This Chapter focuses on public climate finance provided by both bilateral and multilateral providers based on the three broad financial instrument categories of loans, grants and equity investments. The Chapter provides disaggregated analysis and insights per provider types, climate theme, sectors, and based on various recipient country characteristics and groups.
Climate Finance Provided and Mobilised by Developed Countries in 2016-2020
Insights from Disaggregated Analysis
Climate Finance and the USD 100 Billion Goal
Public climate finance provided: an analysis by financial instrument
Abstract
In 2020, total public climate finance provided by developed countries amounted to USD 68.1 billion, 82% of total climate finance in the same year (OECD, 2022[5]). Out of that total, USD 48.6 billion (71%) was in the form of loans, USD 17.9 billion (26%) in the form of grants, and USD 1.6 billion (2%) in the form of equity investments. In 2016, total public climate finance provided was USD 46.4 billion (79% of total climate finance in the same year), of which USD 33.3 billion were loans, USD 12.3 billion were grants and USD 0.8 billion were equity investments (OECD, 2022[5]).1 Between 2016 and 2020, while the volumes of each instrument increased, their respective shares in total public climate finance provided remained stable.
Public finance instruments (equity, grants, loans) analysed in the present Chapter underpin the financial mechanisms used by public finance providers to mobilise private finance, as analysed in the following Chapter. The only exceptions are guarantees and insurances, which are not included in the figures and analysis of public climate finance provided but are instead captured in the mobilised private finance component of the analysis (see Annex A).
Financial instrument split across bilateral and multilateral public finance
Loans represented the biggest share of the financial instrument split in both bilateral and multilateral public finance in 2016-2020, accounting for 59% of total bilateral public climate finance provided and 84% of total multilateral public finance provided (see Figure 6). These shares remained relatively stable across both bilateral and multilateral providers over the five-year period. Equity investments remained marginal in both bilateral and multilateral public, representing 2% in each.
Among multilateral providers, the instrument split varied considerably between MDBs and climate funds, primarily due to the different mandates and operating models of these two types of multilateral institutions (see page 28). The majority (91%) of climate finance provided via MDBs was extended in the form of loans. In contrast, the majority of climate finance provided via climate funds was provided in the form of grants (56%). As further discussed later in this Chapter, a similar distinction could be drawn within bilateral public climate finance, between development finance institutions and aid agencies.
Figure 6. Instrument split of public climate finance provided by provider type in 2016-2020 (%)
Note: Public guarantees are not accounted for as public finance but are instead captured as part of the analysis of private finance mobilised, presented in other figures and sections of this report.
Source: Based on Biennial Reports to the UNFCCC, OECD DAC statistics and complementary reporting to the OECD.
Importantly, public climate finance loans provided can be provided as concessional or non-concessional, depending on the country context, as well as on recipient and project characteristics. Box 2 highlights that the share of concessional and non-concessional loans varies significantly across the different climate finance components, while highlighting underlying definitional differences of concessionality between bilateral and multilateral providers.
Box 2. Concessional and non-concessional loans
A concessional loan is extended to a borrower on more preferential terms than those available on the market. Such preferential terms may include below-market interest rates, extended grace periods, or a combination of both. Concessionality is an essential part of development finance. The reporting of concessional and non-concessional loans is, however, underpinned by different definitions for DAC members on the one hand and for multilateral institutions on the other.
For DAC members, concessionality is a key ODA-eligibility criterion; only concessional loans are currently included in ODA. Grant elements are calculated using five elements: interest rate, grace period, maturity, type of repayment schedule and discount rate, with the latter of which being differentiated by DAC income group. Accordingly, for sovereign loans to be concessional, their grant element2 needs to be at least 45% for LDCs and other LICs, 15% for LMICs, and 10% for UMICs and multilateral institutions. Currently, loans to the private sector need to convey a grant element of at least 25% to be concessional (using a discount rate of 10%). Furthermore, the terms and conditions of ODA loans have to be consistent with the IMF Debt Limits Policy or the World Bank’s Non-Concessional Borrowing Policy. In 2016-20, three-quarters of loans extended by donor countries were concessional (Figure 7).
