copy the linklink copied!2. What does Paris alignment mean for development co-operation?

The Paris Agreement establishes global objectives and processes to achieve them

The Paris Agreement offers a way forward to address climate change that supports Sustainable Development Goal (SDG) 13 on climate action and the broader 2030 Agenda for Sustainable Development (UN, 2015[1]). Article 2.1 of the Agreement (Box 2.1) includes its three core objectives: mitigate climate change, adapt to its adverse impacts, and make finance flows consistent with low-emissions, climate-resilient pathways in the context of sustainable development and efforts to eradicate poverty. Taken together, these objectives are a basis for global climate action, as achieving them means effectively addressing the drivers and impacts of climate change. This is reflected in Article 3, which refers to Article 2 as establishing the purpose of the Agreement (UNFCCC, 2015[2]).

Article 2.1 also acknowledges that these targets require a global response, thereby implicating a range of actors from governments and international organisations to the private sector, civil society and research organisations, among others.

Article 4.1 of the Paris Agreement sets a clear, longer-term target for abating global emissions over the coming decades – the achievement of “a balance between anthropogenic emissions by sources and removals by sinks of greenhouse gases in the second half of this century” – that is often described as “net zero emissions” (UNFCCC, 2015[2]). The Agreement states that Parties to the Agreement should “aim to reach global peaking of greenhouse gas emissions as soon as possible, recognizing that peaking will take longer for developing country Parties, and to undertake rapid reductions thereafter in accordance with best available science”. The latest evidence shows that global emissions are not estimated to peak by 2030, let alone by 2020 (World Meteorological Organization, 2019[3]).

Two global mechanisms are key to delivering on the Paris Agreement

Ownership is fundamental to Paris alignment

Countries’ determination and ownership of their development pathways are practical necessities for effective, long-term action (Box 2.2). Both the 2030 Agenda and the Paris Agreement recognise that countries hold primary responsibility for their economic and social development, and that global aims will be met through national and subnational actions (UN, 2015[1]). As such, they echo the principle of country ownership that the Busan Partnership for Effective Development Co-operation identifies as a requirement for making development co-operation effective and sustainable (OECD, 2012[9]).

Countries included these principles when formulating the universal yet country-driven approaches of the 2030 Agenda and the Paris Agreement. The 2030 Agenda states that the SDGs and their accompanying targets are “integrated and indivisible, global in nature and universally applicable, taking into account different national realities, capacities and levels of development and respecting national policies and priorities” (UN, 2015[1]). The UNFCCC and the Paris Agreement, in Article 2.2, also explicitly recognise that “in light of different national circumstances”, countries have common but differentiated responsibilities and respective capabilities in addressing the challenges of climate change (UNFCCC, 2015[2]). This recognition of developed and developing countries’ different circumstances is particularly important for developing countries that need significant support – for example in the form of funding, technology transfer or capacity development assistance from developed countries – to be able to determine and carry out their priorities on both sustainable development and climate action. This recognition also is consistent with Article 4.4 of the Paris Agreement, which underscores that developed countries “should continue taking the lead by undertaking economy-wide absolute emission reduction targets” (UNFCCC, 2015[2]).

The 2030 Agenda and the Paris Agreement further acknowledge that inclusive, local input is needed to ensure that approaches to global challenges are both just and robust. The Paris Agreement, in Article 7, states that adaptation is “a global challenge faced by all with local, subnational, national, regional and international dimensions”, and that adaptation action should “be based on and guided by … traditional knowledge, knowledge of indigenous peoples and local knowledge systems” (UNFCCC, 2015[2]). The Agreement also emphasises that national governments should engage with subnational actors to build in-country capacity in a way that fosters these actors’ ownership of activities and effectively responds to countries’ needs. It states that capacity development should be “an effective, iterative process that is participatory, cross-cutting and gender-responsive” (UNFCCC, 2015[2]). The same principles are reflected in the 2030 Agenda, which calls for countries to inclusively review their progress on the SDGs at both national and subnational levels and to draw on contributions from indigenous populations, civil society, private actors and others (UN, 2015[1]).

Characteristic 1: Paris-aligned development co-operation does not undermine the Paris Agreement but rather contributes to the required transformation

Development co-operation activities that are Paris-aligned not only do no harm to effective action on climate change. They also make a positive contribution to the system-wide transformation needed to achieve low-emissions, climate-resilient societies, as discussed in detail in Chapter 1. Both the 2030 Agenda and the objectives in Article 2.1 of the Paris Agreement set out an ambitious vision for countries to fundamentally transform their development. It is insufficient for development co-operation providers to focus on meeting a minimum standard of doing no harm by avoiding decisions and activities that undermine the Paris Agreement. A systemic shift is only possible if all countries comprehensively prioritise and pursue the required transformation in all of their decisions about their growth and development, across all sectors and activities, and with a consistent emphasis on inclusion and leaving no one behind (New Climate Economy, 2018[12]).

Development co-operation providers are important agents for supporting the transition away from outdated frameworks and activities that add to the existing mitigation and/or adaptation burden. Their mandate is to actively contribute to the type of development progress that is needed in the 21^st century. To be Paris-aligned, all development co-operation activities – including those without a designated climate objective – should be low-emissions and climate-resilient. While it is not necessary for all development co-operation activities to include active climate objectives, it is critical that their underlying assumptions, conditions and objectives be comprehensively adapted to support a systemic approach to achieving low-emissions, climate-resilient development.

The Paris Agreement, in Article 3, acknowledges the need to raise ambition to adequately address climate change, committing that the Parties shall undertake and communicate ambitious efforts so that the Agreement is effectively implemented (UNFCCC, 2015[2]). The stark reality, as discussed in Chapter 1, is that the collective commitments outlined in current NDCs are insufficient to limit temperature rise in line with either of the objectives of Article 2.1, i.e. to well below 2°C or to 1.5°C. In parallel with these inadequate commitments, global progress across sectors on both climate change mitigation and adaptation has been limited since adoption of the Paris Agreement in 2015 and its entry into force in late 2016. Global energy-related CO₂ emissions reached a historic high in 2018, growing by 1.7% from 2017 (IEA, 2019[13]). This was the highest rate of annual growth since 2013, and demonstrates the massive gap between current emissions and global mitigation objectives (IEA, 2019[13]). Similarly, on adaptation, a major gap persists between current efforts and the levels of coherent policy commitment and financing that are needed across many sectors. The United Nations (UN) Environment Programme noted in 2018 that fewer than half of 162 countries1– both developed and developing – had in place integrated frameworks for holistically addressing climate change adaptation (UNEP, 2018[14]). Moreover, available adaptation finance remains far less than the latest global estimates of the costs of adaptation and far below the needs identified in current NDCs (UNEP, 2018[14]).

As Chapter 1 outlines, the world is not yet on track to achieve the fundamental transformation of socio-economic systems that is needed for low-emissions, climate-resilient societies (OECD/World Bank/UNEP, 2018[15]; UNFCCC, 2019[16]). Chapter 3 discusses further the challenges and limitations of efforts to date.

Characteristic 2: Paris-aligned development co-operation catalyses countries’ transitions to low-emissions, climate-resilient pathways

Development co-operation that is Paris-aligned acts as a catalyst for developing countries’ inclusive transformation (as described in Characteristic 1). This means deploying finance strategically and engaging in policy support and capacity development (see Section 2.3) to trigger broader change, in particular change led by partners and other actors. In this sense, Paris alignment requires providers to plan and implement individual projects with a view towards creating a more conducive environment for the transformation while also helping to ensure that activities support the groups and communities in developing countries that need support the most (Box 2.4). This reflects what the Paris Agreement calls the “intrinsic relationship” between “climate change actions, responses and impacts” on the one hand and “equitable access to sustainable development and eradication of poverty” on the other (UNFCCC, 2015[2]).

