Aligning Development Co-operation and Climate Action

3. How can development co‑operation align with the objectives of the Paris Agreement?

Abstract

This chapter presents a framework for how development co-operation can align with the Paris Agreement by supporting increased levels of ambition for tackling climate change and ceasing activities that undermine sustainable development.

At home, donor countries and providers can address these issues through their own strategies, policies and operations. In developing countries, providers should support central, in-country actors to take ambitious climate action by including climate objectives in overarching development strategies and sector policies and plans. At the system level, basic definitions and common approaches should account for the climate dimension of sustainable development; providers should tackle fragmentation in data, finance and project standards; and providers should create a partnership to achieve systemic de-risking of low-emissions, climate-resilient infrastructure investments in developing countries.

In brief

• Development co-operation should help developing countries to address some of the main challenges they face in co-ordinating development and climate policy. Collectively, the existing nationally determined contributions are not ambitious enough to achieve the objectives of the Paris Agreement. Moreover, very few countries have prepared holistic, long-term low greenhouse gas emissions strategies, and climate action planning often is siloed from broader development and sector planning.

• Development finance is still being used for activities that undermine sustainable development. A conservative estimate places average commitments of official development finance for upstream and downstream fossil fuel activities at USD 3.9 billion annually over 2016-17.

• Development co-operation providers are still not prioritising climate considerations in important sectors that developing countries have identified as most in need of support.

• Development co-operation providers and donor country governments have a range of changes they can make at home, in developing countries and across the development co-operation architecture at the system level to overcome the challenges and work towards Paris alignment.

• Certain of these changes are of high priority: stronger mandates and capacity for providers; more coherence in donors’ international activities; support to increase central leadership and capacity on climate in developing countries; and revision of existing rules, approaches and partnerships across the development co-operation system to more actively support the shift to low-emissions, climate-resilient pathways.

Four years on from the adoption of the Paris Agreement, the international community is reviewing the progress made in reducing emissions and increasing climate resilience (IPCC, 2018[1]).The collective commitments, as expressed in initial nationally determined contributions (NDCs), are not sufficient to halt and contain global warming and to increase resilience to climate change impacts. Similarly, only limited progress is reported on formulating and communicating long-term low greenhouse gas (GHG) emissions strategies (LTSs). Achieving the objectives of the Paris Agreement is still possible. But bold and ambitious action needs to start without delay. Building on the analysis in Chapters 1 and 2, this chapter examines key challenges and urgent priority action areas for donor governments and development co-operation providers – at home, within developing countries and at the system level – to strengthen the Paris alignment of their own activities and catalyse developing countries’ transitions to low-emissions, climate‑resilient pathways.

3.1. Development co-operation should support developing countries to eliminate inconsistencies between the objectives of the Paris Agreement and countries’ NDCs and LTSs

Development co-operation providers are increasingly aware of the urgency of climate change and its implications for sustainable development (see Chapters 1 and 2). This has led to growing momentum for including climate action in strategies, programmes and operations. Still, alignment of development co‑operation with the objectives of the Paris Agreement faces three core challenges. The first is the insufficient ambition of current NDCs. The second is the persistent absence, for the most part, of LTSs. The third is the institutional disconnect that isolates the main implementation mechanisms of the Paris Agreement, on the one hand, from other development and sector strategies and the associated policy and resources plans, on the other.

Collectively, current NDCs are not ambitious enough to achieve the objectives of the Paris Agreement

Countries have begun to act on the climate crisis. Yet it is clear that current NDCs are insufficient to keep greenhouse gas emissions in check and increase resilience to impacts of climate change. The emissions trajectory implied by current NDCs will lead to global warming of between 2.9°C and 3.4°C compared to pre-industrial levels by 2100, while weather and climate-related hazards already are putting development prospects and lives at risk because adaptation and resilience efforts so far are insufficient (IPCC, 2018[1]; World Meteorological Organization, 2019[2]). Countries need to take bolder action, and are required to prepare and submit new or updated NDCs in the coming months that go beyond current efforts and demonstrate a higher level of ambition.

Countries faced considerable challenges in developing their initial NDCs as a result of limited time, resources, capacities and expertise. Additionally, current NDCs were largely developed before the adoption of the Paris Agreement, which meant targets, actions and measures were developed in the abstract and with limited certainty regarding the rules and guidelines of the new global climate regime (Fransen, Northrop and Mogelgaard, 2017[3]). As a result, initial NDCs were often hastily compiled and did not take into account the context of national priorities, available capacities and sectoral contexts (Table 3.1) With a view to adaptation, the underlying process did not always foster consistent strategies and action; for instance, more than three out of four NDCs include adaptation components but in many cases, these components bear no clear relation to the previously introduced national adaptation plans (GIZ, 2017[4]). National adaptation plans are explicitly intended to facilitate the integration of adaptation into development planning processes across all sectors and at different levels, and are the mainstay of national adaptation planning and action for many developing countries.

Very few countries have developed a long‑term strategy to carry forward their ambition for climate action

While the Paris Agreement allows developing country governments to consider their development priorities in defining climate action, all countries need to increase ambition over time and globally, emissions need to reach net zero in 2050 if global warming is to be limited to 1.5°C (UNFCCC, 2015[5]); (IPCC, 2018[1]). It is in this context that LTSs become an essential element to address the climate emergency – they define the trajectory of action, create a framework for progressively ambitious NDCs and provide a tool for policy makers to explore the implications of short-term policy decisions on the required long-term structural transformation. By providing clear, long-term political signals, these strategies support the mobilisation of sectors to implement climate-related measures and achieve climate goals, shape expectations of economic actors about the scale and nature of needed investment, and help to minimise stranded assets1 (Buira and Arredondo, 2019[6]).

Lack of progress in formulating and communicating LTSs in both developed and developing countries is a core challenge to delivering the objectives of the Paris Agreement. While many countries have begun developing these strategies for submission by 2020, only 13 have submitted them to date. Only 4 are by countries that are eligible to receive official development assistance2 (ODA) (UNFCCC, 2019[7]), and a recent survey of policy makers indicates that progress on LTSs remains limited (van Tilburg et al., 2018[8]).

Planning for climate action is often still separate from other development and sector planning

The limitations of current NDCs and LTSs arise in large part from their disconnect from development planning processes and strategies, which centres of government typically lead or co-ordinate, and from sector policies and resource plans. The failure to link and integrate NDCs into development processes and sector planning is a key factor in their weakness, both in terms of ambition and with regard to their financing and implementation. Additionally, the insufficient integration of NDCs and LTSs into other national development and sector processes represents a missed opportunity to fully harness the co‑benefits of the development and climate agendas. Development and sector strategies and planning, and resourcing processes that fail to take into account the need to transition to low‑emissions, climate‑resilient development pathways, will fail to deliver sustainable development.

Implementing structural change policies will be impossible so long as NDCs and LTSs are not embedded in, or reflective of, countries’ central planning tools and mechanisms and their broader development plans and sector policies. Nor is it possible, in the absence of a comprehensive approach, to effectively address the need for a just transition and leaving no one behind. The experience of the first round of NDCs shows clearly that many of the main challenges stemmed from the limited involvement of relevant government and other stakeholders in the preparation of NDCs (Table 3.1)

Table 3.1. Countries’ main challenges in drafting initial nationally determined contributions

Planning	NDCs were often prepared in silos or with limited degrees of whole-of-government approaches.* In many developing countries, the limited degree of country ownership in drafting NDCs exacerbated this challenge. NDCs were often prepared with limited involvement of sector stakeholders in civil society, academia and the private sector. This contributes to a lack of progress, both in implementing structural change and, more generally, in increasing the ambition and scale of action. Also missing are considerations of just transition, leaving no one behind and the political economy of sector stakeholders. NDCs often lack linkages between the climate and development agendas, and particularly lack links to efforts to achieve the SDGs.
Costing and budgeting	NDCs, often led by environment ministries, feature limited or no involvement by the finance and/or planning ministries that are in charge of the national budget. Many NDCs were not costed or the costing exercise was based on incomplete, inadequate or insufficient data. Most NDCs do not include designated financial means for implementation. Overall, commitments are disconnected from budget planning and the private resource mobilisation needed for implementation.
Monitoring and evaluation	Many NDCs lack a sound scientific and data base. Most NDCs do not have SMART indicators and targets, which makes it difficult to assess progress and draw lessons learned for the next rounds of NDCs.

Note: *As noted by Christensen and Lægreid (2007[9]), whole-of-government approaches typically involve different ministries and levels of government collaborating horizontally and vertically to achieve shared goals and reduce fragmentation. See “The whole-of-government approach to public sector reform” at https://doi.org/10.1111/j.1540-6210.2007.00797.x

Source: (UNFCCC, 2017, p. 21[10]), Opportunities and Options for Integrating Climate Change Adaptation with the Sustainable Development Goals and the Sendai Framework for Disaster Risk Reduction 2015–2030, https://unfccc.int/sites/default/files/resource/techpaper_adaptation.pdf; (NDC Partnership, 2019, p. 34[11]), Partnership In Action 2018: Two Years On, http://www.ndcpartnership.report/wp-content/uploads/2019/03/FINAL-PDF-PIA-FULL.pdf; (Briner and Moarif, 2016, pp. 7, 25[12]), “Unpacking provisions related to transparency of mitigation and support in the Paris Agreement”, https://doi.org/10.1787/5jlww004n6nq-en; (UNEP, 2018, pp. 15-34[13]), Aligning Climate Finance to the Effective Implementation of NDCs and to LTSs, http://unepinquiry.org/wp-content/uploads/2018/10/Aligning_Climate_Finance_to_the_effective_implementation_of_NDCs_and_to_LTSs.pdf; (Löhr et al., 2017, p. 16[14]), Transport in Nationally Determined Contributions (NDCs), https://www.international-climate-initiative.com/fileadmin/Dokumente/2017/171115_Publikation_EN_ TransportInNDCs.pdf; (Pauw et al., 2018[15]), "Beyond headline mitigation numbers: We need more transparent and comparable NDCs to achieve the Paris Agreement on climate change”, https://doi.org/10.1007/s10584-017-2122-x

Paris-aligned development co-operation should respond to the core challenges

These inconsistencies between the objectives of the Paris Agreement and countries’ NDCs and LTSs have implications for development co-operation providers. The Paris Agreement recognises the need for country-based processes, consistent with the ownership principle for effective development co‑operation. At the same time, these country-driven processes, in their current form, outline climate action that is not commensurate with the objectives of the Agreement, which provides their basic rationale. Therefore, supporting the financing and implementation of current NDCs implies, in many cases, acceptance of inconsistencies with the objectives of the Paris Agreement, as the national commitments are estimated to lead to global warming of between 2.9°C and 3.4°C compared to pre‑industrial levels by 2100 (World Meteorological Organization, 2019[2]). Moreover, it would entail a notion of ownership that is essentially autochthonous. Development co-operation would essentially be merely a passive delivery of resources, rather than a partnership in which developing countries and providers work together to overcome constraints to the realisation of their development needs and objectives. As isolated planning processes of the past will not lead to the required transformation to inclusive, low-emissions and climate-resilient societies, it is evident that countries need to enhance their processes and their capacity to integrate climate considerations into their planning across difference sectors. Furthermore, actively supporting and promoting action that addresses binding constraints to sustainable development is the core of the mandate of development co-operation.

