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Second report of the Independent High-Level Expert Group in Climate Finance

The COP26 and COP27 Presidencies, together with the UN Climate Change High-Level Champions, extended the mandate of the Independent High-Level Expert Group on Climate Finance (IHLEG) in July 2022, to prepare this second report for COP28. The IHLEG was tasked to help develop and put forward policy options and recommendations to encourage and enable the public and private investment and finance necessary for delivery of the commitments, ambition, initiatives and targets of the UNFCCC Paris Agreement, reinforced by the Glasgow Climate Pact, and the Sharm el-Sheikh agenda.

The full report is due to be published in early December 2023.

Key messages

1. Finance with a purpose

  • The Independent High-Level Expert Group on Climate Finance was tasked to assess how the climate finance system must change if it is to support the investment and actions necessary to deliver the goals of the Paris Agreement, within the broader goals of sustainable development. This is finance with a clear purpose.
  • Our first report, published for COP27, focused on the amount of investment needed and how to deliver that finance. We concluded that around US$2.4 trillion of investment a year would be necessary by 2030 (in emerging markets and developing countries – EMDCs – outside China) across the priorities of a just energy transition, adaptation and resilience, loss and damage, and the conservation and restoration of nature. This is a four-fold increase from current levels devoted to these areas. The world is badly offtrack on the Paris goals, as the first Global Stocktake shows, the primary reason for which is insufficient investment in key areas, particularly in EMDCs.
  • Despite the clear opportunity that this scale of investment would create for better and more sustainable growth, actual investment performance on key climate priorities in EMDCs has stalled. The focus of this report is therefore on acceleration and implementation.

2. The challenge of investment: acceleration and implementation

  • We now need a much more purposeful approach with strong and committed engagement of all key stakeholders – countries, the private sector, the multilateral development banks (MDBs), donors and private philanthropy. Country leadership will be crucial and country platforms provide a promising way to bring together the main stakeholders.
  • The first task is to act to unlock investment at scale through tackling impediments and buttressing institutional structures that can create investable pipelines of projects, anchored in a strategy of transformational change. This requires a shift from a do-it-alone approach to co-creation of investment opportunities and tackling obstacles with the combined involvement of countries, the private sector and development finance institutions.
  • We must also tackle the immediate debt constraints and lack of fiscal space that are impeding the ability of many countries to invest, especially poor and vulnerable countries.

3. An integrated climate finance framework to deliver on the Paris Agreement

  • Mobilising the scale and quality of finance to meet the large anticipated requirements will require an integrated approach that boosts all sources of finance – public and private, domestic and international – and uses their complementary strengths.
  • Domestic resource mobilisation will be central, given its dominant role and importance in anchoring the macroeconomic sustainability of all finance. There is potential to boost tax revenues, including by harnessing new digital possibilities. Elimination of harmful subsidies and carbon taxation can generate much needed revenues to finance the transition.
  • The role of the private sector in both investment and finance will be crucial and both domestic and international private finance must be boosted. International private finance to EMDCs for climate action will need to be increased by more than 15 times on current levels to deliver on climate mitigation goals.
  • MDBs are key to both unlocking investment opportunities and mobilising finance, through own lending and catalysing private finance. They need to play a much stronger role in reducing, managing and sharing risk and in reducing the cost of capital. To deliver on the Paris targets, their role will need to change fundamentally and the scale of their support to triple by 2030. MDBs need to implement fully the recommendations of the G20 Expert Group on Capital Adequacy Framework to maximise capital efficiency, tap new sources of capital and guarantees to boost their immediate firepower, and secure strong shareholder support for regular capital increases to enable a sustained expansion of lending.
  • Concessional finance is the scarcest and most vital source of finance for meeting urgent and high priority needs. A fivefold increase in concessional finance is needed by 2030. Developed countries must lead by tripling the amount of bilateral concessional finance by 2030, but concessionary finance cannot be provided at the right scale with bilateral official development assistance (ODA) alone. We must therefore pursue all options, including carbon markets (compliance and voluntary), expanded rechannelling of special drawing rights, international taxation and a bigger role for philanthropy, including from the corporate sector.
  • These four sources of finance – from domestic public resources, the private sector, MDBs, and concessional – are mutually supportive and different combinations will be necessary for different investments and activities. The method of combination will be critical, as well as the overall total.

4. Seizing the opportunity – and the consequences of success or failure

  • Momentum has been building over the past year to refine the elements of a more effective framework for climate finance. It is crucial to seize the opportunity at COP28 to secure a breakthrough and to put in place an action plan to deliver on this framework.
  • Failure to generate investment and finance of the scale and nature required is to fail on Paris. The consequences would be devastating, particularly for the poorest people. Seizing the opportunity would unlock the growth story of the 21st century. This is truly finance with a purpose.

The Independent High-Level Expert Group on Climate Finance (IHLEG) is co-chaired by Vera Songwe and Nicholas Stern, and Amar Bhattacharya is the Executive Secretary of the group.

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