Given the mandate of development co-operation and the limited volumes of available development finance, providers need to use development finance to support interventions that maximise development impact. Catalysation is vital. Concessional development finance, in particular, provides significant flexibility to beneficiaries and enables them to operate in higher-risk environments and activities. It is especially critical that such finance be allocated in a way that is targeted, strategic and uses resources efficiently for optimal impact, including by catalysing further action.

While development finance is a relatively small resource, it is the major source of international climate finance flows to developing countries (OECD, 2015[17]). Development co-operation providers need to increase the volume of development finance resources that are available to support Paris-aligned development. As a first step, they should meet their existing commitments and ensure that these commitments are Paris-aligned. Among these are developed countries’ long-standing commitments to continue their existing collective mobilisation goal of increasing the joint mobilisation of climate finance to developing countries to USD 100 billion annually through 2025, and to set a higher collective goal before this date (UNFCCC, 2016[6]), recognising that the need to scale up dedicated climate finance will persist over the coming decades (UNFCCC, 2018[18]).

At the same time, it is clear that development finance alone cannot deliver or account for the full extent of the transition that needs to happen. Where possible, catalysation should support the reduction or phasing out of development finance in sectors, markets, locales or categories of interventions when adequate flows of other financing and funding resources are present. Catalysation includes direct finance mobilisation as well as support for the systems that underpin resource flows in countries, including those that support private financial markets in particular and also fiscal and public financial management and revenue systems in developing countries (Box 2.4). The objectives set out in Article 2.1 demand greater mobilisation and shifting of all financial flows to meet the objectives of the Paris Agreement. A strategic focus on using development co-operation to catalyse increased resources across a broad range of financial flows supports Article 2.1c, which calls for making all financial flows consistent.

Characteristic 3: Paris-aligned development co-operation supports the short- and long-term processes under the Paris Agreement

The Paris Agreement establishes short- and long-term processes to achieve its objectives for addressing climate change in the 21^st century and beyond. Paris-aligned development co-operation helps countries to increase their ambition over time, in line with the objectives presented in Article 2.1 of the Agreement, by supporting the development, financing and implementation of NDCs and LTSs. In many developing countries, development co-operation providers have an equally important role to play by supporting the integration of other climate action processes that countries are pursuing in parallel, including under and outside of the UNFCCC architecture, including at the subnational level (see Section 2.1).

Development co-operation should also help countries to link Paris Agreement processes with other overarching development and sectoral plans. Action on climate change cannot be effective when it is disconnected from countries’ broader visions and decision making on development, including efforts to achieve the SDGs (World Resources Institute/UNDP, 2018[11]). One example pertains to adaptation – countries often develop policies by sector, and both developed and developing countries commonly formulate national adaptation strategies that they pursue through more detailed national and sectoral plans (UNEP, 2018[21]); (New Climate Economy, 2018[12]). Immediate and mid-term plans provide crucial policy signals that create the enabling environment for forward-looking decision making by both public and private actors, and therefore have the potential to determine the effectiveness of both NDCs and LTSs (World Resources Institute/UNDP, 2018[11]). Development co-operation providers already help developing countries to integrate climate processes into development planning. This integration is vital for establishing the right policy settings, realising co-benefits by connecting efforts to achieve multiple SDGs, creating project pipelines that support ambitious climate action, and mobilising new sources of finance (including the unlocking of private capital).

Development co-operation providers need a concerted, long-term focus if they are to plan and allocate resources and encourage institutional change in a way that supports the transformation to low-emissions, climate-resilient pathways. As Chapter 1 illustrates, LTSs that adequately incorporate the necessary transitions in countries are critical for reducing the risks of carbon lock-in and embedded climate vulnerability (Ross and Fransen, 2017[22]).

Development co-operation providers should support countries to connect the short-term and longer-term policy imperatives of climate change and sustainable development. They should also support countries to address the inconsistencies that may arise if climate change and sustainable development are pursued in isolation, as separate agendas. Where greater ambition or coherence between approaches is needed, development co-operation providers should support and work with developing countries to identify and take up opportunities to enable a smooth transition, leveraging their concessional finance resources and long-standing role in facilitating the transfer of technology. This is particularly applicable in developing countries with limited capacities and special needs, and which require support to develop coherent short- and long-term approaches through means such as continuous capacity development, peer learning and collaboration programmes (Ross and Fransen, 2017[22]). Chapter 3 examines some of the key challenges, considerations and priorities for development co-operation in promoting ambitious NDCs and LTSs in the context of sustainable development.

Characteristic 4: Paris-aligned development co-operation proactively responds to evidence and opportunities to address needs in developing countries

Paris-aligned development co-operation proactively responds to continually emerging and evolving evidence on the pace and scale of climate change and its impacts; to identified needs and special circumstances within specific communities and sectors (consistent with Article 2.2 of the Agreement); and to opportunities and solutions (including technologies, innovation and good practices) for addressing these challenges. New information, lessons and opportunities continue to emerge as countries develop. Development co-operation should be attuned and responsive to support countries’ self-determined development pathways while also facilitating the transformation to low-emissions, climate-resilient societies that is needed to achieve the SDGs and the Paris Agreement.

Development co-operation can only facilitate this required transformation if providers commit to using up-to-date information on both climate change and sustainable development progress to inform their institutional priorities and guide their work with developing countries. The Paris Agreement sets objectives that countries will pursue over multiple decades. It is self-evident, then, that Paris alignment is not a single or static task; rather it is a continuous and dynamic process in which providers should refer to the latest evidence to regularly assess and adjust their efforts and take up new opportunities that offer the greatest impact potential (UNFCCC, 2015[2]; World Resources Institute/UNDP, 2018[11]). Such an approach supports the ratchet mechanism of the Paris Agreement and the process for assessing collective progress towards achieving the purpose of the Agreement and its long-term goals. The Agreement states that this assessment process, which it terms the global stocktake, should be done “in the light of equity and the best available science” (UNFCCC, 2015[2]).

The direct relationship between action on climate change and sustainable development means that providers can be crucial pioneers in their Paris-aligned development interventions by supporting developing countries to identify opportunities, respond flexibly to emerging evidence, and work towards Paris alignment in their development and sector strategies. This includes gathering and using not only the latest of evidence of good practice but also evidence from different sources and at different scales – including the best available science on climate scenarios, impacts and emissions trajectories as well as knowledge from traditional, emerging country- and local-level sources on vulnerability, risks and potential solutions. Development co-operation providers’ institutional incentive structures, operations and practices offer catalytic potential, so it is especially important that these are flexible and able to adapt to address existing and emerging constraints. Providers that support Paris alignment focus on the accelerated identification, deployment and scaling of innovation and new solutions (including technologies and practices stemming from local innovation) and are ready to adjust their own operations to the changing approaches or products that these solutions require.