However, as NDCs are intended to be progressively more ambitious over time, the initial commitments represent a baseline ambition, not a ceiling. Development co-operation that supports countries to achieve climate outcomes beyond NDC targets would thus not constitute misalignment or undermine country ownership. Exceeding targets for poverty reduction, sustainable economic growth and other development indicators is rightly considered an achievement. In much the same way, overachieving on NDCs would not constitute a failure. This is particularly the case if overachievement brings development co-benefits, supports a just and inclusive transition, and contributes positively to the long‑term sustainability of progress. Moreover, countries will only successfully transition to low-emissions, climate‑resilient pathways when their development and sector priorities, plans and policies and their budgeting processes integrate climate considerations. Therefore, development co-operation that focuses on efforts to establish whole-of-government approaches to NDC planning, formulation, financing and implementation – and that supports the integration of climate action into countries’ development plans and strategies – does not challenge country ownership. It constitutes, instead, support to developing countries to secure sustainable development.

Continued progress on Paris alignment requires development co-operation providers to respond to the inconsistencies between the objectives of the Paris Agreement, on one hand, and the current NDCs and the missing LTSs, on the other. Providers have can use the levers of financing, policy support and capacity development to engage in more ambitious climate action and to facilitate the institutional and policy co-ordination across sectors and levels of government that is needed in this process. Providers are uniquely positioned to do so, as engagement on developing country strategy formulation, policy co‑ordination and implementation processes, as well as institutional and individual capacity building for any given development outcome, are inherent to development co-operation.

3.2. Development co-operation should stop financing activities that undermine sustainable development

A challenge to Paris alignment of development co-operation is the absence of an approach that appropriately integrates climate considerations across development financing. The scarcity of development finance, combined with the risks that climate change poses for developing countries, mean that activities that conflict with the transition to low-emissions, climate-resilient pathways are an ineffective and inadequate use of these resources.

This section, based on sectoral analysis, identifies where development co-operation providers are failing to make the best use of development financing to respond to the climate crisis, including by engaging in activities that are not sustainable if climate mitigation objectives are to be achieved and by not integrating climate adaptation objectives in areas with expressed country needs. While this report does not provide an exhaustive analysis of all sectors, the following examples clearly show how development financing is being delivered in key areas in a way that is inconsistent with the aims of the Paris Agreement and that threatens other development objectives.

Development finance continues to support the production and consumption of fossil fuels in developing countries

Development co-operation is a traditional source of infrastructure finance in developing countries. It takes three forms: direct financing, mobilising additional financing from commercial sources into these investments and supporting the creation of markets (OECD/World Bank/UNEP, 2018[16]). These include both downstream fossil fuel-based energy infrastructure and upstream development of fossil fuel extraction and generation. There is no question that energy plays a fundamental role in enabling countries’ development; indeed, SDG 7 is to ensure access to affordable, reliable, sustainable and modern energy for all (UN, 2015[17]). Nonetheless, it is clear that many high-emissions energy sources are at odds with the objectives of the Paris Agreement to urgently limit further global warming, avoid carbon lock-in and work towards net zero emissions in the second half of this century (UNFCCC, 2015[5]; Rogelj et al., 2018[18]).

The Paris Agreement requires countries, and the development co-operation providers they work with, to develop a clear approach to how they will transition from fossil fuel-based energy sources by the end of 2020 (UNFCCC, 2015[5]). An analysis of development finance alone cannot show whether development financing of fossil fuel activities is accompanied by a transition or exit plan that provides for short-term development needs to be met without compromising the long-term transition that needs to happen in countries and globally. Existing fossil fuel energy infrastructure around the world and proposed developments of new operating capacity, however, currently surpass the timeline for phase-out required to limit global warming to 1.5°C (Tong et al., 2019[19]). Gas-fired power is often called a transition fuel Box 3.1), but replacing fossil fuel sources in the electricity and industry sectors with non-emitting alternatives is the most cost-effective mitigation solution in many contexts (Tong et al., 2019[19]).

Box 3.1. The role of development co-operation and concessional development finance in gas‑fired power generation

Developing countries face a three-fold energy challenge for achieving low-emissions, climate-resilient pathways: improving access and reliability, increasing generation capacity, and ensuring that energy sources are sustainable or paired with sufficient transition plans. Gas-fired power is sometimes framed as a transition fuel and more sustainable alternative to other fossil fuel-based generation options because it produces fewer CO₂ emissions, especially in comparison to coal-fired power. This does not automatically translate to a strong argument for development co-operation to support gas-fired power plants, particularly for new investments and through concessional financing. Gas may be considered a lower-emitting energy option where it uses existing infrastructure to replace a higher-emitting energy source (IEA, 2019[20]). Where gas-fired power is under consideration for new infrastructure investments, however, the calculation is more complex.

There are strong economic, social and environmental arguments against building new gas-fired power plants. One is that gas-fired operations emit, in addition to CO₂, an estimated 40 megatonnes (Mt) of methane globally; a gas with 28 times more global warming potential over 100 years than CO₂ (IEA, 2019[20]; IPCC, 2014[21]). Furthermore, countries are not on track to achieve sustainable energy pathways by 2050, including for scenarios that factor in a role for natural gas activities in supporting these pathways (IRENA, 2019[22]). Gas-fired power also poses the risk of stranded assets – a significant opportunity cost for developing countries as a share of gross domestic product (GDP) (Bradley, Lahn and Pye, 2018[23]). This makes gas-fired power a high-risk investment because it can lock in physical infrastructure and unsustainable consumption patterns that limit the scope for ambitious NDCs.

In certain circumstances, gas-fired power may be the least GHG-emitting option available for balancing power grids and ensuring reliable electricity in developing countries that need to improve energy access. These short-term considerations still require alignment with long-term strategies through progressive decarbonisation if low-emissions, climate-resilient development pathways are to be achieved. Renewables, however, are already the least-cost option for new power generation in most parts of the world (IRENA, 2019[24]). As renewable energy provision and storage continue to improve and are projected to drop dramatically in price, the instances in which gas-fired power is justified become increasingly rare (McKinsey & Company, 2019[25]).

To help achieve net zero global emissions by 2050, development co-operation needs at minimum to avoid the perpetuation of fossil fuel reliance in developing countries, and ideally should help to reduce it (UNFCCC, 2016[26]). It is also important to consider the additionality of development finance in this area. In 2017 alone, global investments into oil and gas exceeded USD 700 billion and increased modestly from 2016 (IEA, 2018[27]). Private businesses engaged in this sector are among the largest corporations globally and have long-standing operating experience in developing counties. Both the mass volume of investments in oil and gas and the need to achieve sustainable development call into question any use of concessional financing to support gas-fired power. However, there is a clear role for development co-operation to support countries to develop transition plans that phase out existing fossil fuel infrastructure while ensuring sustainable energy access (UNFCCC, 2015[5]; United Kingdom House of Commons, 2019[28]; AFD, 2018[29]; FMO, 2019[30]). Given the scarcity of development finance resources, providers should focus their support whenever possible on future-proof technologies that are consistent with sustainable, low-emissions, climate-resilient pathways.

Development finance for renewables and energy efficiency is on an upward trend but continues to be undermined by fossil fuel-related financing. As illustrated in Figure 3.1, bilateral development co‑operation providers’ support for renewable energy has increased from USD 2.9 billion per year in 2014-15 to USD 4.1 billion per year, on average, in 2016-17, a 40% jump. Support to energy efficiency also increased in this period, from USD 19 million per year in 2014-15 to USD 486 million per year in 2016-17 (OECD, 2019[31]). From 2016-17, bilateral support for fossil fuels is estimated to amount to USD 938 million per year, on average – equivalent to almost double the volumes of finance for energy efficiency and nearly one-fourth the volumes of finance for renewables. In 2016-17, coal-related activities constitute 45% of the fossil fuel support (USD 420 million per year) from bilateral providers and went almost entirely towards new power plants. Total development co-operation support for new fossil fuel plants may be higher than what is estimated here, as 29% of fossil fuel-related bilateral development finance is composed of non-concessional finance for which data are not always disaggregated by technology.

Multilateral providers also have significantly increased support for renewable energy and reduced financing for coal-fired power generation, but they continue to support other fossil fuels such as natural gas. Multilateral providers reduced non-renewable financing over 2014-15 to 2016-17, with the two-year averages dropping from USD 2.4 to USD 1 billion. Multilateral financing continues to support natural gas power plants and significantly increased spending for gas distribution. Remaining fossil fuel generation projects financed by multilateral providers in 2016-17 appear to largely comprise natural gas- and fuel‑powered power plants, while gas distribution accounted for 8% of total multilateral energy financing in the same period. Coal is almost totally missing from new multilateral commitments in 2016-17, with only one transaction at a comparatively small scale. However, this does not mean that some multilateral institutions will not provide new coal financing in coming years, as not all multilateral institutions have committed to withdraw their support to this form of fossil fuel.

Figure 3.1. Development finance to energy sector, by provider type and subsector, 2014-17

Note: Volumes of finance calculated using the two-year average in each subsector by provider type for 2014-15 versus 2016-17.

Source: (OECD, 2019[31]), Creditor Reporting System (database), https://stats.oecd.org/

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Fossil fuel industries pose an institutional barrier for the transition to low-emissions, climate-resilient pathways that is necessary to achieve both sustainable development and global temperature goals (IPCC, 2018[1]). A shift to renewable energy systems is required to meet the need for sustainable energy, and continued investment in fossil fuel industries in developing countries only increases the risk of stranded assets and other risks for communities (New Climate Economy, 2018[32]). This also poses an opportunity cost for developing countries to increase competitive advantage in international markets through renewable industries (Moomaw et al., 2011[33]).

