The discussion about the much-needed changes in the aid architecture has become more active in recent months. Over the last 30-35 years, the aid architecture that came out of World War II (WWII) has evolved without a master plan, without an architect, in a series of ad-hoc adaptations. This has led to a messy and fragmented aid system that few understand and whose efficiency and impact are being questioned. In addition, as the devastating consequences of climate change and pandemics (think Covid, avian flu, etc.), are becoming more obvious to world citizens, and hence their political representatives, urgency of “doing something” or more precisely “doing more” about global public goods has jumped to the top of the agenda (G7, G20, Bridgetown Initiative, etc.).
One of the symptoms of both the fragmentation of the aid architecture and the push for climate action has been the astonishing growth of environment or green “climate funds”1 over the last 30 years. This paper shows that the “system” of climate funds remains very opaque. Even the number of such funds is not totally clear! Let alone basic questions like financial flows, cost of the system and impact. This lack of transparency raises questions about the efficiency, effectiveness and impact of this fragmentation. If value for money cannot be established, it is urgent to stop adding to the problem by creating more funds and rather to give priority to consolidation and rationalization.
The de facto “let one thousand flowers bloom” approach led to a plethora of climate funds...
According to the 2015 reference publication of the OECD, which is one of the very few official attempts to do an inventory of green funds, 91 funds ares listed in their inventory database.2 Another source of green funds is the Climate Funds Update maintained by ODI, however it provides an incomplete picture, listing only 28 active funds (Climate Funds Update, 2022). In fact to date, at least 94 “Climate Funds” have been established since 1991. The Global Environment Facility was the first in 1991 and the most recent is the Climate Finance Partnership (CFP)3 Fund in 2022. Based on an internet research conducted by Ieva Vilkelyte from the Centennial Group, 13 of these 94 climate funds have “disappeared “(due to formal termination and/or lack of recent information or evidence of an active website). This leaves a universe of 81 climate funds active today (see Annex 1 for the estimated list of 81 active funds and the selection methodology).
As shown in figure 1 (below), this “enthusiasm” in creating climate funds peaked during the 2006-2014 period, with an average of 7 new climate funds per year. And it seems that the trend recently picked up in 2021-2022.
Number of Green Funds by Year of Establishment
Note: above covers 88 active and terminated funds (nota bene: establishment year could not be determined for six of the funds).
Sources: OECD (2015b); individual fund websites; see Annex 1 and 2.
Most climate funds are multilateral, and of these, more than half are housed in multilateral development banks (MDBs) or UN agencies. Of the estimated 81 active funds in Annex 1, 62 are multilateral funds (50 are housed in MDBs, bilateral agencies, or in UN agencies with the remaining 12 standalone) and 11 are bilateral funds (8 are housed in bilateral aid agencies with the remaining 3 standalone)4. In total, 73 of these funds are financed by public monies (partially or entirely). The remaining 8 are private. Although eligibility leans towards public sector applicants, more than half of the 81 active funds accept private sector applicants, a welcome feature. However, the number of applications received, or the attribution/selection results are unknown, making it impossible to assess where the funds finally go and to which entities (public or private).
Green Funds by Applicant Eligibility
Note: above covers the 81 active funds.
Sources: OECD (2015b); individual fund websites (see Annex 1); author's estimates.
Based on the OECD fund inventory and our own review, we found that nearly half of the funds encompass both mitigation and adaptation, a third focuses on mitigation only, and about 19% focus exclusively on adaptation.
Share of Green Funds by Focus Area
Note: above covers the 81 active funds.
Sources: OECD (2015b); individual fund websites (see Annex 1); author's estimates.
...With very limited insights/transparency
The wide and diverse universe of climate funds begs a series of important questions:
how much do the 81 active funds commit and disburse per year (in aggregate and in per objective and countries)?
to what end: mitigation, adaptation, biodiversity, technical assistance, investment projects, etc.?
to whom: private sector? Public sector?
in what form: grants, loans, equity, guarantees?
do they leverage their resources?
who finances these funds?
what is their consolidated budget?
with what results and impact?