Figure 7. Bilateral climate finance loans by concessionality level, in 2016-2020 (%)
Source: Based on Biennial Reports to the UNFCCC
For lending by the MDBs and multilateral climate funds, concessionality relates to their ability to extend credit on financially-sustainable terms, based on their own financing costs. In this context, multilateral institutions require external grant resources to extend concessional loans. On the other hand, non-concessional loans are financially sustainable solely based on multilateral organisations’ low cost of funding and preferred creditor status. Non-concessional multilateral loans may, therefore, still be extended on more preferential terms than those available on the market terms. The use of concessional or non-concessional loans by multilateral organisations depends on the recipient country’s income level as well as considerations for its creditworthiness and debt sustainability. In general, MICs and HICs can access non-concessional multilateral loans. In 2016-2020, 48% and 23% of loans extended by multilateral climate funds and MDBs respectively were concessional (Figure 8). Due to the definitional differences outlined above, these percentages are not comparable to the percentages for bilateral providers.
Figure 8. Multilateral climate finance loans by concessionality level, in 2016-2020 (%)
Source: Based on OECD DAC statistics and complementary reporting to the OECD.
Climate theme across public climate finance financial instruments
In the context of public climate finance, between 2016 and 2020, the majority of grants were extended to finance adaptation (42% of all grants) and cross-cutting activities (25% of all grants). In contrast, over two-thirds of both loans (71%) and equity (89%) supported mitigation activities. Over this timeframe, the volume of finance through public loans for adaptation activities rose from USD 5.1 billion in 2016 to USD 17.1 billion in 2020 (+240%).
In contrast, for mitigation, the shares of loans and grants in bilateral and multilateral public finance remained relatively stable over the five years, accounting on average for 82% and 14% of public mitigation finance, respectively (Figure 9). Yet, in absolute terms, reflecting the overall increase of total public climate finance provided between 2016 and 2020, grant-financed adaptation finance still increased by USD 3.4 billion.
Figure 9. Climate theme of public climate finance provided by financial instrument in 2016-2020 (%)
Note: Public guarantees are not accounted for as public finance but are instead captured as part of the analysis of private finance mobilised, presented in other figures and sections of this report.
Source: Based on Biennial Reports to the UNFCCC, OECD DAC statistics and complementary reporting to the OECD.
The sectoral split of public finance varies considerably across different financial instruments. Over half (52%) of loans targeted the energy and transport and storage sectors. The 2016-2020 increase in public adaptation finance was mostly driven by an increase in adaptation loans in the water supply and sanitation as well as transport and storage sectors. In contrast, the three main sectors supported by grants, which together represented 46% of all grants, were (in order) agriculture, forestry and fishing; energy and general environmental protection. For equity, 62% targeted the energy and banking and financial services sectors.
Financial instrument split across different recipient countries’ groupings
The instrument split of public climate finance also varied considerably across regions (Figure 10). Loans accounted for more than three-quarters of total public climate finance in Asia (88%), the Americas (81%) and Europe (79%). In Africa, they accounted for 61% of the total, and in Oceania for only 17%. In relative terms, grants represented a larger share in regions with a relatively high number of poor or more vulnerable countries (Africa, Oceania) than regions with a greater number of middle-income countries (Europe, the Americas).
At an aggregate level, the lower the income group, the higher the share of grants. In LICs, grants represented 61% of total public climate finance provided. In contrast, total public finance provided in LMICs and UMICs was primarily based on loans, which accounted respectively for 86% and 87% of total climate finance provided in each group.
Figure 10. Instrument split of public climate finance provided across developing country regions and income groups in 2016-2020
Note: Public guarantees are not accounted for as public finance but are instead captured as part of the analysis of private finance mobilised, presented in other figures and sections of this report. This figure does not fully reflect developing countries’ differences in terms of size, population, and other socio-economic conditions. The regions included cover developing countries only, as defined in Annex B. This figure does not fully reflect developing countries’ differences in terms of size, population, and other socio-economic conditions.