Development co-operation also is continuing to support upstream fossil fuel operations such as oil and gas exploration and refineries, coal mining, etc., as shown in Figure 3.2. Bilateral development finance support towards upstream fossil fuel operations was estimated at USD 47 million per year, and multilateral support for such operations at USD 1.9 billion per year, over 2016-17. Key subsectors are energy manufacturing, which includes gas liquefaction and petroleum refineries, and fossil fuel subsectors (comprised of coal, oil, and natural gas upstream activities such as drilling and production and transport through pipelines). These industrial investments have implications as well for sectors that support functions related to fossil fuel activities. For example, and as is the case for these upstream activities, development finance for transport and storage infrastructure for fossil fuels poses risks of stranded assets and other risks for communities.

Development finance from multilateral institutions to the industry, mining and construction sectors increased considerably from 2014-15 through 2016-17, with a significant increase to sectors related to fossil fuels. Multilateral finance reported to the sectors of upstream fossil fuels, energy manufacturing and other mining activities increased from USD 2.1 to USD 4.3 billion (Figure 3.2). The composition of total sector finance also changed, with finance for fossil fuels and energy manufacturing increasing from a 17% to a 42% share over the period.

Figure 3.2. Development finance to the industry, mining and construction sector, by provider type and subsector, 2014-17

Note: Volumes of finance calculated using the two-year average in each subsector by provider type for 2014-15 versus 2016-17.

Source: (OECD, 2019[31]), Creditor Reporting System (database), https://stats.oecd.org/

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A conservative estimate places ODF in support of upstream and downstream fossil fuel activities at an annual average of USD 3.9 billion3 from 2016 through 2017, for which non-concessional finance from multilateral providers comprised 70% (OECD, 2019[31]). Investment in fossil fuel activities that lock countries into outdated energy systems and industries is an ineffective use of development financing considering the critical objectives of both the Paris Agreement and the 2030 Agenda for Sustainable Development. Renewable energy systems, on the other hand, offer significant social and economic benefits to developing countries. For example, the decentralised nature of these systems can improve rural development, and integrating more renewables into the energy mix can increase security through diversification (Arvizu et al., 2011[34]). Renewables need to supply between 52% and 67% of primary energy worldwide, and there needs to be a virtually full decarbonisation of the power sector by 2050 to achieve the goal of limiting global warming to 1.5ׅ°C (IPCC, 2018[1]).

Providers underemphasise climate considerations in sectors where developing countries have expressed adaptation needs

Within the fragmented landscape of climate finance providers, country ownership and alignment with partner countries’ own needs are important guiding principles (Shine, 2017[35]). These are applicable to both mitigation and adaptation. The principle of responding to country needs is relevant for both climate objectives. It is also consistent with the dual focus of the Paris Agreement on top-down approaches and bottom-up, country-driven processes for climate action. Adaptation efforts should particularly result from a gender-responsive, participatory and transparent approach, and be based on developing countries’ own identified vulnerabilities, needs and priorities (UNFCCC, 2015[5]). This section uses a gap analysis of NDCs to identify areas where developing country demand indicates a strong justification for considering climate impacts, but where development finance in these sectors fails to reflect these needs.

Approximately 75% of developing countries specify, in their NDCs, the sectors related to agriculture, biodiversity and ecosystems, forestry, health, and water as priority sectors for their adaptation action in response to identified climate risks (German Development Institute, 2019[36]). Figure 3.3 provides a regional breakdown of these sectors in the NDCs of developing countries. Given the role of providers to support developing countries in implementing their NDCs and the importance of climate change adaptation for sustainable development, development activities should reflect these prevalent needs. However, trends in development financing indicate that these dovetail only in certain cases with the priority sectors identified in NDCs.

Figure 3.4 shows changes in the relative proportion of climate-related development finance going to different sectors and compares the two-year average of this finance committed in 2014-15 compared to the two-year average of commitments in 2016-17. While shares of climate-related finance rose during this timeframe in most sectors and decreased in only 2 sectors, the increases are marginal in most cases. The most notable percentage point (pp) increases across these years occurred in the sectors of water supply and sanitation (14 pp); transport and storage (12 pp); development food assistance (20 pp); and other social infrastructure and services (19 pp). The distribution of development finance indicates an increase in climate-related activities in the water sector, but also indicates an under-emphasis in sectors related to agriculture, biodiversity and ecosystems, forestry, and health that developing countries also designate as priorities in terms of adaptation needs.

Figure 3.3. Priority sectors designated in developing countries’ NDCs, by region

Source: Authors based on (German Development Institute, 2019[36]), Klimalog: The NDC Explorer, https://klimalog.die-gdi.de/ndc/#NDCExplorer/worldMap?NDC??climatechangemitigation???cat1

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Figure 3.4. Change in shares of climate-related development finance by sector, 2014-17

Note: Percentages represent shares of climate-related development finance as a proportion of overall development finance committed within each sector, calculated using the two-year average volume of finance in each sector for 2014-15 versus 2016-17.

Source: Authors based on (OECD, 2019[31]), Creditor Reporting System (database) https://stats.oecd.org/; (OECD, 2019[37]), Climate Change: OECD DAC External Development Finance Statistics (database), http://www.oecd.org/dac/financing-sustainable-development/development-finance-topics/climate-change.htm

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The comparison of developing country needs, as expressed in NDCs, with trends in climate-related development finance commitments also shows that this financing particularly underemphasises the health and agriculture sectors. Only 5% of development finance to the health sector contained climate objectives in 2016-17, although many developing countries designate health as a priority sector in their NDCs. At 60%, the share of climate-related development finance in the agriculture, forestry and fishing sector is much higher, but is still too low given its importance in developing countries and its clear associations with climate risks.

The health sector is a significant focus of developing country NDCs. Among developing countries, between 28% (in Europe and Central Asia) and 51% (in sub-Saharan Africa) of developing countries identify the health sector as vulnerable to climate change in their NDCs. In Africa and Central and South America, key risks in the health sector are linked to changes in the incidence and geographic range of vector- and water-borne diseases (IPCC, 2014[21]). The Intergovernmental Panel on Climate Change (IPCC) further identifies heat-related mortality and drought-related water and food shortages causing malnutrition as key risks of climate change in Asia (IPCC, 2014[21]).

Adaptation needs are not reflected across the health sector, including in the areas that receive the most development finance (Figure 3.5). Bilateral and multilateral providers focus a plurality of commitments for health (32%) in the infectious disease, malaria and tuberculosis control subsector. Infectious disease is highly climate-sensitive and projected to rise globally as temperatures continue to warm, particularly in Africa and Asia (IPCC, 2018[1]). Addressing the effects of climate change on infectious disease requires an integrated approach with public health functions and related sectors, particularly for food and water (UNEP, 2018[38]). Improving data availability at a regional level to monitor and the effects of temperature change on the prevalence of various diseases is also crucial for ensuring an effective public health response (UNEP, 2018[38]). Despite these factors, less than 2% of development finance in the infectious disease, malaria and tuberculosis control subsector in 2016-17 was climate-related.

Both multilaterals and bilaterals provide a significant proportion of support within the health sector to policy and administrative management (32% and 16%, respectively) (Figure 3.5). Health policy and administrative management plays a crucial role in enhancing the climate resilience of health systems – when applied at the national level, for example, it ensures that health considerations are integrated across relevant sectors (e.g. agriculture, transport, energy, urban planning) and within public health functions (UNEP, 2018[38]). However, only 8% of multilateral development finance and less than 3% of bilateral development finance committed to this subsector was climate-related in 2016-17.

Figure 3.5. Shares of climate-related development finance in health subsectors, 2016-17

Note: Percentages represent shares of climate-related development finance as a proportion of overall development finance committed within each sector, calculated using the two-year average volume of finance in each sector for 2016-17.

Source: Authors based on (OECD, 2019[31]), Creditor Reporting System (database), https://stats.oecd.org/; (OECD, 2019[37]), Climate Change: OECD DAC External Development Finance Statistics (database), http://www.oecd.org/dac/financing-sustainable-development/development-finance-topics/climate-change.htm

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The agriculture sector is identified by most countries, across regions, as vulnerable to adverse impacts of climate change. All developing countries in South Asia identify agriculture, in their NDCs, as a vulnerable sector. This is consistent with the IPCC’s assessment of climate risks, which finds that one out of three key, regional-specific risks relates to the agricultural sector (IPCC, 2014[21]). In Africa, climate change is projected to negatively impact food security and livelihoods of households by reducing crop productivity and increasing pest and disease damage and flood impacts (IPCC, 2014[21]).

Development finance that does not have a climate-related objective in the agriculture sector is primarily concentrated in the subsectors for financial services, development and policy, and administration (Figure 3.6) Climate objectives are integrated in development finance to other agriculture subsectors to varying degrees, with 17% to agricultural water resources non-climate-related compared to 56% of the finance to “other agriculture”.4

Strengthening adaptation efforts for agricultural financial services is particularly vital in countries where the majority of jobs are in agriculture. It is estimated that over 60% of the labour force in low-income countries was employed in the agricultural sector in 2018 (ILO, 2018[39]). SDG 2, moreover, includes the explicit target of doubling agricultural productivity and the incomes of small-scale food producers, and notes a parallel need to strengthen capacity for climate change adaptation to achieve the target of zero hunger by 2030. Given the role of economic development in addressing adaptation needs, integrating climate considerations in development financing across the agriculture sector is crucial for adaptation generally in most low-income countries (IMF, 2017[40]).

Figure 3.6. Shares of climate-related development finance in agriculture subsectors, 2016-17

Note: Percentages represent shares of climate-related development finance as a proportion of overall development finance committed within each sector, calculated using the two-year average volume of finance in each sector for 2016-17.

Source: Authors based on (OECD, 2019[31]), Creditor Reporting System (database), https://stats.oecd.org/; (OECD, 2019[37]), Climate Change: OECD DAC External Development Finance Statistics (database), http://www.oecd.org/dac/financing-sustainable-development/development-finance-topics/climate-change.htm

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Significant volumes of development finance continue to be committed without including climate considerations in sectors where developing countries have expressed climate-related needs. As with many aspects of climate change and sustainable development, lack of investment in specific sectors can create a chain reaction of broader implications for other sectors and for sustainable development as a whole. For example, sustainable agricultural development and access to water and sanitation affect both economic and food security in many developing countries. Food security in turn affects malnutrition rates and health, health outcomes affect labour force productivity and wider economic development, etc.

