Flows of finance to developing countries to support climate mitigation and adaptation efforts are growing in speed and scale, toward the target formalized in the Cancún Agreements to increase flows from developed to developing countries to $100 billion a year by 2020. Ensuring that this money is well spent, and hence maximizing its impact and effectiveness, will of course be critical for achieving outcomes and maintaining support. However, the tools and methods that are now being used to estimate, measure, monitor and disseminate the impact of public climate finance will not be sufficient to support this expansion. With many international institutions and bilateral agencies boosting their climate portfolios, as well as the creation of the Green Climate Fund, the time is ripe to examine current practices to improve the effectiveness of climate finance.

This paper presents an overview of existing practices by summarizing the findings from an extensive survey of various institutions, drawing on the lessons learned from development finance, the public and private activities of international financial institutions and experience with market-based instruments. The paper mainly focuses on mitigation, and it seeks to discern lessons for policymakers by addressing two key questions: What makes climate finance effective? and what tools, methods or systems might improve the effectiveness of climate finance?

What Makes Climate Finance Effective?

Lessons from existing practices suggest that climate finance will be more effective when:

  • It promotes clear objectives that are shared among key stakeholders.
  • It supports activities that have a powerful transformative or demonstration effect.
  • It ensures the most effective balance between public and private capital.
  • The actions it funds incorporate a results-based approach.
  • It considers cost-effectiveness—that is, actions with a larger “climate return on investment” per dollar allocated—as one of its guiding principles.
  • It supports actions that are nationally owned and aligned with local and national priorities.
  • Funding is predictable, coordinated and less fragmented.
  • It is administered transparently, with flows and results shared to promote accountability and support effective prioritization, and is supported by strong “real-time” systems to measure progress, draw early lessons, and allow modification.

What Tools, Methods or Systems Might Improve the Effectiveness of Climate Finance?
With regard to the methods and systems that might improve the effectiveness of climate finance, this study suggests that the following tools need to be developed, refined and applied:

  • robust and credible ex ante and ex post estimates of the scale and cost of abatement likely to result from a particular intervention, addressing the demonstration potential and other transformative impacts;
  • a common “climate effectiveness” methodology and metric, with tools, methods and systems that allow some comparison between funding proposals, institutions and activities;
  • real-time evaluation of operations to enable prompt learning and corrective actions to be undertaken within the lifetime of a particular intervention, incorporating independent verification;
  • systematic postaction reviews of climate activities, with lessons incorporated into the design of future actions;
  • tools, methods and systems that strike a balance between the rigor of measurement systems and the related transaction and administrative costs;
  • processes to estimate in advance the potential climate impact of all interventions, not just those within a “climate portfolio”;
  • tools to promote transparency and the coordination of donor funding.

It will be necessary to build capacity across the relevant actors to include these additional elements required to provide more accurate and harmonized information on the effectiveness of climate finance. Current approaches provide a set of ready field experiments; exploring this knowledge will allow lessons to be learned from ongoing practices to scale up finance for a transition toward low-carbon, climate-resilient development.