COP27, the so-called ‘Implementation COP’, kicked off in the shadow of recent climate impacts in Pakistan, St Lucia, Somalia and many other countries. These devastating events were highlighted  by the COP23 President, Fiji’s UN Ambassador, Satyendra Prasad, who asked developed countries to “deliver on the financial commitments that you have made”.  Debt-free climate finance and financial system reform were also key themes throughout COP27. 

Yet despite these calls, and the escalating financial and social costs of inaction on climate change, they were not enough to get countries to agree to close the current global climate finance gap. Instead, countries at COP27 could only agree to another yearly reminder to meet a goal that was set in 2009, and has never been delivered. The only truly positive outcome in a package of decisions was a long-called-for Loss and Damage Fund.

The Loss and Damage Fund is finally established

The urgency of addressing loss and damage was felt in all parts of the COP27 venue. Indigenous groups, civil society, countries in the global south, and youth activists, all shared lived experiences of how loss and damage caused by climate extreme events is already ravaging communities and economies in the global south. But having no financial mechanism to provide finance to address loss and damage, meant they had no way out of the ongoing and escalating cycle. This focus literally ‘paid off’ when, following  30 years of work, countries agreed to set up a fund to address loss and damage through new and additional finance. As part of the fund’s creation, countries also recognised that loss and damage costs increased global south countries’ debt burden and thus impacted their ability to achieve the Sustainable Development Goals. 

This is a huge accomplishment that, if  designed well, will help ensure that generations of people in the global south can move into the future with greater. However, there were some worrying developments. For instance, while the Fund is under the auspices of the UNFCCC, countries specifically asked international financial institutions (IFIs) to discuss the potential role they can play in providing such finance. They were asked to reflect on innovative approaches in particular and would start this process  during the next World Bank and International Monetary Fund Spring Meetings in April 2023. Requesting such institutions to play a relevant role in providing finance for loss and damage is concerning. Their financing mechanisms consist mainly of loans, and in the case of financing for middle- income countries, this has  traditionally been non-concessional lending. The World Bank and other multilateral development banks have also traditionally provided massive financial support for fossil fuel industries, and both the World Bank and the IMF’s policy advice and conditionalities play a detrimental role with regards to the  protection of public services. 

This call for IFIs to support loss and damage financing was coupled at COP27 with a request for reforming “multilateral development bank [MDBs] practices and priorities, align and scale up funding, ensure simplified access and mobilize climate finance”. As Eurodad stated after the 2022 World Bank Annual Meetings, while the calls for reform are welcome, there needs to be a substantive discussion on what  “evolution” and “reforms” mean for the MDBs’ policies and practices. Requesting MDBs, and particularly the World Bank, to have a more relevant role in climate finance poses risks, including deepening the financialisation of, and promotion of, the private sector in climate action, rather than a qualitative change in how MDBs work in relation to the challenges of climate change. Crucially, if these institutions engage in finance to address loss and damage and further engage in climate finance, they should prioritise grants over loans, and refrain from imposing economic policy conditionalities. 

Progress on adaptation finance remains elusive 

Despite the gains made in finance to address loss and damage, momentum on adaptation finance remains elusive. The United Nations Environment Programme (UNEP) estimates annual adaptation needs at US$ 160-340 billion by 2030. Yet COP27 saw less money pledged to the Adaptation Fund (US$ 230 million) than at COP26 (US$ 356 million). Developed countries must start prioritising grants and highly concessional finance to carry out adaptation activities. Importantly, the final COP27 text highlights that scaled-up public grants for mitigation and adaptation would be cost-effective and have high social returns. This is crucial to building resilience to climate impacts in the global south, without exacerbating economic inequities such as debt and low public services, within and between countries. 

CSOs call for financial systems reform now!

COP27 also saw a crossover with calls for wider reforms of the international financial architecture, including of the Bretton Woods Institutions. Various heads of state highlighted this need in their speeches, including Barbados (which drew from its Bridgetown Agenda), Ghana and Colombia. Throughout COP27, the African Group of Negotiators (AGN) made numerous calls for climate finance to refrain from causing indebtedness and pointed to the need to transform the international financial system. All of this was echoed in the People’s Plenary at COP27 where civil society called for the current global economic system to be decolonised; for the climate debt to be repaid; and for the 1.5℃ global temperature rise limit in the Paris Agreement to be both defended and achieved.

Indeed, the final COP27 text calls on the shareholders “to reform multilateral development bank [MDB] practices and priorities [and to deploy] a full suite of instruments, from grants to guarantees and non-debt instruments, taking into account debt burdens”. While this crossover between climate finance and wider financial system reforms is useful, there’s a concern that this could lead to “more lending, and risk-taking - with losses being backed by the state and public money, rather than a qualitative change in how the Bank conceives development”.  

On the margins of COP27, the Egyptian Presidency launched a number of initiatives, separate to the UNFCCC processes taking place. These included a Sustainable Debt Coalition and an initiative called Reducing The Cost Of Green And Sustainable Borrowing. Both seek to provide solutions to addressing the economic impacts of debt-based financing for climate action. Given that low- and middle- income countries (LMICs) spent US$372 billion on debt repayments in 2020, more than four times greater than the total 2020 climate finance flows (US$ 83.3 billion), these are useful initiatives. 

Beyond COP27, what can we expect on climate finance in 2023?

The need for financial system reform was not lost on French President Emmanuel Macron who announced he will be convening a finance summit in Paris in June 2023. The purpose is to see how to follow up on Barbados’ Bridgetown Initiative proposals on how to fund mitigation, adaptation and loss and damage. To facilitate this, an expert group will be set-up.

Additionally, the ongoing process to set a post-2025 climate finance goal will go up a notch next year, including several dialogues with experts, high-level ministerial meetings, and public consultations. What is more, a 2023 workplan for the new goal will be developed, covering several climate finance themes. These will include the needs and priorities of global south countries; quantity, quality, scope and access features; sources of funding; and monitoring and transparency arrangements. A public consultation will be held on the workplan, ending in February 2023. Updates on how to participate in all of the public consultations on the new goal will be posted on the UNFCCC webpage here, so keep an eye out. 

COP27 only delivered one part of the climate finance puzzle, namely a Loss and Damage Fund. Ahead of COP28 in the United Arab Emirates (UAE) (30 November to 12 December 2023), developed countries need to step up and repay the climate debt so all countries are able to work to achieve the goals of the Paris climate Agreement and pursue sustainable development.