Alignment with the objectives of the Paris Agreement requires climate action at different levels to ensure that low-emissions, climate-resilient pathways are reinforced across activities. Weak NDCs and long‑term strategies, as well as inconsistencies in development finance that undermine sustainable development, are overarching challenges to achieving Paris alignment.

3.3. Development co-operation needs to address challenges at home, within developing countries and at the system level

This section unpacks the core challenges described in Section 3.1 to allow for a detailed examination of how they constitute barriers to Paris alignment for donor country governments and development co-operation providers. It further elaborates priority action areas for these actors to address the challenges. The proposed actions presented here, and the accompanying analysis, are not exhaustive. But they serve to identify those action areas that play a central role in the ability to align development co‑operation with the Paris Agreement, and further highlight some of the constraints to both Paris alignment and action on other priorities. The challenges and proposed priority actions are framed at three levels:

• at home, i.e. in donor countries’ and development co-operation providers’ overarching strategies and policies – to help ensure that providers and donor countries are coherently supporting the transition of developing countries towards low-emissions, climate-resilient pathways

• within developing countries – to support a broad range of stakeholders in developing countries to plan for and implement the transition towards inclusive, low-emissions and climate-resilient pathways

• at the system level – to establish consistent standards and pursue ambitious action across the international development co-operation architecture to promote the transition of developing countries to inclusive, low-emissions and climate-resilient pathways.

Aligning with the objectives of the Paris Agreement at home

Challenge 1: Development co-operation providers are not yet adequately set up to address the climate emergency

While development co-operation providers increasingly recognise the importance of the objectives of the Paris Agreement for achieving sustainable development, they face persistent challenges in integrating climate considerations into their policies, budgets and activities across portfolios. Figure 2.6 in Chapter 2, showing the sectoral breakdown of shares and volumes of climate-related development finance, demonstrates that addressing the climate emergency across all economic and social sectors requires more robust and wide-ranging approaches than today’s climate-related finance commitments, strategies and tools can deliver (Germanwatch/NewClimate Institute, 2018[41]).

Several development co-operation providers have begun efforts to align their portfolios with the objectives of the Paris Agreement, and many others have recognised the need to clarify what Paris alignment means (AFD, 2017[42]; IDFC, 2018[43]; African Development Bank et al., 2018[44]). One-third of the providers that responded in the survey undertaken in connection with this report note that they have yet to establish a definition of Paris alignment within their institution. For the remaining institutions where a definition exists, it remains unclear how this definition ensures consistency of operations across portfolios with the objectives of the Paris Agreement.

If providers are to play a transformational role, they need to go beyond conventional approaches such as developing standalone climate strategies (which often remain siloed), setting targets for climate finance without simultaneously ensuring that other areas of their own activities do not counteract those targets, and undertaking climate mainstreaming that does not reflect the required level of ambition. Alignment requires that providers move systematically and strategically towards aligning their overall activities with the objectives of the Paris Agreement and scale up efforts to catalyse additional resources for climate outcomes (OECD/World Bank/UNEP, 2018[16]).

For their approaches to be effective, providers need to revisit their fundamental parameters – e.g. mandates, performance indicators and capacities – as these parameters are not now set up to address the climate emergency. Providers’ mandates currently do not reflect that climate change and sustainable development are inseparable. A desk review of public mandates of 37 development co-operation providers finds that climate considerations are explicitly integrated in only 5 of these mandates to date. The survey conducted in connection with this report additionally shows that while targets on climate-related development finance are fairly common, only 9 out of 22 providers report that they include climate-related targets and indicators in their institution’s results and performance framework. In response to questions regarding internal incentive systems, only one provider reported that a few departments within the institution have integrated climate objectives into performance metrics. Until they deliberately embed climate considerations in both mandates and performance and incentive systems, it seems unlikely that providers will be able to strategically and systematically move towards Paris alignment.

Development co-operation providers also lack capacity to support transformative climate action in developing countries. Only ten of the providers responding to the survey state that staff with technical expertise on climate change are positioned across corporate-level climate teams, regional/sector teams, and country teams. Most other providers report that rather than having dedicated climate expertise across the house, they concentrate their technical climate expertise in teams operating at the corporate level. While most providers indicate that they have climate risk screening tools in place, it is less clear how these tools can be effectively applied, given the climate capacity constraints in operational teams. The dearth of dedicated climate expertise across a range of departments and teams in most provider institutions raises questions as to whether development co-operation providers are able to effectively undertake climate risk screening and, as a consequence, whether they are adequately equipped to support developing countries’ efforts to transition to inclusive, low-emissions and climate-resilient development pathways.

The way forward: Integrate the climate imperative into providers’ mandates and performance systems and establish the right capacities and tools

The mandates, performance and incentive systems, capacities, and tools of development co-operation providers should reflect the ambition of the Paris Agreement and the commitment to support developing countries to engage in progressively ambitious climate action, in line with the objectives of the Agreement. In particular, donor country governments and providers should do the following:

• Establish mandates for providers that are commensurate with the ambition of the Paris Agreement. Donor governments and development co-operation providers should revisit and revise the mandates of providers to ensure that these integrate the climate imperative and reflect that the climate and sustainable development agendas are inseparable.

• Change providers’ institutional practice through internal performance and incentive systems that drive staff behaviour to engage in transformative climate action. Providers should embed metrics related to climate outcomes in their performance and incentive systems to direct the focus of their institution and staff towards the objectives of the Paris Agreement and ensure that resource allocation and operational practice are mission-driven.

• Establish adequate capacity for providers to execute the mandate. Development co‑operation providers’ capacity is a fundamental condition to address the climate imperative. Ideally, providers should strengthen capacities across the institution and its operations, but at a minimum, providers should strengthen capacity in their priority sectors, including with a view to deploying development finance catalytically in these priority sectors.

• Deploy a set of tools that enable staff to drive climate action at the pace and scale needed. Providers should require that mitigation and adaptation-related tools are applied as compulsory elements of decision making across all activities. In particular, climate risk screening tools are critical to ensure that all development co-operation activities achieve their intended purpose over the short-, medium- and long-term.

Overall, integrating the climate imperative into providers’ mandates, incentive systems, capacities and tools has the potential to dramatically accelerate progress on Paris alignment by making the Paris Agreement central to sustainable development and the set-up of development co-operation itself. In this regard, it is essential that donor governments take consistent positions and approaches to integrating these elements comprehensively – into activities under their immediate control as well as through their governance and shareholder role as multilateral and bilateral providers, and thereby throughout development co-operation supply chains.

Challenge 2: Lack of coherence in donor countries’ broader international activities counteracts climate action through development co-operation

The Paris Agreement highlights developed countries’ role in supporting developing countries’ mitigation and adaptation efforts, including by providing financial support and co-operation for technology development, dissemination and deployment (UNFCCC, 2015[5]). Developed countries engage with developing countries through a range of international activities, notably in this context through development co-operation and trade and investment promotion. In consequence, it is important that developed countries support the needed transition across these policy areas. This calls for policy co‑ordination across different government ministries, agencies, and the government-supported or government-directed institutions that oversee and implement the full range of international activities.

The transition towards low-emissions, climate-resilient pathways cannot be achieved without transformation of energy systems, including energy supply infrastructure, and the energy sector is a key example of an area in need of greater policy co-ordination. While development co-operation providers are supporting renewable energy (see Figure 3.1), governments continue to provide officially supported export credits for activities that undermine global climate and sustainable development goals. According to an analysis of OECD member countries that have reported arrangements,5 58% of the official export credits that support energy production benefit fossil fuel technologies. Developing countries received 48% of the total export credits committed in 2010-16, a significant proportion relative to economic size of the lower-income countries (OECD, 2019[45]). Volumes of export credits reported for non-renewable energy production plants nearly quadrupled over this period, increasing from USD 12 to USD 46 billion (Figure 3.7). Renewables increased nearly five-fold in the same period, although from a much lower baseline, growing from less than USD 5 billion in 2010 to more than USD 24 billion in 2016.

Figure 3.7. Official export credit for energy production plants, 2010-16

Note: Data derived from reporting to the OECD Working Party on Export Credits and Credit Guarantees. Y-axis is shown in cumulative value.

Source: (OECD, 2019[45]), Export Credit Statistics (database), http://www.oecd.org/trade/topics/export-credits/statistics/

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Government-backed financial support to fossil fuel-based energy production directly conflicts with Article 2.1c of the Paris Agreement and, by extension, Articles 2.1a and b, which all Group of 20 members have ratified. This support delays the transition to net zero emissions economies and increases costs related to adaptation, climate resilience and residual risks. In consequence, it counteracts public monies spent on both domestic and international climate action, including climate-related development finance, and development co-operation more generally.6 A recent report by the International Development Committee of the United Kingdom House of Commons (2019[28]) finds that export finance – including, for example, export credits, refinancing or interest-rate support, guarantee cover for credits, and export credit insurance – creates incoherence in donor countries’ efforts to address the climate challenge across different policy areas.

Development co-operation providers are planning for and undertaking efforts to align with the objectives of the Paris Agreement. There is less evidence, however, that donor countries are working to ensure that their international activities beyond ODA are individually and collectively consistent with the objectives of the Paris Agreement, as is indicated by responses to the survey conducted for this report.

Many countries use interministerial and interdepartmental committees and strategies to promote whole‑of‑government decision making and policy coherence, although it has often proven difficult for these government entities to achieve consistency and coherence across policy areas (OECD, 2018[46]). Some countries are deliberately pursuing coherence with the Paris Agreement through dedicated plans and co-ordination mechanisms. For example, the survey conducted for this report shows that Ireland’s new National Climate Action Plan represents a whole-of-government approach to the Paris Agreement that integrates domestic and international efforts. Likewise, the Netherlands is taking steps, in consultation with the business community, to promote what is termed the “greening” of general export instruments such as export credit insurance. Building a whole-of-government response to the climate emergency across all forms of international activities should generally include consideration of the political economy, including with a view to actors with vested interests in the status quo.

The way forward: Donor countries should eliminate policy conflicts between their international activities and their commitments under the Paris Agreement

Donor countries’ international activities across different policy areas should not undermine each other, and fundamental inconsistencies between these activities and the objectives of the Paris Agreement should be eliminated. In particular, donor country governments should do the following:

• Ensure that strategies and action plans in relation to the Paris Agreement cover the entire range of international activities. To coherently and effectively deliver commitments under the Paris Agreement, donor country governments should establish whole-of-government strategies and action plans that integrate all forms of international activities and include clear objectives consistent with the commitments under the Paris Agreement. Such strategies should establish a clear hierarchy of priorities and transparent guidance on addressing any policy conflicts.