The climate strategy of the European Investment Bank (EIB) – the first version of which was approved two months before the Paris Agreement in 2015 – is an example of a plan that has successfully provided for institutional responsiveness to new evidence and opportunities. The strategy commits EIB to extending its coverage of sector policies and to regularly updating policies in view of sectors’ climate sensitivity and the need to account for “the most recent scientific knowledge and available best practice” (European Investment Bank, 2015[23]). The strategy further provides for the revision of sector policies with reference to shifting economic and regulatory conditions, as well as “transition pathways towards a maximum 2°C global temperature rise”2 (European Investment Bank, 2015[23]). In 2019, these provisions were a basis for informing a new energy lending policy that commits the EIB Group to aligning all financing activities with the goals of the Paris Agreement from the end of 2020, and to end EIB financing for fossil fuel energy projects from the end of 2021 (see Section 2.4) (European Investment Bank, 2019[24]).

Responding to evidence inherently entails also responding to existing and future needs for support within countries at both the national and subnational levels. Development co-operation providers already significantly contribute to recognising and responding to needs and opportunities within developing countries. This knowledge allows them to target their interventions and help to protect populations facing the greatest vulnerability. This role is also recognised throughout the Paris Agreement including in Article 2.2, which notes the differentiated responsibilities and respective capabilities of actors in the light of different national circumstances (UNFCCC, 2015[2]).

Development co-operation providers best support developing countries’ transformation by being responsive to evidence and needs and working with these countries to improve access to vital information and evidence and identify emerging opportunities, experience, innovation and needs.

The four characteristics of Paris alignment work in tandem

While not exhaustive, these four characteristics highlight important considerations for development co-operation providers in interpreting and prioritising Paris alignment. Taken together, they synthesise what Paris alignment means for development co-operation and underscore that providers will contribute positively to the needed transformation by making the most of their resources, connecting with and involving the right actors, and using established mechanisms to support climate action and raise ambition in line with the objectives of the Paris Agreement.

Development banks and development finance institutions have a primary focus on non-grant instruments typically used for infrastructure financing

Development banks and DFIs include multilateral and bilateral institutions of vastly different sizes, financial assets and operational focuses. While heterogeneous, development banks and DFIs share a fundamental, defining feature – their business model is that of a financial institution, which means that their operations need to generate the financial returns to cover their operating expenditure and funding costs. As such, and by necessity, the core operations of these institutions rely on non-grant, repayable financial instruments. Once capitalised, development banks and DFIs can continue to operate and recycle their financing, although in the absence of additional grant or concessional funding, they are constrained in their ability to finance highly concessional activities with high financial risks.

In addition to financing, development banks and DFIs provide capacity development and policy support. To do so, they also receive grant resources from their shareholders and additionally use these resources to offer highly concessional financial terms to the poorest countries and countries with the least access to market finance. MDBs, for example, engage in these activities through their concessional windows. While development banks and DFIs are distinctly financing institutions, they also are often a channel of choice for donors to engage in capacity-building policy support, due to their substantial and unique expertise, skill set, and delivery capacities

Nonetheless, it is useful to differentiate development banks from DFIs according to their partner entities and use of financial instruments. Very generally, bilateral and multilateral development banks pursue both public and private sector operations. Public sector operations of bilateral banks and MDBs provide debt finance and, to a lesser degree, grants. With a view to their partner entities, these institutions work largely with the public sector; private sector operations of development banks have a specific mandate to engage with the private sector. Many DAC members also have bilateral DFIs. DFIs and private sector operations of development banks provide equity, loans, guarantees and insurance, for example to private sector infrastructure projects, and most often do so at non-concessional terms.

Development banks and DFIs serve as important channels for infrastructure finance to developing countries, and therefore have a direct impact on low-emissions, climate-resilient pathways (Crishna Morgado and Taşkın, 2019[29]). For development co-operation providers and development banks, particularly DFIs, investments in hard infrastructure, i.e. physical assets, have taken centre stage in Paris alignment to date. Beyond the provision of finance for infrastructure-related investment, however, their efforts – for example, the mobilisation of additional resources and provision of finance to promote specific business models and technologies – have an impact on developing countries’ transition to low-emissions, climate-resilient pathways.

Development agencies are critical to facilitating the transformation that is needed

Non-bank development co-operation providers, hereinafter called development agencies, deliver grant-based development co-operation across a range of sectors and policy areas, relying on recurrent funding from budgetary appropriations and donor contributions. Very generally, development agencies focus on capacity development, technical co-operation and support to policy reform. With few exceptions, the financial volume of these activities usually does not reach the scale of development co-operation in the form of debt instruments such as sovereign lending or project finance for hard infrastructure. As a rule, development agencies are comparatively more focused on activities that do not lend themselves to non-grant, i.e. repayable, assistance that is typically associated with hard infrastructure.

Policy support and capacity building usually do not have major direct climate outcomes per se, for example in the form of greenhouse gas (GHG) emissions produced or avoided by a financed power plant. However, policy support and capacity development can have significant impacts on developing countries’ enabling environment and the resulting public or private investment choices, as well as on their capacities to successfully undertake the transition to low-emissions, climate-resilient pathways. Paris alignment is much less understood and developed with respect to policy support and capacity development. But alignment across all three levers is essential for development co-operation to effectively support low-emissions, climate-resilient development (see Section 2.2).

Specialised agencies and vertical funds need to integrate the climate dimension into their policy and sector focus

Specialised agencies and vertical funds are institutions with a focused mandate on a specific development priority or challenge. In the climate change area, some notable examples include the Green Climate Fund (GCF), the Adaptation Fund and the Global Environment Facility (GEF), although the latter has a somewhat broader mandate. The International Renewable Energy Agency and the Global Green Growth Institute can also be included in this category.

Specialised agencies and vertical funds concentrate expertise and substantive capacity on climate change, although they tend to have less implementing capacity on the ground in developing countries compared to development agencies and development banks. Their individual models and mandates vary. The Adaptation Fund has an exclusive focus on adaptation and resilience activities. The GCF mandate relates to both adaptation and mitigation, whereas GEF’s remit covers a broader range of environmental priorities including but not limited to climate change. All operate through accredited entities that develop and have execution responsibility for selected programmes and activities. Their public counterparts include many traditional development finance actors, both international and national, that invariably link them back to the broader institutional architecture for international development.

The specialised institutions with a dedicated mandate for addressing climate change do not operate with a bank-like business model, although they may use financial instruments such as loans, equity, guarantees and grants. In doing so, they have a greater ability to take on financial risk across their portfolio of activities than do bank-type institutions, because the core resources that sustain their operations do not rely on these financial activities and instead are provided mainly through regular replenishments. At the same time, the financial scale within which they can take on risk is more limited than that required for full project finance of large-scale infrastructure.

Many other specialised agencies exist to address specific development priorities outside the area of climate change. Most are international bodies, among them the Global Fund to Fight AIDS, Tuberculosis and Malaria and specialised UN agencies such as the Food and Agriculture Organization and the UN Industrial Development Organization, although some, like the President's Emergency Plan for AIDS Relief, are bilateral institutions. Like specialised funds in the climate change space, these agencies often have unique expertise and resource capacities, and they play a systemic role in their focus area, including to identify and understand new and emerging challenges to their policy mandates. One of these challenges is climate change, given its impact on development, and these actors need to respond to it. While the immediate, direct exposure to climate change is well understood in sectors such as agriculture, stronger awareness and action are also required for development priorities that have so far been only marginally associated with climate change such as health, as climate change is liable to affect the entire delivery system for health in many developing countries (UNEP, 2018[14]).