Unfortunately, few answers exist on such basic questions because this information is not available to the public. The difficulty in aggregating annual fund commitments and disbursements arises from the fact that the 81 fund websites have vastly different standards regarding public reporting. For example, some funds produce annual reports while others only provide general information directly on their website. And, even for funds that produce annual reports, many report only cumulative financial results rather than annual financial results. In addition, these reports often do not provide information on both commitments and disbursements (most often only on the former). Another difficulty in aggregating data stems from the fact that some fund websites are outdated or do not report in a timely manner. It does not mean that the information does not exist, but it is most likely restricted to the funders of these funds.
The answers we can give are indirect, limited, and sadly disappointing: besides climate funds, other forms of climate finance already exist and have developed in leaps and bounds over the last 30 years. Yet, surprisingly, very little consolidated information exists. On the amounts and flow of climate finance by type of channels (total, national banks, green bonds, bilateral and multilateral channels, climate funds, etc.), the only consolidated information that we found is in: (1) the Climate Policy Initiative (CPI) in their very useful “Global Landscape of Climate Finance 2021” (CPI, 2021, and (2) the “Report of the Standing Committee on Finance (SCF)” issued on October 2022 for the Conference of the Parties (COP) (UNFCCC, 2022). Both sources underline that their aggregated estimates are plagued by many issues related to lack of harmonized definitions and reporting standards.
In 2019-2020, the annual average of total climate finance flows amounted to $632 billion according to the CPI and $803 billion according to the SCF. Despite the huge difference in total climate finance estimates, it is interesting to note that both sources are consistent in showing that one of the smallest sources of climate finance are the estimated disbursements of the multilateral climate funds: $4 billion according to the CPI and $3.1 billion according to the SCF. This is respectively 0.6% and 0.3% of the total of climate finance flows. May be a better and fairer comparison is with the average annual disbursement flows financed by the own resources (i.e., excluding the disbursement of the climate funds that they host) of the Multilateral Development Finance Institutions (DFIs) and of the Multilateral Development Banks (MDBs) in 2019-20. According to CPI, the Multilateral DFIs disbursed $68 billion on climate projects and, according to the SCF, the MDBs disbursed $38.3 billion on climate projects and programs.
This means that the disbursements of Multilateral climate funds represent only 5.8% of the climate disbursements of Multilateral DFIs in 2019-2020 according to CPI, and 8% of the MDBs disbursements according to SCF.
Another way to look at this data is to compare the estimated total disbursements of multilateral climate funds of $ 4 billion (by CPI) and $ 3.1 billion (by SCF) to the 62 publicly funded multilateral funds (50 housed in MDBs or UN agencies and 12 standalone funds)5. This is a tiny amount of disbursement flows per active fund. Even worse, if we subtract the two largest funds (namely the Green Climate Fund and the Global Environment Facility – which have the most transparent financial data on their websites – see Annex 4) that showed disbursements of $1.3 billion in 2020, this leaves an aggregate disbursement of $2.7 billion spread over 60 funds if we take the CPI estimates and $1.8 billion if we take the SCF estimates. This is equivalent to a yearly average disbursement of, respectively $45 million or $30 million in 2019-2020, per multilateral climate fund
This system cannot provide value for money for either the donors or the recipients of these funds
The very limited publicly available information prevents any deep analysis. However, this opacity itself and the tiny average amounts of disbursements per fund raise serious questions.
The first question is to try and understand why “official donors” de facto participated in this seemingly unchecked “exuberance”? There are many drivers. First and foremost, it is a way for official donors to earmark “climate” and use the existing organizations that are generating the projects (MDBs, UN, bilateral agencies), thereby ensuring that their political priorities are catered to. While each new fund may have a good rationale when taken individually, when taken as a “system”, the plethora of funds has not yet produced the necessary results at scale and may never do so. And finally, there is simply no coordination, “no pilot in the plane”, or no “architect” to ensure the efficiency, effectiveness and impact of the climate fund system. As a result, the multiplication of climate funds has added to an already badly fragmented aid system as it evolved over the last 30-40 years (World Bank, 2021a).