• Establish cross-government mechanisms to translate whole-of-government strategies and action plans into implementation that supports commitments under the Paris Agreement and is based on clear targets.

Aligning with the objectives of the Paris Agreement in developing countries

Challenge 3: Process and capacity limitations in many developing countries constrain the integration of climate action into critical plans and decision making

One of the core challenges to achieving the objectives of the Paris Agreement is the insufficient integration of climate action into development plans, sector policies and budgetary processes. As noted in Section 3.1, this is reflected in the weakness of initial NDCs, which are expected to lead to an average global temperature increase of between 2.9°C and 3.4°C by 2100 compared to pre-industrial levels (IPCC, 2018[1]; Larsen et al., 2018[47]). In delivering more ambitious climate action, governments should reflect mitigation and adaptation considerations in national and subnational development planning processes and across sector-specific policies, and should adequately budget and fund mitigation and adaptation measures (England et al., 2018[48]; Bird, Monkhouse and Booth, 2017[49]; UNEP, 2018[38]). Several factors have hampered the integration progress (UNDP/UNEP, 2011[50]). These include the following:

• Conflicting or staggered government policy-making and budget cycles lead to key decisions on climate and fiscal policy being made in isolation from one another.

• Low awareness of the climate emergency among actors in central positions, and the perception that addressing climate change is too burdensome or not cost-effective, results in decision makers not taking adequate action.

• Insufficient information on technological advancements is an obstacle to adoption of cost-effective climate solutions and the delivery more ambitious climate action.

An example of the insufficient integration of climate action into plans, policies and processes is seen in the area of transforming energy systems. Renewable energy technologies have consistently surpassed expectations in terms of their technological advancement, declining investment cost and development co-benefits, and yet energy sector plans and policies continue to neglect these developments as drivers for a more secure and affordable energy system and for climate action (IRENA, 2017[51]). Moreover, persistent inconsistencies with respect to institutions and instruments in the energy and climate realms hamper the transition to sustainable energy systems and effective climate action overall (GIZ, 2019[52]).

Integrating climate action into core development processes implies that institutions whose remit relates to key climate sectors need to change. Traditionally, environment and climate change ministries have been designated to lead on international climate regimes and their implementation. However, this generally has not led to the integration of climate action in critical plans and policies, as these ministries are often perceived as limited in their resources and public spending authority (Jones et al., 2015[53]). As discussed in Section 3.1, the limited policy authority of environment ministries had an impact on initial NDCs, in that finance and/or planning ministries were insufficiently involved and thus budgets for mitigation and adaptation measures were sometimes inadequate. If ambitious climate action is to be adequately integrated into development plans and policies, the challenges of political will and leadership also need to be addressed alongside associated institutional arrangements and co-ordination mechanisms (UNDP/UNEP, 2011[50]; Pervin et al., 2013[54]; Bickersteth et al., 2017[55]; Ruhnhaar et al., 2018[56]; Mogelgaard et al., 2018[57]).

Climate change is yet to be fully integrated into central development planning processes and policies

Centres of government are pivotal in whole-of-government, economy-wide climate action. They have responsibility and oversight of apex intergovernmental co-ordination mechanisms, a primary role in initiating transformative policy reforms, and the ability to pursue integration opportunities within and across different sectors. By setting policy frameworks at the national level, centres of government also can either support or hinder climate action. In this regard, they are often decisive in defining the enabling environment for climate action and the scope of climate action by a multitude of other actors. On the ground, for example, centres of government are not the principal entities to execute climate action. Rather, local communities lead adaptation measures and cities lead mitigation action. Nonetheless, centres of government have a crucial impact because supportive national policies and incentives are required to ensure that sub-national and local-level climate action has sufficient resources and potential to effect meaningful change (OECD/Bloomberg Philanthropies, 2014[58]). Initiatives such as the global Coalition of Finance Ministers for Climate Action have recognised the critical role of central policy, budgetary and financial decision-making institutions. However, such a comprehensive approach to climate action – i.e. with centres of government embracing the climate challenge and leading action to address it – is still in the early stages. This approach also is to date limited to a relatively small number of countries.

Development co-operation providers are beginning to integrate climate change dimensions into strategic dialogues with developing country governments and into their support to institutional arrangements to drive sustainable development. As they adopt a more consistent approach to Paris alignment, providers also are focusing on strengthening the climate components in their overarching development and individual sector and policies. Yet fewer than one in five providers responding to the survey indicate that they support developing countries to translate NDCs into sectoral policies and to establish action plans. For example, the integration of climate change into employment, labour and social policies is a precondition to address the challenges of a just transition, including inclusive climate action for marginalised communities and those disproportionately affected by global warming. Irish Aid is the only provider that reports making climate vulnerability part of its support for social protection programmes. In Mexico, the German Agency for International Cooperation supports comprehensive institutional and legal reform whereby the office of the Mexican President assumes the central co-ordination function to implement the 2030 Agenda and the Paris Agreement in an integrated approach (MGM Innova Mexico, 2018[59]); (BMZ, 2018[60]). Importantly, this reform has received political backing from the Ministry of Finance and Public Spending and includes the aim for greater coherence between Mexico’s National Development Plan, energy and climate policies, strategies, as well as underlying planning and consultation processes (GIZ, 2019[52]).

Central institutions face resourcing constraints that impose fundamental limitations to climate capacity

Fully integrating climate change dimensions into central planning and policy-making processes requires adequate capacity in centres of government. Yet these central institutions often lack the financial resources to enhance capacities. Capacity not only is a condition of political leadership on climate but also determines its scope, and a lack adequate institutional knowledge, expertise and resourcing narrows the scope for whole-of-government approaches for climate action (UNDP/UNEP, 2011[50]; Mogelgaard et al., 2018[57]). Current capacity constraints of line agencies and other key government institutions hamper the integration of climate objectives into sectoral plans and programmes. These constraints also hamper appropriate budgeting for climate action.

Only two development co-operation providers responding to the survey report that they support developing countries to establish integrated approaches to implementing the Paris Agreement and the 2030 Agenda in development plans and processes and in sector policies. Similarly, support to build capacity (for instance of national statistical offices, including for improved data and information on the physical and societal impacts of climate change) has been supply-driven and piecemeal, and remains limited to a relatively small number of countries (OECD, 2017[61]; PARIS21, 2017[62]). Such capacity constraints have repercussions for climate action, as illustrated in the first round of NDCs. Many of the NDCs were not based on adequate scientific evidence and data, which are also needed to establish meaningful baselines for the formulation of LTSs.

The importance of enhanced climate change expertise and capacity is generally well understood in development co-operation, and capacity development interventions for climate policy and planning form a core part of many providers’ activities. Initiatives such as the NDC Partnership aim to address these essential capacity needs, typically through different forms of technical co-operation and peer exchange or dialogue formats. Overall, however, such approaches rely on the underlying base capacity of line agencies and other key government institutions. In such instances, development co-operation providers should support these institutions, including through the direct provision of financial resources. Addressing the resourcing constraints to strengthened climate capacity is essential for effective policy support and capacity development across sectors and, importantly, for inclusive and participatory decision making.

Development co-operation plays an important role in building institutional capacity of developing country partners. Strengthening central actors, institutional co-ordination and decision-making processes, including with a view to the climate imperative, is crucial, as these processes determine the authorising and enabling environment for sustainable development. Effectively transitioning to inclusive, low‑emissions and climate-resilient pathways depends on the climate capacity of these institutions.

The way forward: Support the leadership and capacity of central actors and systems to drive the integration of climate change into policy and planning

Key developing country processes and capacities should reflect the indivisibility of climate change and sustainable development and the repercussions of climate change on all economic and social sectors. To support developing countries, development co-operation providers should do, in particular, the following:

• Work with developing countries to incorporate appropriately ambitious climate objectives in their development plans and sector policies. Development co-operation providers should support developing countries to develop and integrate climate objectives that are commensurate with the objectives of the Paris Agreement in national and subnational development legislation, policy documents, strategies and action plans and ensure that these are appropriately connected with successive NDCs and LTSs.

• Support and facilitate leadership for transformative climate action at centres of government. Providers should support developing countries to establish ambitious and transformative climate action that is championed at the highest levels of national leadership. To that effect, providers should support the strengthening of country processes to underpin whole-of-government approaches to implementing the mutually reinforcing Paris Agreement and 2030 Agenda.

• Provide targeted resources to enhance climate capacities in central institutions. Providers should support the core climate capacity of central government institutions, including through the direct provision of financial resources to build and further strengthen dedicated climate units in the offices of national leaders or central co‑ordination units.

Challenge 4: Central systems in public administrations and private finance in many developing countries continue to perpetuate high-emitting, climate-vulnerable pathways

Public and private actors7 in both developing and developed countries continue to finance high-emitting, climate-vulnerable activities. As recently as 2017, for example, investment in fossil fuels represented 57% of all global investments in energy supply (IEA, 2018[27]). In 2018, investment in upstream oil and gas and coal supply drove the increase in global energy investment, while investment in energy efficiency was unchanged and investment in renewables decreased (IEA, 2019[63]). Central mechanisms for the allocation and intermediation of financial resources – tax and budgetary systems and processes on the public side and financial systems on the private side – enable these financial flows because they are not integrating climate considerations into authoring environments, despite increasing evidence of the impacts of climate change on these systems (Huxham, Anwar and Nelson, 2019[64]); (Tooze, 2019[65]).

These systems form the space within which decisions on financial resource allocations and activities of all economic agents (domestic and international, governments, companies and households) are made. Public sector entities such as governments, central banks and finance ministries set the rules that frame economic and financial decisions. For example, governments choose which behaviours and activities to tax, which behaviours and activities to subsidise, and how otherwise to spend public funds. In terms of volumes and leverage, tax revenues are a particularly significant resource, and indeed these revenues are the central pillar of the financing for sustainable development system (OECD, 2018[66]).

Financial systems provide similar incentives for certain types of economic and financial behaviours and activities to which actors such as companies and households respond when formulating and meeting individual goals and needs. Like tax revenues, private investment is important as it makes up around 20% of GDP for many developing countries and routinely dwarfs development finance (OECD, 2018[66]). Overall, public and private financial systems are not neutral. Rather, they form a path along which societies and economies develop, and currently this path is high-emitting and climate-vulnerable. As developing country governments aim to further develop their public and private financial systems as critical enablers of development, it is essential that they integrate climate outcomes in these systems.