Paris alignment of development co-operation requires a stronger focus beyond the financing lever

Measures of Paris alignment and analytical work have so far largely focused on the financing lever and emissions reduction, as indicated by a survey conducted for this report, commitments made by providers and a growing body of literature (IDFC, 2018[30]; Larsen et al., 2018[31]; African Development Bank et al., 2018[32]) (Germanwatch/NewClimate Institute, 2018[33]). Focus on direct financing, and particularly direct financing of hard infrastructure, is clearly relevant and important. Across developing countries, the investment gap for sustainable infrastructure is estimated at USD 4 trillion annually until 2030, equivalent to two-thirds of global infrastructure investment needs (Global Commission on the Economy and Climate, 2016[34]). The goals of the Paris Agreement require a fundamental transformation of existing infrastructure (IPCC, 2018[5]). This should be reflected in the policies and factors development banks and DFIs look at in determining how and why to finance infrastructure projects and the technologies they support through this financing.

Nonetheless, the overall share of development finance in direct financing of infrastructure is relatively small, at 6-7% of total infrastructure spending in developing countries (OECD, 2015[35]). Moreover, direct financing of infrastructure investments through development finance is much more important in least developed and low-income countries than it is in middle-income countries. This difference reflects their greater aid dependency and that alternative sources of infrastructure finance are less available and accessible. It also points to the need to unlock alternative sources of development financing as income levels increase (Sy and Rakotondrazaka, 2015[36]).

Policy reform and capacity strengthening levers have an important catalysing role for climate and development financing. Against this backdrop, the policy and capacity levers assume central importance, including with regard to the mobilisation and re-directing of further funding and finance. For example, much of the advancement of renewable energy has been achieved due to effective policies that provided a level playing field with fossil fuel-based energy sources, a basic precondition for the financial viability of such investments in the first place (IRENA, 2019[37]) (IRENA, International Energy Agency and REN21, 2018[38]). In developing countries, development agencies have supported such policy reform and are increasingly taking a systems approach to support developing countries to leapfrog inefficient and polluting heating, cooling and transport systems.

In addition to supporting these emission-critical sectors, policy reform can support the establishment of financial systems and fiscal policies for climate action that will be needed to mobilise domestic and international and public and private financing for sustainable development. While not directly responsible for climate policy and action, fiscal policy and the way financial systems are regulated and governed can have significant effects on climate outcomes. These can be direct effects, e.g. through fossil fuel subsidies, or reflected in the way climate risks are accounted for in financial regulation for due diligence, which has immediate and significant impacts on the performance and viability of a given project (OECD, 2018[39]). Beyond this, indirect effects can be important, for example through inadvertent technology bias in corporate income taxation (Dressler, Hanappi and van Dender, 2018[40]). Fiscal policy and financial regulatory frameworks are therefore powerful determinants in efforts to transition to low-emissions, climate-resilient pathways.

Policy frameworks need to be matched with essential capacity to provide an enabling environment for climate action. Developing and developed countries need stronger capacities at different levels to effectively undertake the transition to low-emissions, climate-resilient pathways. While there is no universal definition of these levels, capacities can be required at the system, institutional, individual and network level (GIZ et al., 2012[41]). Development agencies have traditionally supported capacities across these levels. For example, they support municipalities to design and implement climate change action plans. Development agencies also facilitate exchange among industry and business associations, financing institutions, and governmental entities to promote conducive partnerships for the implementation of mitigation measures that go beyond those supported directly through individual technical co-operation projects.

Policy support and capacity development are critical building blocks in Paris alignment. While development co-operation providers can only facilitate the processes of establishing and strengthening enabling environments, they can extend their impact beyond individual measures by informing and supporting the rules of the game for economic and financial and public and private actors and by building these actors’ capacities. All of these can have a beneficial, catalytic effect. Therefore, it is critical that development agencies integrate the objectives of the Paris Agreement across their activities.

Given that Paris-aligned development co-operation can take the form of financing, policy support and capacity development, separately or in tandem, these efforts will require different approaches, tools, monitoring and reporting. The three levers need to be used in improved ways that sufficiently incorporate climate objectives and facilitate sustainable development. For example, triangular co-operation, whereby providers of development co-operation facilitate initiatives between two developing countries, can be used as a tool for technical exchange that furthers various environmental objectives (OECD, forthcoming[42]). More information and evidence on emerging good practice approaches, initial lessons learned and challenges to Paris alignment are needed across varying scopes and domains of development co-operation.

Delivering effective development co-operation against existing and future threats of climate change will require a more systematic and scaled-up effort to provide development finance that consistently supports low-emissions, climate-resilient pathways. A systematic and accelerated effort will also be needed to embed climate considerations in the policy and capacity levers and into endeavours to catalyse financial flows more broadly.

Linking climate action to sustainable development requires alignment across development finance and associated activities

Aligning development co-operation with the objectives of the Paris Agreement preserves development progress already made and helps to achieve the SDGs. Climate action and sustainable development are inseparable, as is put forth in Article 2.1 of the Agreement. As sustainable development is the primary aim of development co-operation, the impacts of climate change need to be taken into account in pursuing this objective. These include all areas that substantially affect, or are substantially affected by, climate change either directly or indirectly, such as investment, taxation, fiscal systems, energy, agriculture and sustainable food production, employment, transport, and regional and urban policy. In this way, an overarching understanding can be built of what Paris alignment entails for development co-operation, and which is relevant to most policy areas and sectors in developing countries.

Intertwining climate action and sustainability has implications for how development co-operation conceives of financing and respective mandates. Development co-operation providers have begun to make commitments to align with the Paris Agreement, and this reflects an evolving interpretation and conceptual shift.

Recent analysis shows the need for what Larsen et al. (2018[31]) call a “Paris Alignment Paradigm” that supports Article 2.1c and would represent a shift from the current “Climate Finance Paradigm”. Climate financing currently focuses on defining, tracking and maximising financing towards climate change mitigation and adaptation. The Paris alignment paradigm would alternatively ensure consistency with the Paris Agreement across portfolios, pipelines and activities in addition to maximising climate finance volumes. While this literature focuses on MDBs and DFIs, the significance of the Paris alignment paradigm applies across development co-operation. Its associated framework (Figure 2.2) applies globally to all activities across countries and organisations. This paradigm also highlights a need for all development co-operation providers and developing countries to pursue Paris alignment using the levers of finance, policy support and capacity development and a need to carefully track and report on how finance flows are shifting towards low-emissions, climate-resilient development pathways.

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Figure 2.2. What does a Paris alignment paradigm look like?

Source: (Larsen et al., 2018[31]), Toward Paris Alignment: How the Multilateral Development Banks Can Better Support the Paris Agreement, https://germanwatch.org/sites/germanwatch.org/files/MDBs%20and%20Paris%20Report.pdf

Development actors have various approaches to alignment

Bilateral development co-operation providers have started to purposefully define Paris alignment as a core dimension of financial decision making, and they have made commitments towards alignment. One example is the French Development Agency (AFD). Having committed to making its activities “100% Paris Agreement-compatible”, AFD created what it terms a “sustainable development analysis” mechanism (AFD, 2018[43]; AFD, 2017[44]). This mechanism defines six operational dimensions for sustainable development, including a two-part climate change dimension on the “transition to a low-carbon pathway” and “climate change resilience”. This approach situates climate action at the heart of sustainable development along with five other dimensions of sustainable development (AFD, 2018[43]): sustainable and resilient economic growth; social well-being; gender equality; biodiversity conservation and management of environments and natural resources; and project impact sustainability and governance.. AFD also defines the scope of climate action at the country level through respective NDCs. This strengthens consistency with country-led climate action but requires emphasis on the role of development co-operation in raising ambition and ensuring that NDCs themselves are Paris-aligned. Box 2.5 outlines the AFD approach.

