The Green Climate Fund (GCF) plays a critical role in delivering climate finance to developing coutnries. It is the world’s largest multilateral climate fund and supports developing countries to realize their Nationally Determined Contributions (NDCs). One of the GCF’s aims is to de-risk climate finance at scale, meaning that it uses limited public resources to improve the risk-reward profile of low emission climate resilient investment and crowd-in private finance, notably for adaptation, nature-based solutions, least developed countries (LDCs), and small island developing states (SIDS).

The GCF has various key features, including:

As the GCF is a relatively new institution, it is too early to measure impacts of the funding. However, detailed GCF project data gives insight into how funding is being allocated and to what extent the GCF is living up to its mandate. This analysis will look at some of the key features of the GCF to understand if the GCF is achieving the benchmarks that it has set for itself.

Methodology

This study used the GCF data from the Open Data Portal to examine project level data.

Overall Funding Allocated

The GCF is capitalized by voluntary donations from developed countries. The GCF is considered to be part of the $100bn annual climate finance goal. Since 2017, the GCF has been able to mobilize over $11 billion. This is far below the needs of developing countries. However, as developed countries have committed to meeting this goal, the question is whether GCF funding allocations have increased steadily since 2017.

The funding allocated by the GCF has been increasing each year, which is promising, however this increase is not yet enough to meet the climate finance needs of developing countries. Coming off of COP27, it is not clear when the $100 bn climate finance goal will be met.

##Funding balance: adaptation and mitigation While the GCF is mandated to primarily focus on mitigation, it is mandated to invest 50% of its resources to mitigation and 50% of its resources to adaptation in grant equivalent. Has the GCF met this goal?

As of 2022, the GCF funnels more funding into mitigation and cross-cutting projects than to adaptation, with over 75% of funding going towards those 2 themes, indicating that adaptation funding needs are not necessarily being met.

However, calls for increased finance for adaptation are coming to the forefront of climate finance disccusions, with developing countries emphasizing the need of adaptation finance at COP27. Because of the shifting conversations, it is possible that the GCF is adjusting its strategy in allocation.

Has the proportion of finance going to mitigation, adaptation or cross-cutting finance changed over the years?

Looking at this graph, it demonstrates that from 2018-2021, mitigation funding as a proportion of overall GCF financing has been rising. However, 2022 shows divergence in this trend, with mitigation representing less of the funding compared to previous years. This is a key area to watch, as developing countries have been calling for a doubling in adaptation finance by 2025, although little progress was made on this issue at COP27.

Country-level financing

The GCF is designed to help Small Island Developing States (SIDS) and Least Developed Countries (LDCs) to access climate finance, as these countries face barriers to climate finance, including small market sizes, high perceived risk, and high debt burdens. As the GCF aims to address some of these challenges, it is important to understand how much money is going to SIDS and LDCs as a proportion of overall climate finance.

LDCs

Looking at the amount of funding going to Least Developed Countries (LDCs). Least Developed Countries, as defined by the UN as “low-income countries confronting severe structural impediments to sustainable development.” There are currently 46 countries on the LDC list.

The graph shows that approximately $3 billion of the GCF’s total funding goes to Least Developed Countries, this is approximately 27% of the funding. Seeing as LD’s represent 31% of countries eligible for GCF funding, this is almost proportional, however, given that the GCF is designed to be a vehicle for financing for these countries, this number feels low given the high financing needs of these countries.

SIDS

The GCF is also designed to channel funding into SIDS. SIDS often struggle to attract financing because of their small economies and high risk perception. 37 countries eligible for GCF financing are classified as SIDS.

As the graph shows, a very limited amount of GCF funding goes to SIDS, approximately $1.3 billion or 11%. This is very small given the high climate vulnerability of SIDS and the significant roadblocks that they face in accessing private and other sources of finance.

Country-ownership

One of the key tenets of the GCF is country ownership, meaning that countries are in charge of the financing and its directions. One mechanism for this is country’s having direct access to climate finance. One way to measure the degree of country-ownership would be to understand how much of the funding goes through direct access entities at the national level, rather than regional or international access entities. While this is not a perfect measure for country ownership, it serves as a good proxy and one key element.

This graph illustrates that only 7% of GCF funding is channeled through direct access entities, with 14% goes through regional access entities. This means that 79% of GCF funding goes through international entities, indicating that the GCF is struggling in acheiving its goals of country ownership. As this is a key critique of the GCF, has the amount of funding going to national direct access entities increased over the past 5 years?

When looking at this trend over the years, it does seem that in 2022 funding to national entities increased, making this an area to watch in future years, as the GCF accelerates its direct access mechanisms. However, the GCF funded is currently dominated by international organizations, which calls into question the GCF’s capacity building efforts and commitment to country ownership.

Funding Instruments

Another key debate surrounds finance instruments. Developing countries are calling for grants funding for climate finance, as they are hesitant to increase their debt burdens with climate debt, as developing countries contributed minimally to GHG emissions.

This graph indicates that Senior Loans is the most common form of climate finance, followed by grants. Co-financing outstrips GCF funding, however that is expected as one of the goals of the GCF is to crowd-in additional sources of finance. What this data indicates is that the majority of GCF funding is provided in the form of loans, with a slightly lesser proportion in grants. This is concerning on 2 fronts. The first is on the issue of climate debt, wherein many developing countries do not want to take on additional debt burden to mitigate and adapt to a crisis they did not cause. The use of senior loans indicates that the GCF does use debt as one of its key financing tools. The second concern is in the use of senior loans over other instruments that would de-risk private sector investment, such as subordinated loans, equity, guarantees, or results-based payments. As senior loans are the first to be paid back in the case of default, the GCF’s use of senior loans over other instruments suggests that it may be failing in acheiving its goal to de-risk private sector investment in climate finance, which is especially crucial for LDCs and SIDS due to their challenging macroeconomic contexts.

Conclusion

The GCF, as the largest global climate fund, is an important mechanism to channel climate finance to developing countries. However, it struggles in areas of balance between adaptation and mitigation, channeling funding to least developed countries and small island developing states, country-ownership, and utilization of financial instruments which minimize climate debt or de-risk private sector investment.

These findings are important, as they offer key recommendations for how the GCF can improve its funding processes. One way would be increase direct access to GCF funding for least developed countries and SIDS, through enhanced readiness programs and additional funding windows. Another avenue would be for the GCF to take on more risk in its own investments, whether through equity, guarantees, or subordinated debt in order to better crowd-in private capital and make projects bankable that otherwise might not be.