The challenge of integrating climate dimensions extends beyond the realm of national policy making in key areas such as fiscal policy, and equally pertinent in specific sectors and subnational jurisdictions; climate dimensions clearly need to be integrated in different sectors’ regulations and norms (World Bank Group, 2019[67]). There is nascent but increasingly available evidence of misalignments in policy domains such as finance, domestic resource mobilisation, energy end use and land use, trade, and innovation. For example, fiscal systems often contain several provisions that continue to guide companies and consumers towards higher fossil fuel consumption and production and increase their vulnerability to climate change impacts (OECD, 2013[68]). Policy and regulatory environments also need to more stringently support innovation, emerging technologies and business models including those that offer mitigation and adaptation solutions and can provide important co-benefits for the 2030 Agenda (OECD, 2018[69]). The integration of land use planning and sustainable transport systems has proven difficult in the past (Ang and Marchal, 2013[70]); (ITF, 2019[71]), and environmentally harmful subsidies remain in rural land use (Helming and Tabeau, 2018[72]); (Mamun, Martin and Tokgoz, 2019[73]).

Fiscal policies covering taxation, expenditure and contingent financing are seen as a powerful but under-utilised tool in aligning financial resources towards fulfilling the Paris Agreement. The World Bank, for example, has called for a blend of environmental tax reforms that could finance resilience building and pre-finance contingency funds to cope with increasing disaster impacts (World Bank Group, 2018[74]). Green budgeting approaches can integrate a climate perspective through all stages of government financing, from budget design to taxation as well as procurement and performance auditing (OECD, 2018[75]). Similarly, financial system development is a key mechanism to foster better access to international financial markets, generate and channel domestic savings and investments to productive investments, and diversify and manage risk. It is long seen as a critical driver for development (Beck, 2012[76]).

The call to make all financial flows, both public and private, consistent with the objectives of the Paris Agreement (Article 2.1c) (UNFCCC, 2016[26]) relates to the need to integrate the climate imperative into fiscal and financial systems. A similar and related ambition is at the heart of the Addis Ababa Action Agenda (AAAA) (UN, 2015[77]). This agreement sets out an agenda for financing the SDGs by diversifying the sources of financing that serve development needs and requiring actors to recalibrate financial choices, incentives structures and rules of the game to “shift the trillions” towards development outcomes (OECD, 2018[66]). Although transformative climate action is the prerequisite for sustainable development, the AAAA does not yet have climate at its core. As developing countries work to deploy a broad range of financing to achieve their national development goals – for example through integrated national financing frameworks outlined in the AAAA – development co-operation providers should support these efforts, including through policy support and capacity building that enable developing countries to integrate the climate imperative into these activities.

Development co-operation providers should support developing countries to integrate climate considerations in their fiscal and financial systems to equip these systems to effectively support sustainable development. A track record of support for public financial management is increasingly focused on the mobilisation of tax revenues for development, and financial system development is a mainstay in development co-operation. Nonetheless, this support often fails to integrate the climate imperative and thereby foregoes opportunities to deliver climate and development outcomes. An analysis of climate-related development finance shows that only 20% of development finance commitments to private financial systems was climate-related in 2016-17 (OECD, 2019[31]). The climate-related share of development finance is significantly lower for commitments to domestic resource mobilisation (10%) and public financial management (7%).

By supporting the integration of climate considerations in budgetary processes, fiscal policies and financial systems, development co-operation can unfold its catalytic potential towards Article 2.1c of the Paris Agreement as well as more ambitious NDCs and LTSs. The support provided should additionally boost developing countries’ ability to engage with and act on the findings of recent related international initiatives. 50 developed and developing countries have to date joined the Coalition of Finance Ministers for Climate Action and endorsed the Helsinki Principles and the associated Santiago Action Plan to promote comprehensive national climate action through fiscal policy and the use of public finance. In the realm of financial systems, the Network of Central Banks and Supervisors for Greening the Financial System is a forum for its 34 member countries to share emerging good practice approaches to develop climate-related risk management in the financial sector and increase the consistency of financial flows towards sustainable pathways. Moreover, the Task Force on Climate-related Financial Disclosures, mandated by the Financial Stability Board, has developed recommendations for integrating climate risks into financial disclosures.8

The way forward: Assist countries to incorporate ambitious climate objectives throughout their financial and budgetary systems

Developing countries need public and private financial systems and financing strategies that can unlock greater financial flows to meet the objectives of the climate and sustainable development agendas. Support from development co-operation providers can help to establish such systems with strong climate components to avoid further financing of unsustainable and high-emitting development. In particular, providers should do the following:

• Support the integration of climate action into financing strategies that leverage public and private and domestic and international sources. Development co-operation providers should support the formulation and implementation of national financing strategies, such as the integrated national financing frameworks outlined in the AAAA, to increase the consistency of all financial flows with the objectives of the Paris Agreement.

• Support the integration of climate objectives into national budgeting frameworks and tax systems as a core component of robust public financial management. Provider efforts to support developing countries in mobilising revenues and reinforcing robust public expenditure frameworks need to integrate climate objectives, foster alignment of national financial resources and support incentives for transformative climate action across the economy.

• Support the development of green financial systems in developing countries. While these countries are developing, broadening and deepening their financial systems, providers should support them in integrating climate action so that financial flows are oriented towards low-emissions, climate-resilient pathways.

Aligning with the objectives of the Paris Agreement at the system level

Challenge 5: The basic rules of the game of the international development system do not consider climate as an integral dimension of sustainable development

The Paris Agreement recognises that developing countries’ emissions will take longer to reach a peak (UNFCCC, 2015[5]), and fossil fuel-based energy supply is projected to continue playing an important role in energy systems globally over the medium term (IEA, 2019[78]). Nevertheless, avoiding average global temperature increase beyond 2°C – and thereby keeping adaptation objectives and sustainable development within reach – requires a transformation of energy supply infrastructure (IPCC, 2018[1]; Edenhofer et al., 2014[78]).

Analysis of IPCC and energy industry data indicates that the current stock of fossil fuel fields and mines in operation or under construction will alone release CO₂ emissions resulting in a 1.5°C rise in global temperatures (Oil Change International, 2019[79]). Furthermore, emissions from these sources together with those from land use change and cement would exhaust the levels of emissions consistent with a 2°C limit (Oil Change International, 2019[79]). Even if global coal use were to be eliminated from this mix, CO₂ emissions from developed reserves for oil and gas alone would push the world above global warming of 1.5°C (Oil Change International, 2019[79]). While renewable sources are estimated to comprise more than three quarters of investments in new power generation up to 2050 (Bloomberg NEF, 2019[80]), this still falls significantly short of what is required to limit temperature rise to under 2°C (Oil Change International, 2019[79]). Even if the 2°C target is reached, global temperature rise of 2°C versus 1.5°C means several hundred million more people will be in poverty by 2050, and climate risks will be higher for the world’s most vulnerable communities (IPCC, 2018[1]).

Developing countries will continue to use fossil fuels, and while further investment in new fossil fuels is expected according to both current plans and alternative scenarios oriented towards sustainable development, it would drop rapidly under the latter (IEA, 2019[78]). However, support from development co-operation in this area raises concerns about value for money and additionality. The effective and efficient allocation of resources, and associated technology choices, requires cost-reflective pricing that accounts for externalities. The externalities of fossil fuel production and consumption are not limited to climate impacts but also include effects such as the harm to public health from pollution. As such, development co-operation supporting fossil fuel-based energy supply and power generation raises fundamental questions of consistency with the sustainable development mandate as well as global climate goals. The use in particular of concessional development finance implies an active promotion of a given activity, with high levels of financial subsidy as reflected in the high concessionality criteria (OECD, 2018[81]). The deployment of these scarce resources for fossil-fuel based energy supply is already incompatible with sustainable development today given the lifespan of these investments. Moreover, such deployment would constitute directing these scarce development resources to an area that already receives direct and indirect subsidies that are estimated to have amounted to up to USD 5.2 trillion globally in 2017, or 6.5 percent of world GDP (IMF, 2019[82]).

The promotion of energy supply has always been an important component of development co-operation given that energy enables almost every aspect of development and economic growth. Development co-operation can support the energy needs of developing countries by enabling them to fully benefit from already available alternatives to fossil fuel-based power generation. As a shift away from fossil fuels is inevitable, development co-operation providers need to ensure more than ever that they work with developing countries to meet the energy needs and achieve the energy access goals required for their development. Building reliable, affordable, secure and sustainable energy systems requires a comprehensive approach to energy policy and investments. Development co-operation can support developing countries in considering and addressing the changing synergies, co-benefits and trade-offs involved in building sustainable energy systems. For example, many developing countries in Southeast Asia are expected to become energy importers by 2040 and face mounting energy security concerns without an accelerated transition to sustainable energy systems (IEA, 2017[83]).

Renewables as alternatives to fossil fuels are available, especially in the power sector, and have developed into one of the most cost-effective ways to enhance energy supply security, boost economies’ competitiveness and potential for employment generation, deliver health co-benefits, and help to achieve global climate and sustainable development goals. Falling technology costs have led developing countries to add more renewable energy-based power generation capacity than fossil fuel-based generation (Bloomberg NEF, 2018[84]). Accordingly, renewable energy technologies are now being deployed at a faster pace than any other energy source (IRENA, 2019[85]). Further accelerating renewables deployment requires addressing challenges in three key areas, i.e. policy and regulatory uncertainty, high investment risks in developing countries, and system integration of wind and solar (IEA, 2019[86]). All of these relate to areas in which development co-operation can provide critical support through the levers of financing, policy support and capacity development. The current scale of investment in renewables (including in power generation) does not put the world on track to reach either of the temperature goals of the Paris Agreement (IEA, 2019[87]), and this has negative implications for achieving adaptation objectives in developing countries.

Sustainable energy systems and the promotion of renewables provide wide-ranging development benefits. Distributed renewable energy systems such as mini-grids and off-grid applications are the most cost-effective means for providing access to electricity in rural and remote regions, and women and girls particularly benefit from such solutions (IEA, 2017[88]). The energy demand reflected in the International Energy Agency’s most recent Sustainable Development Scenario implies a sharp drop over the next two decades in global fossil fuel demand, reflecting decreases in all fossil fuel sources between today and 2040 at varying degrees (IEA, 2019[89]). According changes in the global electricity generation mix from 2018 to 2040 would entail the respective shares of coal dropping from 38% to 4%, oil from 3% to 0.4%, and natural gas from 23% to 12% (IEA, 2019[78]). The global market and policy transformations that are needed to support sustainable development are beyond the control of any individual country’s policy decisions – this invariably implies increased risks for stranded assets in fossil fuel-related sectors. New investments in fossil fuel-related assets are thereby liable to increase fiscal stress and debt burden, particularly for countries reliant on fossil fuels for export revenues. This is especially problematic for countries that depend on international financing in foreign currency to undertake investments in fossil fuel-related sectors but are marginal fossil fuel consumers relative to the global market. Introducing alternatives to fossil fuel-based power generation into the energy mix decreases these risks in parallel with managing other risks associated with the transition, such as job losses (Huxham, Anwar and Nelson, 2019[64]). Fully realising the development benefits of sustainable energy systems requires appropriately accounting for these factors, while ensuring the long-term support for policy reform and capacity development required for a successful transition.

