What Aid Agency Leaders Should Worry About on Climate Finance

One of my overwhelming preoccupations over the last 10 years as a chief executive of international aid organisations, first as permanent secretary of the UK’s Department for International Development and then as head of the UN’s humanitarian affairs, has been that there was never enough money, even when budgets were growing.

The aid industry has always been characterised by a strong focus on trying to get more money, and not enough focus on how effectively the money is spent. (What happened at the Glasgow COP this month is more evidence of that—lots of talk about getting to $100 billion, less about what money has bought so far.)

Development effectiveness really does matter. In the first decade of this century, it was a hot topic, with a series of international agreements adopted at big meetings in Paris, Rome, Accra, and Busan. But the issue has gone off the boil since then. A new survey by some of my CGD colleagues reveals that leaders in many official development organisations are no longer sure how relevant the Busan agreement of 2011 still is.

So I was pleased that this was on the agenda at last week’s Development Leaders Conference organised by CGD and the Swedish International Development Agency (SIDA).

Aid agency work on global public goods displays some of the best approaches I have seen to development effectiveness—as in the health sector, for example, where over the last 20 years we have seen both highly effective and very cost-efficient and sustained progress on malaria, polio, immunisation, and other problems. (The Gates Foundation deserve a lot of the credit for this, and the medical profession’s culture of valuing evidence has helped too.)

But some of the worst wastes of development money I have seen have also been on global public goods, especially in the area of climate change. I have followed this area for more than 30 years now, since the time I was involved in the negotiations leading to the establishment of the Global Environment Facility. (A lot of that money has been spent well, let me hasten to add.)

How development leaders can get more from their money on climate

Given what’s just happened in Glasgow, the pressures on agency chiefs to throw money at the climate problem are growing. Here are a few things that, were I still in their shoes, I would be thinking about.

Leaders can ask their climate teams how their climate projects reflect the aid effectiveness principles agreed in Busan and other international agreements. Many of them, I predict, won’t be able to say. But getting agency climate teams to act consistently on the core aid effectiveness principles—ownership, alignment, harmonisation, managing for results, and mutual accountability—would deliver a much bigger bang for the climate buck. Achieving that will require a lot of effort, persistence, and determination.

My second suggestion arises from the fact that the climate financing landscape in the development sector is unusually complex and fragmented. Multilateral organisations provide $50-60 billion a year in climate finance, and another $3 billion or so is provided by the climate funds (including those of the Global Environment Facility, the Green Climate Fund, and the Climate Investment Funds, all of which mostly act as intermediaries between financiers and operational multilateral organisations). Collectively they are now operating through thousands of implementing partners. My advice to development leaders is: Don’t add further to the fragmentation. Try to work through partnerships. It would also be a good idea, for those with the energy, to push for the requirements to access climate finance to be harmonized across funds and donors. That would ease the burden and reduce transaction costs for applicants (and for financiers).

A few more dos and don’ts for agency leaders

On the “do” list, agency leaders should:

• Invest a lot more in your agency’s professional expertise. Enthusiastic generalists (who abound in the climate space) can make ill-informed bad decisions and waste a lot of money.
• Invest more in helping developing countries build agricultural resilience not to today’s climate but to what they will face in future. Talking at length in recent years to heads of government and senior ministers in southern Africa, for example, I have been surprised how they can’t see beyond rain-fed subsistence maize and how little help they are getting in planning for the future. Funding agricultural (and related) research has good returns. Remember the Green Revolution?
• Invest more in disaster preparedness. More and bigger storms and floods are coming. There is a lot of easy stuff with high returns to do here, including in modernising financing systems for emergency response. (CGD will be publishing more on this early next year).
• Given the visible failings of the policy framework for the energy sector in many countries (with inefficient subsidies, bad regulation, irrational pricing, and distortionary investment regimes), do invest more in helping to build better policymaking capability in that area. Solar is still significantly stymied in the Sahel not because of a shortage of sunny days but for security reasons—both physical security and investment security.
• Invest more in long-term capacity-building partnerships with think tanks, universities, and other civil society organisations—but in a way which genuinely builds local capability. Acting effectively on climate remains a frontier issue in many countries and these institutions can help them accelerate the journey.

And on the “don’t” list, agency leaders should not:

• Make the mistake of thinking you can quickly achieve a lot with a little. The huge majority of small-scale initiatives in this sphere fail. It is better to do fewer well-chosen things in a small number of places over many years. So be selective.
• Co-finance with the private sector unless you know what you are doing—which generally only the development finance institutions, bilateral and multilateral, do. Throwing grant money at private businesses is often even worse. I understand the political pressure around this, but I have seen huge amounts of money poured down these tubes often by well-intentioned people. On a related point, aid agencies need to be careful not to get wrongly seduced by some of the current innovation fads. Many of the transformational possibilities for the global economy, like green hydrogen, are unlikely to be relevant to most developing countries for at least another 10 years.
• Ignore the fragile and poorer states. There was a lively debate at last week’s CGD-SIDA conference over the right balance between country and thematic budgeting. There are different views on this, but my observation is that for a national donor (e.g. a bilateral agency), moving to more thematic programming often in practice means doing two things: (a) adding an intermediary and (b) changing your country focus, because everything at the end of the day happens at the country level. Moving towards a more thematic approach for budgeting has often in the past tended to take money from the poorest countries to better off ones. (The global health funds are a partial exception.) One thing that is not contested is that climate finance is currently passing the poorest countries by—and the fact that they are hard places to work does not make that acceptable or wise.
•  Make big project investments where the country’s policy framework is not supportive of them. That’s how white elephants are made.

Development agencies will probably end up playing a significant role in how well developing countries cope with climate change for two reasons. First, the resources they have are, in a sense, discretionary and are more likely than national resources to be used on climate issues. Second, a lot of what will need to happen will depend on bringing new ideas into a country from elsewhere, and that is something development agencies excel at.

That said, the impact gap between spending climate finance well and spending it badly is large—so there is a high return to working on the effectiveness of a climate portfolio now. And if development agency leaders ramp up spending in a way that proves not to generate many benefits, there will be a price to pay.