New ways to channel climate money crucial to meeting Paris Agreement targets

'Money where it matters: designing funds for the frontier’, by IIED, sets out how a fundamental reform of the way climate finance is distributed can make sure it reaches the local level and meet the needs of growing numbers of people living in the poorest and most vulnerable countries.  

IIED’s Money Where it Matters framework recommends fundamental reform to how finance is delivered. This includes: aggregating investment into local projects to reduce transaction costs; building trust between donors and local actors; providing flexible finance to enable bespoke responses; and investment in developing local capabilities to ensure that, over time, the funds can absorb large-scale and more risk-averse finance.

It is vital that throughout the development of financing mechanisms local actors – government and community representatives – are involved in decisions about where and how funds are channelled.

Less than 10% of international climate finance is being committed to the local level. Funds’ over-dependence on such institutions as the World Bank and UN agencies for distributing money committed under the Paris Agreement means, too often, finance is focused on short-term projects. These are designed by distant, uninvolved experts. As a result, this can miss local priorities and the flexibility to respond both to rapidly changing needs and new opportunities.

Also, a significant proportion of the money is spent on separate administration costs, diverting it away from its purpose of enabling communities to adapt to the impact of climate change and develop low-carbon economies.  

The research builds on earlier work and reviews four frontier funds in Brazil, Thailand and Zimbabwe that grew out of social movements and are effective in channelling money to the forefront of climate action. The Dema Fund, Babaçu Fund, Gungano Urban Poor Fund and Tree Bank Foundation demonstrate that there are effective alternatives to the current dependence on multilateral banks and other international bodies.

Clare Shakya, director of climate change at IIED and one of the report’s authors, said: “This meeting is an important opportunity for governments and donors to make critical changes to a system that too often is more of an obstacle than solution. Making sure climate finance reaches the women, children and men who need it most, is critical to achieving the Paris Agreement’s targets.

"By strengthening local institutions and making sure they are involved at every step, climate finance can have the agility, responsiveness and relevance necessary to help communities thrive in the face of climate change and keep temperature rise below 1.5°C above pre-industrial levels.”