The Netherlands Development Finance Company (FMO) is an example of an actor approaching climate mitigation as fundamentally tied to the science-based temperature goals set out in Article 2.1 of the Paris Agreement (Box 2.6). Actors that are not development co-operation actors are taking similar approaches. The Science Based Targets initiative, for instance, supports companies to develop corporate targets for reducing their emissions that are consistent with the temperature goals of the Paris Agreement (Science Based Targets, 2019[46]). To accomplish this, the initiative proposes methods such as defining a carbon budget and using emissions scenarios and allocation approaches to make companies’ approaches credible and rigorous (Science Based Targets, 2019[46]). The initiative’s aim – to help private sector actors to make their activities consistent with the global temperature goals in the Agreement – reflects the growing recognition that Paris alignment is a priority for non-government actors and a critical part of the global effort to meet the objectives of Article 2.1. Science Based Targets also emphasises that companies should devise targets that cover up to 15 years of activity while also developing long-term targets for 2050 (Science Based Targets, 2019[46]). This approach is mitigation-centric and does not explicitly support companies to achieve climate resilience or adaptation aims, but instead concentrates support into high-emitting sectors when Paris alignment requires shifts across portfolios.

Another approach to Paris Alignment is exemplified by the United Kingdom, which has embedded its commitment within broader government policy. In July 2019, the United Kingdom committed to align its official development assistance (ODA) with the Paris Agreement in the government’s Green Finance Strategy, which is designed to align private sector financial flows with clean, environmentally sustainable and resilient growth supported by government action (Government of the United Kingdom, 2019[49]). The strategy specifies that aligning ODA includes pricing carbon during the assessment of relevant bilateral development programmes and ensuring that fossil fuel support aligns with temperature goals and transition plans, as well as a commensurate response for addressing climate risks. The strategy also highlights a need to ensure that development activities do not undermine the ambition of country NDCs and adaptation plans in support of fundamental processes of the Paris Agreement. This approach translates the objectives in Article 2.1 into a top-down commitment for development co-operation activities, and also recognises the need to work with developing country governments to make their contribution towards the Paris Agreement goals.

Multilateral development co-operation providers have also committed to define alignment across financing activities and have started to do so. At the 2017 One Planet Summit, MDBs and the IDFC committed to align financial flows with the Paris Agreement. One aspect of this is the commitment by MDBs and IDFC members to redirect financial flows in support of low-emissions, climate-resilient development in developing countries and to develop processes and tools to put commitments into practice. They also expressed the need for urgent action to enhance support to developing countries to develop decarbonisation and long-term, low-emissions development strategies. This joint commitment illustrates the recognition of a need for consistency across development banks and DFIs, and builds on existing efforts to harmonise approaches in tracking climate finance.

In 2018, reinforcing their 2017 joint statement with IDFC, nine MDBs announced they would develop a dedicated approach to Paris alignment, identifying six “building blocks” that reflect its conceptualisation (African Development Bank et al., 2018[32]). The building blocks present Paris alignment as a process and objective that the MDBs will incorporate into internal and external activities in pursuance of the objectives of mitigation, adaptation and finance flow in Article 2.1. Three of the building blocks are clearly anchored in these objectives: align with the Paris Agreement’s mitigation goals and countries’ individual low-emissions development pathways; manage climate change risks and support adaptation; and increase and accelerate the provision of climate finance (African Development Bank et al., 2018[32]). The other three relate more to the processes that support coherent and effective implementation: i.e. support the revision of NDCs and broader policies; further develop and harmonise monitoring and reporting of Paris alignment activities; and align MDBs’ internal activities. The MDB group was to report in late 2019 on its progress on the joint approach and on advances by individual MDBs towards Paris alignment.

A 2018 IDFC position paper recognises the need to go beyond examining areas “that are directly beneficial for the climate and traditionally classified as climate finance” in aligning finance flows with the Paris Agreement (IDFC, 2018[30]). The IDFC articulated this position in the context of its joint commitment with a group of MDBs to align financial flows with the Paris Agreement (African Development Bank et al., 2018[32]). The IDFC paper focuses on Article 2.1c as a guidepost for alignment and emphasises the overarching need to mobilise finance for climate action while ensuring that the “non-climate” aspects of IDFC members’ portfolios are consistent with low-emissions, climate-resilient pathways (IDFC, 2018[30]). The paper recognises the need to increase domestic and international resources mobilised for climate action and to support country-led, climate-related policies (e.g. long-term, 2050 decarbonisation pathways). IDFC has also committed to help to enhance developing countries’ capacity for implementing climate-related policies, particularly in regard to the support for climate resilience to those most vulnerable to risks. The IDFC paper further states the IDFC’s intention to support the transition away from fossil fuels and prioritise financing for renewables, for example by embedding GHG emissions into project selection and overall decision-making processes. Finally, it notes the need for financial institutions to make the internal transformation necessary to comply with the Five Voluntary Principles for Mainstreaming Climate Action adopted at the time of the Paris Agreement in 2015 (IDFC, 2018[30]).

A number of studies in recent years have examined development co-operation providers’ progress on Paris alignment to date and reflect that Paris alignment is a far-reaching imperative that providers need to pursue across their strategies, programmes and operations. For example, a review of six MDBs’ consistency with Article 2.1c assesses progress along four extensive categories derived from the Financial Stability Board’s Task Force on Climate-related Financial Disclosures: governance, strategy, risk and operational management, and transformational initiatives (Wright et al., 2018[50]). Another 2018 study focuses on the role of financial policies and regulations, fiscal policy, public finance, and information instruments as part of governments’ and non-state actors’ efforts to pursue the objectives of Article 2.1c (Whitley et al., 2018[51]). Both studies are examples of the predominant focus of the Paris alignment literature to date on Article 2.1c and the critical role of finance, policy and regulation.

Paris-aligned development co-operation is both top-down and bottom-up

The Paris Agreement advances a top-down, global approach to climate action while facilitating implementation through bottom-up, country-driven processes. The global objectives of the Agreement describe a desired collective outcome of countries’ climate action. The aim of this combined top-down and bottom-up approach is to maximise coherence by ensuring that countries take climate action in the context of reaching the shared goals. While its goals are ambitious, the Agreement allows countries to tailor their approaches to individual contexts and needs. Country-level mechanisms outlined in the Agreement, most notably NDCs and LTSs, constitute the primary bottom-up, country-driven processes for achieving the Agreement’s overarching objectives. Development actors are already working to ensure that activities support transformative change along both dimensions.

Development co-operation providers’ approach to climate action is embodied in their strategies, programmes and operations. In the context of the top-down and bottom-up approaches underpinning the Agreement, this report focuses on how providers can set and pursue goals within their own organisations that are consistent with the top-down approach, while also ensuring that development co-operation activities support bottom-up processes in developing countries.

Development financing needs to support Paris alignment as a part of broader financing for sustainable development

As discussed in Chapter 1, development finance is increasingly seen as an important part of a broader context of financing for sustainable development. It encompasses flows beyond such development finance resources as domestic taxation, private investment and remittances. The Addis Ababa Action Agenda (AAAA), in a similar vein to Article 2.1c of the Paris Agreement, calls on actors to work together across the public and private sectors in support of sustainable development. In development co-operation, this collaboration varies by provider type and the nature of finance being used. This is illustrated in Figure 2.3 which shows the breakdown in 2013-17 of concessional versus non-concessional ODF5 by provider.