Source: Based on Biennial Reports to the UNFCCC, OECD DAC statistics and complementary reporting to the OECD.
On average, over 2016-2020 the share of climate finance provided via grants was higher in SIDS and LDCs than when considering all recipient countries. In SIDS, grants represented 60% and loans 40% of total public climate finance. In LDCs grants represented 62% and loans 37% (Figure 11). For both SIDS and LDCs the instrument split remained stable over the five years. Fragile states3 offer a similar picture; over 2016-2020, more than half (58%) of total public finance provided in these countries was in the form of grants. Loans represented 41% and equity investments less than 1%. In each one of the three country groupings, one-quarter (25%) of loans targeted the energy sector, whereas about 20% of grants targeted the agriculture, forestry and fishing sector.
Figure 11. Volume and share of grants provided across SIDS, LDCs and fragile states
Note: This figure does not fully reflect developing countries’ differences in terms of size, population, and other socio-economic conditions.
Source: Based on Biennial Reports to the UNFCCC, OECD DAC statistics and complementary reporting to the OECD.
Insights from the disaggregated data analysis of the instrument split in public climate finance
Findings from the data analysis of climate finance data presented in the previous sections indicate that public climate finance can be provided through a variety of financial instruments, as different public climate instruments serve different purposes in different contexts. While in aggregate, public climate finance is mainly extended via loans, the share of grants is higher in bilateral public finance and multilateral climate funds. Grants are mostly used to fund adaptation and cross-cutting activities, particularly in vulnerable and/or lower-income countries, whereas the share of loans is significantly higher in mitigation activities in middle-income countries. This section delves deeper into these observed trends.
The instrument split varies significantly between different types of public climate finance providers with different mandates and operating models
The substantive difference in the share of loans extended by MDBs as opposed to that of climate funds largely depends on differences in mandates and operating models. Many MDBs’ business models are geared towards direct lending. They rely more heavily on financial instruments that imply repayment and interests (loans) or an exit and return (equity), although the extent to which this is the case differs depending on the mandate of each MDB (OECD, 2021[27]). Further, MDBs often finance relatively large infrastructure projects, within which debt financing plays a critical role.
In contrast, multilateral climate funds typically operate on the basis of disbursing paid-in contributions or replenishments by member countries over a given period, rather than using these as equity to capitalise their operating model and leverage for revolving development financing. As a result, such multilateral climate funds have a higher ability to extend grants than MDBs, including in support of non-income generating activities.
A distinction can also be drawn within the bilateral climate finance component, between aid agencies on the one hand and development finance institutions on the other hand. The former operate on a model similar to that of climate funds and the latter more on a business model similar to that of MDBs, although such characterisation needs to be nuanced on a case by case. However, the level of granularity of bilateral climate finance data reported by donor countries to the UNFCCC does not lend itself to further analysis of this distinction, as it does not include information on the extending agencies.
Grants mainly fund adaptation, demonstration and capacity-building activities, whereas loans focus more on mitigation and financially-sustainable projects.
Grants, loans and equity can all contribute to the economic development of developing countries and climate action. The use of different instruments generally evolves with the stage of socio-economic development of recipient countries (see concluding section of the next chapter), as well as varies across different types of projects and activities. Table 2 provides a selection of examples of different activities supported by loans, grants and equity in the energy and transport sectors.
Table 2. Selected examples of loans, grants and equity in the energy and transport sectors
Note: Public guarantees are not accounted for as public finance but are instead captured as part of the analysis of private finance mobilised, presented in other figures and sections of this report. The examples in the present table were selected to provide an overview of the common grant-, loan- and equity-funded activities supported by climate finance. This selection is non-exhaustive and does not fully represent the breadth and variety of activities supported by climate finance provided through different instruments. This table is to be read in the broader context of the chapter. The descriptions of activities have been edited to remove any explicit reference to the recipient country or entity.
Source: Based on Biennial Reports to the UNFCCC, OECD DAC and Export Credit Group statistics, complementary reporting to the OECD.