Key standards for development co-operation do not yet reflect that sustainable development involves a shift to low-emissions, climate-resilient pathways

While there is growing momentum to move away from using development finance to promote fossil-fuel based energy supply, many of the basic standards and processes of development co-operation do not account for the fact that a decisive and systematic shift away from fossil fuel-based energy generation offers the only pathway for sustainable development. Development co-operation has a clear role to play in addressing fundamental bottlenecks and constraints for developing countries’ transition to low-emissions, climate-resilient pathways and sustainable development. This role entails contributing consciously and coherently to the establishment of the sustainable energy systems that are needed to limit global warming and keep sustainable development within reach. Given the long lifespan of energy infrastructure assets, it is essential that inconsistencies in the use of development finance in the energy sector are eliminated now to support a clear, accelerated shift towards sustainable energy systems.

Development co-operation providers have the opportunity to improve the coherence of their approaches by revising their standards and processes to ensure they are collectively supporting a decisive shift to low-emissions, climate-resilient pathways. Climate considerations are not currently reflected in agreed definitions of development co-operation, nor in the criteria that determine the range of activities that constitute development co-operation. The Paris Agreement recognises that developing countries’ emissions will take longer to reach a peak and that developing country parties will need support for effective implementation (UNFCCC, 2015[5]). Revising the standards and processes of development co-operation would not preclude the use of other sources of finance or support to facilitate developing countries’ continued use of fossil fuels. Yet the evidence is clear that fossil fuel-based energy supply needs to be dramatically and progressively reduced if countries are to avoid dangerous climate change and achieve both adaptation objectives and sustainable development (IPCC, 2018[1]).

There is a broader need for more systemic frameworks to guide low-emissions, climate‑resilient development

Apart from definitions of eligibility and other basic standards that apply universally, there is currently no existing mechanism or process that provides a common agreement among development actors on the kinds of activities that are consistent with low-emissions, climate-resilient pathways. Such central mechanisms exist in other areas to help ensure consistency across the range of development co-operation actors. For instance, the International Monetary Fund debt sustainability framework provides a tool to ensure an agreed, collective approach to financial sustainability for low-income countries. This framework is accepted by and guides almost all providers of development co-operation to avoid the risk of debt distress.

In the context of climate change, such common mechanisms could help to guide efforts to achieve mitigation, adaptation and resilience objectives. They could inform the assessment of financial interventions in a given context as well as the extent to which policy support and capacity development interventions are consistent with low-emissions, climate-resilient pathways. Such tools could also help to co-ordinate and ensure the coherence of development co-operation activities with NDCs and sector strategies.

Without mechanisms and tools of this type, the risks of system incoherence persist. Where development co-operation providers only partially align their activities with the Paris Agreement, they may be undercutting their dedicated climate efforts. In much the same way, partial alignment by some actors could thwart others’ alignment efforts and compromise the effectiveness of the international development co‑operation effort as a whole.

The way forward: Adopt core definitions and mechanisms to ensure Paris alignment at the system level

The basic standards and processes of development co-operation should coherently and unequivocally support sustainable development. To accomplish this, such standards and processes should include clear provisions for effectively addressing climate change and its implications for sustainable development. In particular, all countries and institutions providing development co-operation should:

• Promote the transition to low-emissions, climate-resilient pathways, including by updating key standards. While development co‑operation would continue to support secure and affordable energy supply, a revision of eligibility criteria would rule out the promotion and subsidisation through concessional resources, such as ODA, of activities that undermine or delay the transition to low-emissions, climate-resilient pathways and, by extension, sustainable development, such as new fossil fuel-based energy supply and power generation. To enhance the effectiveness of these exclusions governments should actively promote this approach in their governing functions in multilateral development banks. Relevant eligibility criteria should also be periodically reviewed to ensure that standards are based on the best available current evidence.

• Support measures that provide systemic guidance to all development co-operation providers to identify activities that are incompatible with the objectives of the Paris Agreement, and by extension sustainable development. These measures should include a basic, context-specific framework that could act as a central point of reference to ensure that development co-operation integrates climate action and does not contribute to unsustainable development. Providers of development co-operation should actively promote and support the creation of such a framework, based on broad international agreement, with a clear methodology and objective criteria, and modelled on the debt sustainability framework. Such guidance would assist providers in aligning all of their development co-operation activities with low-emissions, climate-resilient development pathways, including the 80% of bilateral and 60% of multilateral development finance that does not report the integration of any climate objectives (Figure 2.5).

Challenge 6: Fragmented approaches in development co-operation limit the scale of effective climate action

The international development co-operation system is characterised by a multitude of actors. The number of actors has continued to increase in both the bilateral and multilateral space over recent decades, and their different policies, approaches and procedures have contributed to and maintain a fragmented system. One result is that there are now more than 1 000 different development finance instruments (OECD, 2018[66]). Harmonised approaches, including through common standards, are more essential than ever to avoid further fragmentation and limit transaction costs and system inefficiencies where possible. To increase Paris alignment of development co-operation providers at the system level, common approaches are critical, particularly in funding and financing instruments; data and information standards; and operational and procedural standards, and especially those pertaining to infrastructure projects.

Lack of transparency and common access standards limits the potential impact of climate-related development finance

Developing countries need significant financial resources to transition to inclusive, low-emissions and climate-resilient pathways. While relatively small in terms of volume, climate-related development finance can have a catalytic effect on these transitions (see Section 2.2 and Challenge 4). The provision of climate-related development finance is set in a complex international architecture, however, and is often perceived as inadequate, inefficient and ineffective (Commonwealth Expert Group on Climate Finance, 2013[90]) (Amerasinghe et al., 2017[91]).9

The complexities of the international architecture of climate-related development finance stem from financing vehicles and instruments with differing thematic and policy priorities and an even broader array of implementing entities; together, these have led to inefficiencies and the overburdening of developing countries (Bird, Watson and Schalatek, 2017[92]); (Lundsgaarde, Dupuy and A., 2018[93]). For example, developing country governments may find it difficult to obtain a full overview of financing options in this complex landscape, and this restricts their ability to access those financial resources that are the best fit for their identified priorities. Moreover, these difficulties often are aggravated and prolonged due to access modalities and spending rules that require significant resources and specialist knowledge on behalf of developing countries. Like the complex and restrictive procurement policies, the monitoring, reporting and verification requirements of funding entities of climate-related development finance place considerable burden on developing countries, particularly least developed countries. Complying with such requirements can strain countries’ already limited capacity.

Fragmented approaches turn climate data and information from signal into noise

Data and information are vital for climate action that is responsive to emerging evidence of the pace and scale of climate change and its impacts, and to evolving opportunities and challenges. A sound base of data and information is needed to inform not only NDCs and LTSs but also decision making on climate action more broadly by public and private actors at all levels, from local to global. Given that climate change will have impacts on every sector and every community, a sound base of climate data and information is a public good that can prevent market failures. It is a requirement for the transition to inclusive, low-emissions and climate-resilient pathways.

The public goods aspect of data and information gives public actors, including development co-operation providers, an important role in supporting the production and dissemination of data and information as a prerequisite for an effective response to the climate emergency (Hallegatte et al., 2018[94]). Common standards and methods for the generation and availability of data and information – in particular, for comparability over time and aggregation across countries and regions – are crucial to this support (OECD, 2017[61]). While development co-operation is already engaging in the generation of data and information, including related to climate, this support is largely supply-driven and focuses on isolated interventions. In the absence of a co-ordinated approach, there has been a surge of continuously new data and information even as basic data and information remain scarce, particularly with respect to disaggregated, localised climate change impacts and risks (OECD, 2017[61]).

Development actors are beginning to respond to the data challenge, and the recent emergence of central hubs for climate-related data and information marks an important step. However, to decrease uncertainty for users of these data, common standards and frameworks are needed for their generation and use. Such common standards and frameworks also are needed to minimise lost opportunities for climate action and avoid costly, ineffective measures as well as lock-in and maladaptation. Development co-operation providers should facilitate a co-ordinated approach by international and domestic actors that responds to identified data and information needs and increases the usability of data and information. Global weather and climate-related data and information from the World Meteorological Organization and the IPCC, including the underlying methodologies and standards of the scientific assessments should be at the core of this harmonised effort.

All development is taking place in a changing climate. Therefore, climate-related data and information – generated and used in a co-ordinated approach and through common standards – provide essential signals for development activities across sectors. An illustrative good practice approach to co‑ordination and common standards of data and information is the Global Emerging Markets (GEMs) Risk Database, within which an increasing number of development banks and DFIs provide information on infrastructure project performance (OECD, 2017[61]). By providing countries an investment track record that otherwise would not exist, the GEMs database helps to fill the gap of comprehensive, asset-level and systematised data on infrastructure projects. This data gap is repeatedly cited as a key challenge to establishing infrastructure as a broad-based asset class. To make this information available to private markets, the data are anonymised, but the database nevertheless performs an important function with regard to supporting market creation and ensuring additionality of development finance.

Lack of standardisation limits the mobilisation of resources to promote sustainable infrastructure at scale

The ability of societies to limit global warming and to adapt and increase resilience to climate change impacts rests, to a significant degree, on their infrastructure choices. To meet the objectives of the Paris Agreement, developing countries need to make infrastructure investments on the order of USD 4 trillion per year that take into account, in particular, the needs of already marginalised and vulnerable communities (Global Commission on the Economy and Climate, 2016[95]); (IPCC, 2018[1]). Due to the magnitude of the investment needs, governments will not be able to fund this infrastructure through public resources alone and will need to look to private resources. Infrastructure investments offer long-term, predictable revenue. Even so, only a small fraction of private finance – estimated at between 1.1% and 2.9% across major OECD-based funds – is invested in infrastructure (OECD, 2018[96]). Of these investments, only a fraction is invested in low-emissions, climate-resilient infrastructure. For many projects, this is due to a mismatch between the nature and terms of finance supplied on one hand and the demand for financing on the other. Long tenors and high upfront capital costs, illiquidity, market uncertainties and uncertainty regarding the policy and regulatory environment deter potential investors (Dasgupta, Hourcade and Nafo, 2019[97]). In the case of developing countries, foreign exchange risk is an additional constraint (see Challenge 7).