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Figure 2.3. Official development finance by flow, 2013-17

ODA and OOF, bilateral and multilateral development co-operation providers

Note: Percentages represent shares of concessional development finance as a proportion of overall development finance committed within each year by provider type. OOF is other official flows.

Source: (OECD, 2019[61]), Creditor Reporting System (database), https://stats.oecd.org/

 StatLink https://doi.org/10.1787/888934036728

In developing countries, development finance – financial instruments and resources with an explicit development mandate – has an essential role to play to achieve the ambitious goals of the AAAA by directly addressing finance, policy and capacity gaps and through leveraging additional resources. At the same time, the volumes and composition of finance for sustainable development evolve over the different stages of development, implying that the role and use of development finance also changes in different contexts. Figure 2.4 depicts trend lines of finance for sustainable development as recipient countries progress along their respective development pathways, as measured by a sustainable development indicator that combines gross national income (GNI) per capita and environmental, social and other economic vulnerability measures. The figure shows that ODA gradually phases out as these vulnerability indicators improve in recipient countries and that other flows follow a similarly incremental trend as they take the place of ODA. There is a notable lag for less concessional flows (OOF and private) in entering transitioning markets along this scale for sustainable development, suggesting a clear response to the risks that exist along the multiple dimensions of economic, social and environmental vulnerability.

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Figure 2.4. Evolution of financing for sustainable development

2012-17 disbursements, 2017 prices

Note: The sustainable development indicator is based on three indices applied at equal weight: GNI per capita; the Economic Vulnerability Indicator (EVI), which includes an environmental factor; and the Human Asset Index (HAI), which includes health and education factors.

Source: (OECD, forthcoming[62]), Paris alignment in a transition context, Calculators based on (OECD, 2019[61]), Creditor Reporting System (database), https://stats.oecd.org/Index.aspx?DataSetCode=CRS1 (ODA, OOF and private flows); (World Bank, 2019[63]), Personal remittances, received, https://data.worldbank.org/indicator/BX.TRF.PWKR.CD.DT; (UN-WIDER, 2019[64]), GRD - Government Revenue Dataset (database), https://www.wider.unu.edu/project/government-revenue-dataset.

 StatLink https://doi.org/10.1787/888934036747

Domestic resources, and especially tax revenues, are increasingly recognised as the main long-term source of financing for development, and amounted to USD 4.3 trillion in 2016 (OECD, 2018[65]). This volume was more than 25 times the development finance disbursements to developing countries, although with significant variations for income groups; development finance amounted to the equivalent of 51% of tax revenues in LDCs but 13% of tax revenue in lower middle-income countries (LMICs) and 0.2% in upper middle-income countries (UMICs) (OECD, 2018[65]). Tax revenue has been rising in low-income countries and emerging markets, but remains limited to 16% of gross domestic product (GDP) on average, while tax revenue accounts for 34% of GDP on average for OECD countries (Akitoby et al., 2018[66]; OECD, 2018[67]). The structure of taxation, as a method of incentivising or discouraging certain economic activities, is one of the main tools available for a government to influence a country’s development pathway.

Private finance, both international and domestic, also plays a key and increasingly significant role in developing countries. Total domestic investments tend to compose a sizable portion of GDP – at estimates of 20% – for many developing countries, including those that are considered low-income and LMICs.. Total external financing, in comparison, represents less than 20% in low-income countries, under 10% in LMICs and below 5% in UMICs, on average. Private financing is often volatile in these contexts. As private finance flows make up a significant share of resources in developing countries, they need to be mobilised for the transition to low-emissions, climate-resilient development pathways.

Development actors are working to mobilise additional private resources through indirect interventions and direct co-financing. Between 2012-17, development finance mobilised USD 152 billion from the private sector through the use of guarantees, syndicated loans, shares in collective investment vehicles, credit lines, direct investment in companies and project finance special purpose vehicles, and simple co-financing arrangements (OECD DAC, 2019[68]). Blended finance is one of the most prominent approaches to mobilisation, and climate action is clearly a priority for blended finance funds and facilities. A survey undertaken to inform a recent OECD paper on blended finance funds and facilities (Basile and Dutra, 2019[69]) indicates that, of 180 responding countries, almost two-thirds report that they contributed towards SDG 13 (climate action), with energy as the largest sector focus (42%), followed by agriculture (15%) and water and sanitation (14%).

The situation of development finance within the context of other financing sources has implications for its role. Given the scarcity of development finance relative to domestic flows and private investments, and the scope of the Sustainable Development Goals, the focus needs to be on catalytic change if the development mandates of these financial resources are to be met. What this change entails varies according to country context, particularly income level. Given that Paris alignment is a priority for development, the integration of climate action across development co-operation activities needs to fulfil a catalytic role if climate objectives are to be met. Fulfilling both climate objectives and development mandates in developing countries requires a systematic focus on supporting change through low-emissions, climate-resilient pathways. The extent to which this is being done can be observed by examining where development co-operation providers are integrating climate considerations across various activities, income levels and climate objectives.

Providers are not sufficiently integrating climate considerations across activities

The effects of climate change and its risks to developing countries are well evidenced in an increasingly broad range of areas. However, it is not clear that development co-operation is responding adequately to address the impacts of the climate crisis. Climate-related development finance accounted for 18% of bilateral and 32% of multilateral development finance over 2013-17. The political consensus signalled by the Paris Agreement did not bring a notable shift of climate-related development finance from bilateral providers between its adoption in 2015 through 2017,6 although for multilateral providers, this finance has increased each year since (Figure 2.5). Data on development finance towards mitigation and adaptation needs (in line with Article 9 of the Paris Agreement) and technology support and transfer (in line with Article 10) in developing countries also indicate a need to increase these efforts for Paris alignment and the sustainable development it supports.

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Figure 2.5. Shares of climate-related development finance, 2013-17

Note: Percentages shown in white text represent shares of climate-related development finance as a proportion of overall development finance committed within each year by provider type. Percentages shown in black text represent shares of development finance reported without any climate objective as a proportion of overall development finance committed within each year by provider type.

Source: Authors based on (OECD, 2019[61]), Creditor Reporting System (database), https://stats.oecd.org/; (OECD, 2019[70]), Climate Change: OECD DAC External Development Finance Statistics (database), http://www.oecd.org/dac/financing-sustainable-development/development-finance-topics/climate-change.htm

 StatLink https://doi.org/10.1787/888934036766

The absence of a strong upward trend in climate-related development finance is indicative of insufficient action in development co-operation, although this varies by provider type. Bilateral support to climate-related development finance has stagnated, ranging from a share of 15% to 19% of overall development finance over 2013-17. Volumes of climate-related development finance from multilaterals have been on an upward trend since 2015. As a share of overall development finance, climate-related development finance notably increased, from 33% to 43%, over this period, peaking in 2016 at 54%. These differences by provider type may reflect the focus of Paris alignment, and of climate action more broadly, on aligning financial flows with the objectives of the Paris Agreement. Multilaterals primarily operate through debt financing, while bilateral institutions include comparatively more grant-based agencies. As is highlighted in Section 2.4, most approaches to alignment emphasise the role of multilateral institutions in fulfilling Article 2.1c, which calls for aligning all financial flows. Bilateral providers, however, also need to emphasise the role of policy support and capacity development in achieving Paris Agreement objectives across their respective development portfolios.