Activities with low or no direct financial returns, but high expected economic or social returns often benefit from grants. This is notably the case for technical assistance or capacity building, which tend to be more frequent for adaptation than mitigation, as well as adaptation activities more generally (UNEP, 2021[28]). Grants can also be particularly effective to support the non-commercially attractive feasibility study or demonstration of early-stage clean technology innovation or to improve access to technologies and innovation in poor countries and isolated communities. In contrast, public loans are often used to fund financially-sustainable mature or close-to-mature technologies as well as large infrastructure projects with a future revenue stream, which are more often found in the context of mitigation activities, e.g. renewable energy power plants. The fewer adaptation activities financed by loans also mainly relate to infrastructure projects such as the construction of water treatment plants or sewerage systems.
Finally, equity investments can take the form of direct investments in companies and project finance special purpose vehicles (SPV)4, or investments through funds and collective investment vehicles. Public climate finance provided as equity almost exclusively focuses on mitigation activities in the energy and transport sectors. Such public equity investment typically helps improve the financial viability of large projects to private investors, which may otherwise consider investments in developing countries too risky (OECD, 2014[29]). For these reasons, equity investments are mainly used by development finance institutions with a mandate to promote investment in the private sector, as well as to mobilise private finance.
Grants represented a larger share in more vulnerable and/or poorer countries
SIDS, LDCs and LICs benefitted on average from larger shares of grants compared to all recipients. On the one hand, this stems from the fact that they are mainly recipients of climate finance for adaptation activities, which are often supported by grants. On the other hand, these countries often present economic and socio-political conditions that do not favour loan-based investments and limit the absorptive capacity of debt financing more generally (OECD, 2021[27]). Notably, high level of government debt, which often characterises these countries, may limit the country’s borrowing capacity and make any further borrowing expensive in terms of high-interest rates (OECD, 2020[30]). Conversely, limited private and financial sector development limits the use of loans to finance activities by non-state actors.
Overall, capacity constraints with regard to skills, institutions, and management and other implementation constraints can increase the cost of investment (Drabo, 2021); (Gurara, Kpodar, Presbitero, & Tessema, 2021). In such context, infrastructure projects in particular can suffer from a lack of transparent and bankable project pipelines that could attract loans and equity investments (Bielenberg, Kerlin, Oppenheim, & Roberts, 2016); (OECD, 2018). Due to capacity constraints, many developing countries lack to date the ability to plan for and develop pipelines of e.g. low-emissions, climate-resilient infrastructure projects that are central to climate and development objectives (OECD, 2018). These capacity constraints typically correlate closely with development status and income levels. They are in fact a key characteristic of low levels of development, notably in lower-income countries, fragile states and small countries remote from markets and trade patterns.
In contrast, the share of loans in total climate finance received is significantly higher in MICs and HICs, compared to LICs, as economies at higher income levels can more readily absorb and deploy large-scale financial resources. MICS and HICs tend to have a relatively higher capacity to repay as well as more developed private sector and local capital markets and, correspondingly, attract larger shares of loans. Moreover, these groups of countries generally offer enabling environments more conducive to large infrastructure projects that lend themselves better to loans and equity investments.
Notes
← 1. The sum of individual financial instruments may not add up to totals due to rounding.
← 2. Grant element refers to the difference between the face value of a loan and the present value of the service payments the borrower will make over the lifetime of the loan, expressed as a percentage of the face value.
← 3. Fragile states are generally defined as presenting weak capacities to carry out basic governance functions and lacking the ability to develop mutually constructive relations with society. Fragile regions or states are also more vulnerable to internal or external shocks such as economic crises or natural disasters (OECD, 2020[71]). The OECD multidimensional fragility framework measures fragility on a spectrum of intensity across five dimensions: economic, environmental, political, security and societal. Results from the 2020 framework identify 57 fragile states. Of these, 13 are classified as extremely fragile (OECD, 2020[71]).
← 4. Special Purpose Vehicles (SPVs) are legal entities that are created for a specific purpose. In the context of project finance they are often created to structure resources from a group of investors, typically including MDBs, bilateral DFIs and private investors, finding optimal risk distribution across the investor pool.