The Climate Finance Reform Compass

To ensure an equitable global climate transition, developed countries need to deliver on their goal of mobilizing $100bn in climate finance for emerging markets and developing economies. In addition to increasing mitigation finance, this includes doubling adaptation finance and operationalization of arrangements for responding to loss and damage.

Fiscal authorities around the world must prepare for more frequent and severe climate-related shocks, as well as for large financing needs. Reform topics in this theme are intended make sovereign balance sheets more resilient and robust to achieve climate goals.

Establishing the foundations of climate-smart growth in some areas and sectors may not consistently generate the returns required by private investors. Concessional finance, including guarantees and other de-risking mechanisms, as well as emissions pricing and taxation, can help bridge this gap.

While the global climate transition presents significant opportunities for resilient economic growth, we must take care to ensure that vulnerable populations are not left behind. In developing countries, this may include transferring knowledge, skills, and technology at scale, and will depend on strong policy frameworks and adaptation strategies.

Country-owned investment platforms are an essential starting point for aligning stakeholders and building investment pipelines across sectors. To establish such platforms, countries must commit to ambitious but achievable transition pathways that are in line with their circumstances.

MDBs are central actors in the international financial architecture and have begun work on a reform agenda to respond to the scale of the climate challenge. MDBs need to work as a cohesive system to support country-led climate strategies, including by streamlining access and scaling innovative risk-sharing mechanisms.

A significant portion of total climate finance needs will come from domestic savings, including in emerging markets and developing economies. Key steps necessary to build and mobilize domestic savings include strong macroeconomic policies and financial-sector development.

The majority of financing for the climate transition will come from the private sector, but in many cases, private actors will need guidance, de-risking, and appropriate incentives from the global public sector to deliver at the necessary speed and scale. In particular, catalytic financial and policy mechanisms can help reduce the cost of capital where it is currently too high to achieve climate results.

Carbon markets remain an essential component of the climate finance architecture, but unlocking their potential requires transparency and high-integrity standards across the value chain. At the domestic and international levels, policies to achieve real emissions reductions, in line with country circumstances, can help build supply and demand for carbon credits.