Climate-related development finance is concentrated in areas frequently cited as fundamental to the transition to low-emissions, climate-resilient pathways (Figure 2.6). The sectors of energy (24%); transport and storage (20%); agriculture, forestry and fishing (12%); water supply and sanitation (9%); general environment protection (7%); and “other multisector” (6%) accounted for nearly 80% of the total climate-related development finance committed in 2016-17.

However, the need to shift from a climate finance paradigm to a Paris alignment paradigm (Section 2.4) means that climate considerations should be integrated across activities and beyond these priority areas to advance the transition to low-emissions, climate-resilient pathways. Yet climate-related development finance is limited even within the priority sectors. In the agriculture, forestry and fishing sector, for example, 40% of development finance was not climate-related. In light of overwhelming evidence that climate considerations should be integrated into areas related to land and water use, this suggests that improved development co-operation is needed even in priority climate-related sectors (IPCC, 2019[71]; IPCC, 2019[72]). Other areas with increasing relevance for achieving low-emissions, climate-resilient development pathways, most notably the sectors of banking and financial services and health, receive especially low levels of climate-related development finance.

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Figure 2.6. Shares and volumes of climate-related development finance by sector, 2016-17 average

Note: Volumes of finance calculated using the two-year average in each sector by climate objective for 2016-17. Percentages shown in white text represent shares of climate-related development finance as a proportion of overall development finance committed within each sector, calculated using the two-year average volume of finance in each sector for 2016-17. Percentages shown in black text represent shares of development finance reported without any climate objective as a proportion of overall development finance committed within each sector, calculated using the two-year average volume of finance in each sector for 2016-17.

Source: Authors based on (OECD, 2019[61]), Creditor Reporting System (database), https://stats.oecd.org/; (OECD, 2019[70]), Climate Change: OECD DAC External Development Finance Statistics (database), http://www.oecd.org/dac/financing-sustainable-development/development-finance-topics/climate-change.htm

 StatLink https://doi.org/10.1787/888934036785

Achieving a balance between adaptation and mitigation objectives requires a focus on country needs

Developing countries will be better placed to participate in and benefit from a low-emissions, climate-resilient global economy if mitigation and adaptation needs are supported without delay. While Article 4.1 of the Paris Agreement recognises that peaking emissions will take longer for developing countries, this should not be taken as a presumption that prevents developing countries from taking up opportunities to transition (New Climate Economy, 2018[12]); (OECD, 2017[73]) (UNFCCC, 2015[2]). Meeting adaptation needs is a prerequisite for sustainable development as by definition, it requires long-term resilience. Accounting properly for climate risks, however, also depends on the progress of mitigation efforts. Closing the finance gap for adaptation, even in a scenario where warming is limited to 1.5°C, requires greater ambition and increased scale (UNEP, 2018[14]). Addressing development challenges is intrinsic to fulfilling these adaptation needs.

Allocation of development finance towards adaptation and mitigation should advance the inclusive, low-emissions and climate-resilient transition in a way that strikes a balance between countries’ needs for both of these climate objectives. Article 9.4 of the Paris Agreement states that “financial resources should aim to achieve a balance between adaptation and mitigation, taking into account country-driven strategies, and the priorities and needs of the developing country Parties” (UNFCCC, 2015[2]). The role of Paris-aligned development co-operation as a catalyst for inclusive low-emissions, climate-resilient pathways (Characteristic 2) is particularly relevant in terms of how providers should determine the balance between adaptation and mitigation. Although climate-related development finance is different from the climate finance referenced in Article 9 of the Paris Agreement, as discussed in Box 2.7, development financing needs to play a complementary role to climate financing if it is to fulfil a catalytic role in the inclusive low-emissions, climate-resilient transition.

Climate-related development finance did not fluctuate notably over 2013-17 in terms of shares for each Paris Agreement objective,7 and mitigation accounted for the majority (52%) of this finance. Multilaterals emphasised mitigation objectives more than did bilateral providers (54% versus 48%, respectively) within their respective portfolios. Multilaterals also emphasised adaptation slightly more than did bilaterals (33% versus 30%), although bilaterals financed significantly more cross-cutting objectives (22% versus 13%). It is difficult to directly compare financing for climate objectives, particularly to determine whether a balance is reached between the two categories and climate-related country needs. For example, progress made in adaptation is incremental and context-specific, and there is a persistent lack of quality metrics for climate resilience (UNFCCC, 2018[74]). Furthermore, climate change adaptation requires integration across relevant interventions; it is almost never the sole objective of any single development project but rather a feature that is essential for project sustainability. However, some overarching traits can be gleaned from the nature of goals and targets within climate change mitigation, adaptation and cross-cutting objectives.

Total climate-related development finance as a proportion of total development financing does not vary significantly across national income levels of recipient countries. Less than 20% of bilateral development finance on average was climate-related within each income group category in 2016-17. For multilateral development finance, almost 40% was climate-related in the same period. Income levels are a key determinant of how populations are affected by climate change, however, with lower-income countries requiring more adaptation support and higher-income countries needing to engage in more mitigation activities (IMF, 2017[75]). This is reflected in development financing in the climate objectives that are emphasised and in the instruments that are used. Finance that was reported to have only a mitigation objective was concentrated in LMICs and UMICs for both bilateral and multilateral providers, while finance with only an adaptation objective primarily targeted LDCs and low-income countries (LICs),8 as shown in Figure 2.7. Proportions of bilateral finance at a regional scale were similarly distributed across climate objectives, with the plurality of such finance (43%) reported to have both adaptation and mitigation objectives; 35% of the finance was reported to be for mitigation and 22% for adaptation.

Financing instruments used by bilateral providers vary significantly across national income groups and by climate versus non-climate-related objectives. More than 70% of development finance to LDCs, for instance, was issued in the form of grants in 2016 and 2017, for both climate and non-climate objectives. Middle-income countries received 45% of non-climate financing from grants and over 70% of climate-related financing through debt instruments. Regionally distributed finance from bilaterals was notably grant-heavy in this period, comprising more than 70% of non-climate-related finance and almost 90% of climate-related finance. Multilateral providers primarily utilised debt instruments across income groups, and also integrated climate objectives into their development finance at similar rates (approximately 40%) regardless of income level. For regional financing, however, half of non-climate-related development finance from multilaterals was in the form of grants, while over 80% of climate-related financing issued used debt instruments.

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Figure 2.7. Shares of development finance by income, climate objectives and instrument, 2016-17

Note: Percentages represent shares of development finance as a proportion of the financing instrument used in each income group and climate objective, calculated using the cumulative volume of finance for 2016-17.

Source: Authors based on (OECD, 2019[61]), Creditor Reporting System (database), https://stats.oecd.org/ (OECD, 2019[70]), Climate Change: OECD DAC External Development Finance Statistics (database), http://www.oecd.org/dac/financing-sustainable-development/development-finance-topics/climate-change.htm

 StatLink https://doi.org/10.1787/888934036804

Article 9 of the Paris Agreement outlines the need to consider grant-based finance to achieve adaptation objectives and generally a mix of instruments to achieve climate goals. Adaptation-related development financing has been consistent with the Agreement on this score depending more on grants, while mitigation has used debt instruments more (UNFCCC, 2015[2]). This division is particularly pronounced in LDCs/LICs and in finance at a regional scale, although most climate-related finance is in the form of debt instruments.

