The Crucial Role of Concessional Capital in Achieving Climate Goals

As the world grapples with the urgent need to combat climate change, the concept of concessional capital has emerged as a pivotal element in financing the transition to a low-carbon and resilient economy. Concessional capital refers to financial resources offered at more favorable terms than those available in the market, making it essential for driving investments in sectors that are either emerging or lack immediate revenue streams. To meet the ambitious targets set by the Paris Agreement, concessional capital must increase by at least fivefold by 2030. This article delves into the significance of concessional capital, its current state, and the necessary steps to scale it effectively.

Understanding Concessional Capital

Concessional capital plays a vital role in reducing the average cost of capital for investments, creating markets, and fostering enabling conditions for private actors to fill the multitrillion-dollar climate investment gap. According to the Climate Policy Initiative’s Global Landscape of Climate Finance 2023, concessional finance constituted only 11% of total climate finance, with the remainder focusing on market-rate debt and equity instruments. This highlights a critical need for increased concessional funding to support climate action, particularly in vulnerable regions and sectors.

The Current Landscape of Concessional Climate Finance

Assessing the baseline for concessional climate finance is crucial for understanding how to scale it up effectively. The Climate Policy Initiative’s report reveals that international concessional climate finance increased by 50% from 2019 to 2022, reaching USD 81 billion. While this growth is encouraging, it pales in comparison to the staggering USD 1.3 trillion spent on fossil fuel subsidies in 2022. Redirecting even a fraction of these funds towards concessional climate finance could significantly bolster efforts to combat climate change.

In 2022, global official development assistance (ODA) also saw a 22% increase, amounting to USD 287 billion, with climate-related grants making up 35% of this total. However, the challenge remains in ensuring that these funds are directed towards impactful climate initiatives rather than perpetuating harmful fossil fuel investments.

Distribution of Concessional Climate Finance

International concessional climate finance is primarily provided by bilateral development finance institutions (DFIs), multilateral DFIs, and direct project-level funding from governments. Notably, around 360 institutions contributed to international concessional finance between 2019 and 2022, with just 10 institutions accounting for 70% of the total. This concentration of funding sources can lead to increased transaction costs and logistical hurdles for recipients, potentially delaying climate action.

Geographically, least-developed countries (LDCs) received approximately 33% of total international concessional climate finance, while Sub-Saharan Africa emerged as the primary destination, receiving 30% of the total. However, countries affected by conflict and fragility, such as Myanmar and Sudan, have seen stark decreases in funding, underscoring the need for targeted support in these regions.

Focus Areas for Concessional Climate Finance

Between 2019 and 2022, nearly 42% of international concessional climate finance targeted climate mitigation activities, while 36% was allocated to adaptation and resilience efforts. The remaining 22% supported projects with dual objectives. Despite the increasing trend towards dual-objective financing, there remains a significant gap in funding for adaptation and resilience, which is critical for vulnerable populations facing the impacts of climate change.

Interestingly, international grants for climate action tended to focus on smaller projects, with an average ticket size of USD 3 million, compared to USD 74 million for low-cost loans. This disparity can deter larger institutional investors, leaving funding primarily to public development finance institutions and aid agencies.

The Role of Domestic Concessional Climate Flows

While the report emphasizes international concessional climate finance, domestic flows also play a crucial role in national climate action. However, data on domestic concessional climate finance is scarce, primarily due to a lack of transparency in public budget expenditures. Available information suggests that domestic concessional finance is predominantly concentrated in high-income economies, with 75% of investments made in Western Europe.

Domestic concessional climate finance tends to support long-term government objectives, providing clear signals to the private sector. However, the lack of data on these flows hinders the ability to track and assess their effectiveness.

Recommendations for Scaling Concessional Climate Finance

Given the current scarcity of concessional climate finance, both internationally and domestically, international cooperation is essential to scale these flows within a coherent climate finance architecture. Here are some specific strategies for enhancing the scale and efficiency of concessional climate finance:

1. Strengthen International Cooperation: Foster collaboration among countries and institutions to create a unified approach to concessional finance, ensuring that resources are allocated effectively and transparently.

2. Redirect Fossil Fuel Subsidies: Advocate for the reallocation of fossil fuel subsidies towards concessional climate finance, leveraging existing funding pools to support sustainable development.

3. Enhance Data Transparency: Improve data collection and reporting on domestic concessional climate finance to facilitate better tracking and assessment of funding flows.

4. Support Capacity Building: Invest in capacity-building initiatives for national development finance institutions to enhance their ability to mobilize and manage concessional capital effectively.

5. Encourage Private Sector Engagement: Move beyond vague calls for private sector mobilization and develop concrete strategies to engage private investors in financing climate action.

Conclusion

Concessional capital is a critical component in the global effort to combat climate change and achieve the goals set forth in the Paris Agreement. While recent increases in concessional finance are promising, significant challenges remain. By redirecting existing funding, enhancing cooperation, and improving data transparency, the global community can unlock the potential of concessional capital to drive meaningful climate action and support the most vulnerable populations. The time to act is now, and the stakes have never been higher.