In order to meet the targets set by the Paris Agreement, global concessional climate finance must increase at least fivefold by 2030. Concessional finance refers to funding provided on more favorable terms than the prevailing market rates. It is essential for advancing a low-carbon and resilient transition, particularly in sectors that are still emerging or lack viable revenue streams. Moreover, it plays a critical role in protecting the regions and populations most susceptible to the effects of climate change. By reducing the average cost of capital, concessional finance helps create markets and establishes favorable conditions for private sector involvement, ultimately bridging the multitrillion-dollar climate investment gap. However, the Climate Policy Initiative’s recent report, Global Landscape of Climate Finance 2023, indicates that concessional finance accounted for only 11% of total climate finance, with the majority being directed toward market-rate debt and equity.
The Importance of Tracking Concessional Climate Finance
Establishing a baseline for concessional climate finance is pivotal for understanding its potential for scaling up and identifying optimal directions for unlocking additional capital. This report utilizes data from the Landscape to analyze concessional climate finance flows, focusing on both international and domestic sources, with an emphasis on cross-border transactions. Our investigation relies on publicly accessible data on international concessional climate finance from 2019 to 2022, primarily concentrating on international concessional loans (affordable debt) and grants, while excluding market-rate financial instruments.
Key Findings
Growth in International Concessional Climate Finance
International concessional climate finance experienced a 50% increase, reaching USD 81 billion in 2022. Despite this growth being a positive development, it remains inadequate when compared to global financing requirements and the substantial concessions directed toward fossil fuels, which totaled USD 1.3 trillion in 2022. Additionally, international public funding for the fossil fuel sector averaged USD 47 billion per year from 2020 to 2022. Redirecting these significant funds could bolster concessional climate finance and promote sustainable development more broadly.
Increase in Official Development Assistance (ODA)
Global ODA rose by 22% in 2022, amounting to USD 287 billion, partly due to increased aid related to the crisis in Ukraine. Of this, USD 109 billion was allocated as grants, with climate-related grants constituting 35% of the total, equating to USD 38 billion.
Sources of International Concessional Climate Finance
Most international concessional climate finance originated from bilateral development finance institutions (DFIs) (33%), followed closely by multilateral DFIs (30%), and direct government funding (26%). Multilateral environment and climate funds contributed a modest 5% of the total concessional climate finance. Although the amounts from multilateral funds are relatively low, their concessional nature has the potential to drive transformative changes while building the capacity necessary to mobilize additional finance.
Diversity of Financing Institutions
Between 2019 and 2022, approximately 360 institutions provided international concessional climate finance, with around 10 institutions contributing to 70% of the total financing. While a diverse array of funding sources can enhance accessibility to concessional capital, the multitude of providers, each with different disbursement processes, can raise transaction costs and complicate logistical aspects for recipients, leading to delays in climate action.
Trends in Loans and Grants
Over the assessed period, the ratio of loans to grants remained stable, with concessional loans comprising an average of 57% and grants making up 43%. In 2022, international grant financing reached USD 38 billion, in contrast to an average of USD 22 billion from 2019 to 2021.
Target Regions for Concessional Climate Finance
Least-developed countries (LDCs) received approximately 33% (averaging USD 21 billion annually) of total international concessional climate finance, while the remaining emerging markets and developing economies (excluding China) obtained an additional 60%. Notably, Sub-Saharan Africa was the largest recipient, securing 30% of total concessional finance, followed by South Asia and Latin America and the Caribbean, each receiving 16%.
Impact of Conflict on Climate Finance
Countries experiencing fragility and conflict, such as Myanmar, Burkina Faso, Niger, and Sudan, saw a marked decrease in international concessional climate finance between 2019 and 2022. These nations received significantly less adaptation funding compared to other low-income countries, highlighting the need for improved delivery mechanisms in these challenging contexts.
Focus Areas of Concessional Climate Finance
Between 2019 and 2022, nearly 42% of international concessional climate finance was directed toward climate mitigation efforts, while adaptation and resilience projects received 36%. Financing with dual objectives (both mitigation and adaptation) accounted for 22% and has increased over time. Although dual objective financing promotes more systemic transformation, a substantial gap remains for adaptation and resilience initiatives, which are vital given the public good nature of concessional finance.
Differences in Funding Sizes
International grants tend to target projects with smaller funding amounts, with an average project size of USD 3 million compared to USD 74 million for low-cost loans. This discrepancy can deter larger institutional investors, leaving financing primarily to public development finance institutions and aid agencies.
Infrastructure Investment Focus
Approximately 37% of international concessional finance was allocated to infrastructure costs in transport, energy systems, and water and wastewater sectors. Additionally, about 15%, or USD 28 billion, was dedicated to policy and capacity-building support for national governments in developing countries, mainly through technical assistance grants. The share of such policy support, which is crucial for facilitating systemic, country-driven transformations, has seen an increase since 2019.
Status of Domestic Concessional Climate Finance
While this report primarily addresses international concessional climate finance, domestic flows also play a vital role in national climate action. These funds often manifest as subsidies or low-cost debt via fiscal transfers or through public domestic financial institutions. However, data on domestic concessional climate finance is scarce due to a general lack of transparency regarding the climate relevance of public budget expenditures.
Conclusion
With available data indicating that domestic concessional climate finance is mainly channeled by governments and national development finance institutions, it is evident that national entities are crucial to addressing climate challenges. Current statistics suggest that around 75% of domestic concessional investments originate from high-income economies, particularly Western Europe, with only 10% coming from the rest of the world.
To enhance both international and domestic concessional climate finance flows, coordinated global efforts are essential. There is a pressing need to move beyond vague calls for “private sector mobilization” towards establishing a more robust and effective framework for sustainable climate funding.
Recommendations
The report outlines several strategies for concessional climate finance providers to increase the scale and efficiency of their activities, reinforcing the necessity of international collaboration to create a more coherent climate finance architecture.
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