Against this backdrop, mobilising commercial capital for infrastructure-related investment has become a priority for development co-operation. Support so far has focused on the mobilisation of private finance for individual projects, particularly in power generation, and on the promotion of sound policy and regulatory environments. But limited progress has been made in addressing systemic bottlenecks that could unlock unprecedented resources and drive them towards infrastructure-related investments including in urban areas and low-income countries (Humphrey, 2018[98]). To address these systemic bottlenecks, development co-operation providers should widen the focus of their support (see Challenge 3).

To mobilise finance at required scales, low-emissions, climate-resilient infrastructure needs to be established as a broad-based asset class.10 Infrastructure projects are highly heterogeneous, and there is a lack of comprehensive, asset-level and systematised information on the performance of infrastructure-related investment. In consequence, investors face high degrees of uncertainty that deter them from investing their resources in such projects. Enhanced data and information concerning different features of infrastructure projects, in particular their expected risk-return profile, could enable progress in individual infrastructure projects and establish infrastructure as a broad-based asset class (G20, 2018[99]). The example of the GEMs Risk Database highlights the important role that development banks and DFIs, in particular, can play in the provision of data and information and more broadly in infrastructure promotion and common standards. If infrastructure is to be established as a broad-based asset class, however, further progress is needed in generating data for long-term performance metrics at the asset and project level and in making these data available to global markets.

The way forward: Providers should drive effective, scaled-up climate action through common standards in finance, data and infrastructure

Standards provide a basis for co-ordinated interaction, underpin markets and ensure transparency. They also allow effective action on issues ranging from data and information to research and development, technology, and finance. To advance Paris alignment, development co-operation providers should support collaborative approaches to establish standards so that the fragmented development landscape can deliver greater and more coherent impact. In particular, providers should do the following:

• Increase harmonisation and transparency of climate-related development finance and improve access to such finance. Development co-operation providers should develop and adhere to greater transparency and accountability around existing and future climate finance commitments. Additionally, providers should ensure improved efficiency and access to existing sources of climate finance.

• Promote harmonised standards and approaches regarding the generation and use of climate data. Providers should agree on the support of key data and information standards to address risks of critical gaps, duplication and inconsistency. In doing so, they should aim for and support an architecture in which data and information produced at the local, national and international levels are complementary, consistent, verified and accessible.

• Reinforce efforts to standardise procedures and specifications for infrastructure investments. The much-vaunted prospect of unlocking – at scale – financing from private markets for low-emissions, climate-resilient infrastructure will not become reality without a concerted effort to establish infrastructure as broad-based asset class. Providers especially should strive for greater standardisation and harmonisation across the landscape of development finance actors.

Challenge 7: Large volumes of finance are available globally, but systemic barriers impede investment in low-emissions, climate-resilient infrastructure in developing countries

The investment decisions for infrastructure will determine whether the interlocking agendas for sustainable development and climate action are achieved. Establishing infrastructure as a broad-based asset class can open unprecedented opportunities (see Challenge 6). Developing countries, however, face additional systemic barriers in promoting low-emissions, climate-resilient infrastructure. Among these barriers are shallow capital markets (see Challenge 4), limited scope for local currency financing and foreign exchange risks. These risks are linked, and while they partly reflect weak policy environments, they also denote more fundamental handicaps, such as the limited ability to trade and use developing countries’ currencies, that have the effect of limiting access to the capital of international institutional investors. Even if the policy environment is otherwise sound, investments in countries that need significant amounts of external finance for their development but lack significant export earnings or commonly traded currencies, face expensive foreign exchange risk premiums (Eichengreen, Hausmann and Panizza, 2002[100]).

Evidence suggests that unresolved foreign exchange risks not only inhibit capital inflows and discourage investments in low-emissions, climate-resilient infrastructure. These risks also have undermined development objectives by contributing to systemic instability and over-indebtedness, less effective macro-policy adjustment, and excessive volatility of local interest rates. There have been efforts to promote local currency financing, notably through the capitalisation of hedging instruments such as TCX, a fund established in 2007 with support from different providers of development finance to help manage currency risk in developing countries. But the available instruments have not reached the needed scale, and their small size makes them expensive to use. A larger-scale, more systemic approach to dealing with foreign exchange risk would overcome the limitations of currently operating facilities, including by making available a greater range of currencies, instruments and products with longer tenure that can further facilitate the promotion of low-emissions, climate-resilient infrastructure.

A broad partnership of development co-operation providers is needed to realise this potential. This will require a combination of budgetary resources for capitalising such a facility, deep expertise in infrastructure projects and their financing, and large-scale financial risk absorption capacity. No single development actor is equipped to do this on its own. Approaching risk mitigation systemically, by pooling the capacities and assets of different actors, can help not just to mobilise individual transactions but also to catalyse a pipeline of future investments. Collectively, the capital, tools and expertise exist and are already being used. Moreover, all these elements can be generated in the international development system, which already features the common practice of regular capitalisation and replenishments of international funds or vehicles; development banks with unique experience in developing country infrastructure projects; and innovative approaches such as the Swedish International Development Cooperation Agency’s use of part of the balance sheet of the Swedish National Bank to provide development-oriented guarantees (Dasgupta, Hourcade and Nafo, 2019[97]).

Partnership approaches have demonstrated that they can help to deliver collective, up-front risk mitigation to overcome persistent market failures. In the health sector, for example, advance market commitments succeeded in spurring the development of vaccines for long-neglected tropical diseases (Gavi, 2019[101]). An architecture is not yet in place that brings actors together to resolve the challenge of systemic de-risking of long-term infrastructure finance in developing countries. But several initiatives and feasibility studies already aim beyond transactional-level co-financing or risk mitigation, with the goals of pooling contributions and expertise and harmonising, standardising, and simplifying processes and policies. Proposals include systemic risk mitigation to underpin these activities, either through direct capitalisation by sovereign shareholders or by arrangements of sovereigns directly taking on additional contingent liabilities (Dasgupta, Hourcade and Nafo, 2019[97]; CEEW, 2017[102]).

A collective and concerted approach is needed to address the systemic barriers to climate-related investment in developing countries and urgently align development co-operation with the Paris Agreement at the system level. Such efforts should build on initial success stories, including initiatives supported by different donor and non-donor country governments to address foreign exchange risks. But the enormity of the climate challenge to sustainable development also calls for larger-scale international partnerships to promote the roll-out, implementation and operationalisation of approaches that can spur investment in low-emissions, climate-resilient infrastructure in developing countries.

Strong and broad political support are essential, given the considerable resource, engagement and co‑ordination needs. Building on the momentum generated from the United Nations Climate Action Summit in September 2019, strategic partnerships of governments, development co-operation providers and the private sector will be decisive.

The way forward: Focus on effective partnering to promote finance for investments in low-emissions, climate-resilient infrastructure at scale

Financing for investment in low-emissions, climate-resilient infrastructure can be promoted at scale through strategic partnerships of governments, development banks, development agencies and private sector actors. For these partnerships to be effective, political will and backing are needed. Donor country governments should do the following:

• Focus on multi-stakeholder partnerships to trigger the needed transformation, building on momentum generated by the United Nations Climate Action Summit 2019. Overcoming the gap for low-emissions, climate-resilient infrastructure will not be possible through bilateral partnerships or development co-operation providers alone. Instead, providers should facilitate the creation of forceful multi-stakeholder partnerships that convene a critical mass of players and are backed by political and institutional capital to deliver systemic solutions. These partnerships should focus on meeting an identified objective and establish a clear timeline for delivery.

• Establish a strong, mission-driven partnership to address foreign exchange risk that signals political commitment and will to deliver a systemic solution. Donor country governments and development co-operation providers should come together in an alliance focused on providing a systemic solution to foreign exchange risk and complementing other efforts to promote low-emissions, climate-resilient infrastructure in developing countries. To achieve critical mass and momentum, donor country governments and providers should clearly and visibly invest political and institutional capital into this partnership and establish a clear ambition, goal and timeline for delivery.

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Notes

← 1.  The International Energy Agency defines stranded assets as “those investments which have already been made but which, at some time prior to the end of their economic life (as assumed at the investment decision point), are no longer able to earn an economic return, as a result of changes in the market and regulatory environment brought about by climate policy”. For a further discussion, see (IEA, 2013[106]) at https://www.iea.org/publications/freepublications/publication/WEO_Special_Report _2013_Redrawing_the_Energy_Climate_Map.pdf

← 2.  The four ODA-eligible countries are Benin, Marshall Islands, Mexico and Ukraine.

← 3.  These activities comprise those described in the DAC Creditor Reporting System (CRS) database under “Energy generation, non-renewable sources” (purpose codes 23310, 23320, 23330, 23340, 23350 and 23360) for downstream sources, plus the purpose codes for coal (32261) and oil and gas (32262) under “Mineral resources and mining” for upstream sources. See https://stats.oecd.org/Index.aspx?DataSetCode=CRS1

← 4.  The “other agriculture” subsector is composed of 11 smaller subsectors that individually do not account for a significant amount of the development finance committed to the agricultural sector, but that in aggregate account for 21% of the financing.

← 5.  These countries are Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Hungary, Israel, Italy, Japan, Korea, Netherlands, Norway, Poland, Slovak Republic, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States.

← 6.  As discussed more fully in Section 3.2, development finance also currently supports activities that undermine climate-related development interventions and, thereby, developing countries’ development prospects.

← 7.  These actors include public entities such as central and local governments, central banks, national development banks, and private entities such as commercial financial institutions, companies and individuals that undertake financial decision making.

← 8.  The Task Force on Climate-related Financial Disclosures considers “the physical, liability and transition risks associated with climate change and what constitutes effective financial disclosures across industries” in order to develop “voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers, and other stakeholders”. For more information, see https://www.fsb-tcfd.org/about/

← 9.  While climate finance includes a broader range of flows than development finance, international public finance for climate is delivered largely through channels, institutions and instruments of development co‑operation. Where this is the case, the two categories of finance are practically indistinguishable at the operational level.

← 10.  Infrastructure as an established, broad-based asset class would enable individual, bespoke infrastructure investments to be aggregated into larger pools of finance with a more homogenous risk-return profile. This would in turn increase liquidity and make them more tradeable on secondary markets, which ultimately expands the potential investor base for such investments.