate focussed three-quarters of aid budgets, most providers are “screening” their spend but with no single approach–and we’ll be delving deeper into whether those approaches are enhancing effectiveness.

Earlier work from CGD has highlighted how climate spend can be ineffective and showed that mitigation effort could be misdirected in the poorest countries. We’ll be exploring these issues over the coming months to identify principles and practices that can accelerate progress on tackling climate change in the best way for those who need support most.

With thanks to Ian Mitchell for his thoughtful comments.

This blog has been updated on February 2 to update the references to climate-related development finance.