A mitigating factor providing a possible rationale, is budgetary. By housing many of the climate funds in the existing MDBs, UN agencies and bilateral aid agencies, which means using their services, a lot of budgetary expenses can be saved by official donors. These expenses can add up very quickly: human resource policies and management; IT systems; financial management through use of the treasury functions for investment and cash management; legal services; procurement; application of environment, social and governance (ESG) standards; due diligence and compliance policies and implementation; project design and supervision; etc.
And most of the time, these services are charged at marginal rather than full cost. So, by limiting the dedicated staffing of such funds to three basic functions (as opposed to stand-alone funds), namely fund raising, allocation of the funds raised, and reporting and convening the ad hoc governance set up by and for the donors of these funds, the creation of each of the publicly financed 58 Climate funds housed in MDBs, UN agencies, or bilateral agencies may not look so expensive. Still, even such limited budget costs add up when the number of funds increases, especially in view of the small amounts disbursed into real projects on the ground.
Another charitable interpretation of the benefit of the multiplication of the climate funds is that it may encourage innovation and addresses niche issues. In practice, however, it is far from being proven. And hard questions need also to be asked as to the knowledge generated by the “system” of these funds and how it is shared given the lack of the most basic information, and of any independent body to evaluate, curate and disseminate the possible knowledge being generated. As a result, successful good practices and possible innovations cannot be scaled up. Knowledge management is hard enough within a single organization with an established research department and an independent evaluation function (e.g., the World Bank Group's Independent Evaluation Group, which reports directly to the board of directors), let alone of a system made of 73 publicly financed entities with no common definitions, standards or oversight.
In addition to being most likely sub-optimal for the efficient allocation of global taxpayer's monies and contrary to good fiscal principles, the fragmentation of the climate funds system is also a “tax on capacity” for recipients' governments and/or private sector entities. This “capacity tax” is a hidden but very real and heavy tax on recipients' governments that must deal with hundreds of aid institutions and financing channels, with their own rules and procedures. This cost of aid fragmentation is well documented6, and it is the heaviest for the poorest countries where administrative and implementation capacity is generally weak.
Conclusion: time for a serious reset
The analysis above which remains a first attempt for lack of relevant information raises grave doubts about the value for money and impact of the current Climate Funds system, and yet, new funds are being contemplated. Before embarking on adding to the fragmentation of funds (and/or other publicly-funded multilateral new channels of climate finance), it is urgent to increase the transparency, efficiency and impact reporting of the existing climate funds. This would be a useful first step towards rationalizing and consolidating this channel of climate finance. This will, among other things, facilitate the much-needed coordination with recipients' country strategies or the “country platforms” that the G20 recommended to help rationalize aid flots (CGD, 2020).
Such consolidation could start with the 62 multilateral, official donors' financed climate funds. It could be done in many ways: by hosting institutions (World Bank, UN); along key specific functional specializations (e.g., mitigation, adaptation, biodiversity); geographies (global or regional); type of recipient executing agencies involved (public or private); or maybe even by financial instruments (technical assistance, loans, equity, grants, guarantees). Or a combination of the above. For the surviving consolidated funds, harmonizing definitions and standards, setting up transparent reporting requirements on financial flows and results, as well as improving knowledge management should be a prerequisite before setting up new multilateral donor funded climate funds.
The inconvenient truth is that it is politically easier and tempting to create yet another climate fund to show that “we are doing something” rather than making the painstaking effort to ensure efficiency and effectiveness and build on lessons learned from what we have been doing already for 30 years. Beyond the specific example of the climate funds, the fundamental issue is that the aid architecture evolved anarchically, without a blueprint, in a series of ad hoc adjustments. It is true however that the geopolitical and economic realities today are very different from what they were when the post-WWII system was created. If anything, there are more players (new official donors as well as private foundations), an evolving balance of power, and new major challenges.
As a result, consensus is harder to achieve, and some degree of additional complexity is inevitable. But rationalization is essential for both efficiency and legitimacy reasons. At least, the “traditional” donors – the OECD's 33 Development Assistance Committee (DAC) members, for example – should try to improve parts of the existing system that is under their purview. Given the urgency, climate finance should be an obvious candidate.
March 6, 2023