There have also been shifts in the use of grants and debt instruments across income groups and providers over time. For example, bilateral providers increased the use of grants for adaptation objectives in LICs and UMICs, as shown in a comparison of 2014-15 to 2016-17 averages. Mitigation-related bilateral development finance for LDCs/LICs in the same period shifted away from grants towards more debt financing, and finance reported to contain both adaptation and mitigation objectives significantly increased the use of grants in LMICs. These changes reflect a stronger need for adaptation in low-income countries, as well as the role of higher incomes in providing adaptive capacity and resilience in middle-income countries that focus more on mitigation needs.

Mitigation-related development finance dominates the energy and transport and storage sectors. The majority of climate-related development finance was adaptation-related in agriculture, forestry and fishing sector and the water supply and sanitation sector. Distribution of this finance in the sectors of general environment protection and “other multisector,”9 is relatively balanced across climate change adaptation, mitigation and cross-cutting objectives. The sector being financed also affects the instrument used for each climate-related objective. For example, mitigation tends to favour the use of debt instruments (Figure 2.7) but is primarily grant-based in the general environment protection sector (Figure 2.8). Similarly, adaptation tends to favour grants, but is almost entirely debt-based in the energy and transport and storage sectors.

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Figure 2.8. Priority climate-related sectors by objective and instrument, 2016-17 average

Note: Volumes of finance calculated using the two-year average in each sector by climate objective for 2016-17.

Source: Authors based on (OECD, 2019[61]), Creditor Reporting System (database), https://stats.oecd.org/; (OECD, 2019[70]), Climate Change: OECD DAC External Development Finance Statistics (database), http://www.oecd.org/dac/financing-sustainable-development/development-finance-topics/climate-change.htm

 StatLink https://doi.org/10.1787/888934036823

The concentration of adaptation-related development finance in the agriculture, forestry and fishing sector and the water supply and sanitation sector reflects the particular need for adaptation in these areas in developing countries. However, a more holistic approach could be more effective. The cost of adapting to global warming of 2°C is estimated at between USD 70 and 100 billion a year from 2010 to 2050 (World Bank, 2010[81]). Inclusive development in countries that require it most can dramatically offset these costs in terms of proportions of GDP. Inclusive development, however, needs to include adaptation. Adaptation analyses particularly emphasise the agriculture, forestry and fishing and water supply and sanitation sectors, along with health, disaster prevention and preparedness, infrastructure, and coastal areas (World Bank, 2010[81]; UNFCCC, 2008[82]; Olhoff, Bee and Puig, 2015[83]). Development finance is particularly emphasised in agriculture, forestry and fishing due to this sector’s outsized economic role, as it employs the majority of the labour force in developing countries, and its implications for food security and health. The water supply and sanitation sector is similarly emphasised for food security and health reasons. Box 2.8 outlines how sustainable forest management contributes to climate action for both adaptation and mitigation objectives, and how unsustainable deforestation undercuts this cross-cutting potential.

Mitigation-related development finance in the energy and transport and storage sectors reflects the sectors’ fundamental role in achieving global temperature goals (IPCC, 2018[5]). The prominence of infrastructure finance by development co-operation in these sectors and the large volume size that is required for infrastructure financing amplifies the amounts of climate-related development finance for mitigation objectives relative to adaptation. This can be seen in the size of projects with a mitigation objective that are benefiting from development finance – almost double the average finance for projects with an adaptation objective across providers. Although infrastructure is also relevant to meeting adaptation needs, mitigation tends to be concentrated in these high-volume activities while adaptation objectives apply to a wider range of projects and levels of financing.

Climate-related development finance comprises more than 20% of development finance for most regions, but its share was notably low (10%) in the Middle East and high (over 30%) in Asia and South America in 2013-17. The Middle East and North Africa region is considered to require less adaptation financing than other regions, amounting to only 3% of the total annual cost of adaptation globally (World Bank, 2010[81]). Higher shares of climate-related development finance are driven by fast-growing economies such as India and Bangladesh in South and Central Asia and by China in Far East Asia. Shares of climate-related development finance in Latin America are particularly high in Brazil and Colombia. Figure 2.9 shows a breakdown by region of climate-related development finance as a share of development finance.

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Figure 2.9. Share of climate-related development finance by region, 2013-17

Note: Percentages represent shares of climate-related development finance as a proportion of overall development finance committed to each region listed, calculated using the cumulative volume of finance in each region for 2013-17.

Source: Authors based on (OECD, 2019[61]), Creditor Reporting System (database), https://stats.oecd.org/; (OECD, 2019[70]), Climate Change: OECD DAC External Development Finance Statistics (database), http://www.oecd.org/dac/financing-sustainable-development/development-finance-topics/climate-change.htm

 StatLink https://doi.org/10.1787/888934036842

Commitments to climate-related objectives vary by region, but especially high and low shares of climate-related finance in certain regions are usually attributable to specific countries. Only 12 countries received climate-related finance amounting to more than 40% of total development finance in 2013-17, and each of these 12 received different proportions for different climate objectives (Figure 2.10). In the same period, climate-related finance made up less than 10% of all development finance in 26 countries. These figures underscore the importance of both country-led climate action and improving ambition through NDCs, for which development co-operation plays a key role. The 7 countries that receive more than half of their development finance commitments with climate-related objectives either report national sustainable development goals in their respective NDCs or are small island developing states that emphasise disaster risk reduction and equity. Of these 7, 3 (Bolivia, India and Thailand) expressly aim to mainstream their respective NDCs and SDG implementation. India and Thailand also explicitly link achievement of their NDCs to SDG achievement.

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Figure 2.10. Share of climate-related development finance >40% by recipient, 2013-17

Note: Percentages represent shares of climate-related development finance as a proportion of overall development finance committed to each country listed, calculated using the cumulative volume of finance in each country for 2013-17.

Source: Authors based on (OECD, 2019[61]), Creditor Reporting System (database), https://stats.oecd.org/; (OECD, 2019[70]), Climate Change: OECD DAC External Development Finance Statistics (database), http://www.oecd.org/dac/financing-sustainable-development/development-finance-topics/climate-change.htm

 StatLink https://doi.org/10.1787/888934036861

Development finance data indicate that providers need to enhance efforts to integrate climate considerations across development co-operation activities. Overall, climate-related development finance is significantly less concessional than is development finance that is not climate-related. Significantly higher volumes of climate-related finance also are committed through debt instruments (70%) compared to development finance without climate objectives (46%). This holds true across income levels. Climate-related development finance is less grant-based than financing without climate objectives within the low-income and middle-income groupings.

The lower degree of concessionality in climate-related development finance is linked to its concentration in a limited number of priority sectors (Figure 2.8) and the focus on infrastructure financing within a majority of these priority sectors. In overall development finance, support to infrastructure includes a much higher share of non-concessional development finance, and this support is predominantly through non-grant instruments. Improving the systematic consideration of climate across relevant activities, beyond priority sectors, will likely bring about a more even balance between the use of grants versus debt instruments for development finance with a climate objective.

Paris alignment – to the extent that it is indicated by a holistic consideration for climate across sectors, instruments and climate objectives – appears to be lacking across income levels, regions and countries, based on the best available data for climate-related activities. Providers need to see climate finance not exclusively as a dedicated resource for climate action to fulfil the objectives in Article 2.1c. Rather, the potential effects of development finance to enable, or hinder, the transition to low-emissions, climate-resilient pathways should be systematically considered across development co-operation portfolios. Chapter 3 discusses further challenges to Paris alignment and recommendations for addressing these obstacles in development co-operation.