Is climate finance reaching the most vulnerable?

When Storm Daniel swept through the port city of Derna in Libya last September, heavy rainfall burst two dams, unleashing a flood that devastated neighborhoods and claimed thousands of lives. Scientists concluded global warming made the event 50 times more likely and almost 50% worse.

The United Nations pointed to lack of investment, worsened by decades of conflict. Aging infrastructure just couldn't cope with the excess rainfall. The UN said money to rebuild decaying dams and to set up early warning systems could have saved many lives. 

Funding for climate-related projects, such as replacing failing infrastructure, has become ever more important as planetary heating increases extreme weather events. But getting finance to where it needs to be, is not easy. 

"The amount of money coming in is far too low [...] and the money that is coming in isn't being very well utilized," said Henry Neufeldt, head of impact assessment and adaptation at the United Nations Environment Program (UNEP) Copenhagen Climate Center. 

All about the money 

Globally, around $1.5 trillion (€1.4 trillion) flowed into climate-related projects in 2022 and 2023, double that spent in 2019, and around a fifth of what was invested in fossil fuel subsidies, according to experts at the Climate Policy Initiative, which tracks climate funding. 

"[Current climate financing] is just 1% of global GDP — that's nothing when we are talking about 8 to 9 trillion in needs between 2030 and 2050. We need at least a five-fold increase," said Chavi Meattle, a manager at the initiative.

Most climate-related money the organization tracked went to projects within the funding country. Much of that was spent in industrialized nations and emerging economies. 

Climate finance is generally split into funds for mitigation — such as building out renewables to help move away from fossil fuels. And adaptation, which is about measures that help countries cope with the impacts of climate change, like flood protection.

And developing countries need more assistance to help with both. Michai Robertson, senior advisor for finance for the Alliance of Small Island States, said these regions struggle to pay for climate adaptation and mitigation. 

"To adapt or to change the way you do daily things to become more resilient to [climate change], it's really costly, right?" Robertson said, adding that more frequent extreme weather events are making people's lives harder. "Because they are happening more often, it enters a cycle where it regresses all the development gains that you've done."

Mobilizing international climate finance

Poorer countries in the Global South, most of which have done little to contribute to global warming, tend to be particularly vulnerable to climate change impacts like heat waves, heavy rain, and drought.

In 2009, industrialized states agreed to financially support poorer Global South countries — to the tune of $100 billion annually by 2020. 

The idea was that these funds would help less well-off nations better cope with climate change impacts, perhaps by building sea defenses, expanding renewables or fortifying infrastructure against heavy rains. 

Though the $100 billion goal was finally reached, albeit two years behind schedule, the target is up for renegotiation at the COP29 climate conference in Baku, Azerbaijan. 

"One of the key challenges with this goal is getting it [the money] to the people that need it in forms that are useful to them and in a timely way," said Joe Thwaites, senior advocate on international climate finance at the Natural Resources Defense Council. 

Lower capacities for accessing finance

Until now, financing has been largely project-based. Poorer countries can access money by negotiating bilateral agreements with industrialized countries. Applications also run via multilateral development banks like the World Bank or designated entities such as the Green Climate Fund.

But experts say accessing financing has been particularly difficult for the most vulnerable players, like the least developed countries and small island nation states. Of all developing countries, those with a higher income receive most international climate financing per person. 

"Many of these international financial institutions are built and designed, and their processes are built and designed in a way that takes into consideration the biggest economies that access their funding," Robertson told DW.

For example, a small island developing nation like Tuvalu might be expected to get three separate quotes for goods or services for a climate-related project, he said.

"Tuvalu has a low tens of thousands of people and maybe only one service provider that is able to render the service...These are the kind of real things where the processes are not built for the smallest or in a context-specific way," he told DW. 

Another problem, say development experts, is that each fund operates entirely separately and has different rules, meaning applications can take years. This can exclude smaller and least developed nations with fewer resources to commit to such lengthy processes.

"That is a global challenge. You cannot say, 'it's your fault you're poor, so we can't give you money because you don't have the capacities to ask for it'," said Sabine Minninger, climate policy advisor for aid organization, Bread for the World.

Financing low-income economies 

Most climate finance under the $100bn pledge falls under mitigation. But least developed countries and small island developing states receive a higher share of adaptation funding. Between 2016 and 2022, almost half the funding that went to them was for adaptation, much of it as grants that don't have to be repaid.

Adaptation funding accounted for $28 billion of the international climate finance pledge in 2022 and is steadily growing. But UNEP estimates there is an annual shortfall in adaptation money flowing to developing countries of between $187 and $359 billion. 

Of the adaptation projects that are being financed through climate funds, the UN's climate change agency, the UNFCCC, has evaluated around half to be either unsatisfactory or unlikely to be sustainable without further funding.

Tapping into private finance 

Most climate funding goes to helping developing countries reduce their emissions and meet climate targets. But much of that money is in the form of loans.

"It's a huge issue that we face, that where it has been counted towards the $100 billion, but essentially the reflows are just going back into the countries that provided it — plus interest. So, in the end, who is supporting who?" said Robertson. 

The OECD found most loans provided by multilateral climate funds and development banks were given out at market rather than discounted rates, exacerbating difficult conditions in already debt-laden developing nations. Direct country-to-country funding does better: Around 80% of such loans came at discounted rates.  

Analysts say a mix of financial mechanisms, including loans, are needed to bolster financial goals.

If a local community invests in an adaptation project like an early warning system, for example, it is unlikely to yield a financial return and so a loan may not be the best option, said Thwaites.

"But for a mitigation project that might be fine because renewable energy projects can lower fuel bills and can generate profit in some cases and so a loan might not be inappropriate," he added. 

Mobilizing private investment is considered critical for raising the amount of financing needed to help developing countries. But for many of the least developed states, political instability or conflict can put investors off. 

Still, multilateral development banks can play a part in limiting the risk for private investors, said Ambroise Fayolle, vice-president of the European Investment Bank, the lending arm of the European Union. 

"We help those private sector companies — be it financial institutions or not — to be supported by the public entities by having some form of guarantees, for example," he said.

Avinash Persaud, special advisor on climate change to the president of the Inter-American Development Bank, said traditional guarantees don't go far enough and that more needs to be done. 

"They could guarantee a portfolio of loans rather than guaranteeing each loan. That would mean many of the loans have to go bad and then they will put in some money. I think we need to have more tools to de-risk private investors coming to developing countries," he said.

The science is there, now the money

This year will likely be the first to see global temperatures overshoot the 1.5-degree Celsius (2.7 Fahrenheit) temperature limit set out in the Paris climate accord. It is up to Global North governments not only to slash their own greenhouse gas emissions but to help countries in the Global South do the same — and to help them cope with the consequences of the climate crisis, which are already being felt, say experts.

"The vast majority of people and governments are convinced we've got climate change, and we need to mitigate the climate, we need to adapt. There's an understanding of the science, now we need the money," said Persaud.

Edited by: Tamsin Walker, Gianna Grün

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