Climate Finance

This paper is a background review that builds on a growing body of research that highlights both the importance of national sustainable infrastructure and the need to develop more effective and efficient financing mechanisms for delivering compact, connected cities that meet the UN’s Sustainable Development Goals.

This Policymakers’ Summary focuses on the role of national governments in mobilising and directing urban finance, with the aim of supporting policymakers and practitioners to think systematically about financing urban development. It builds on a growing body of research that highlights the critical role of central governments in establishing more effective and efficient mechanisms to finance sustainable urban infrastructure.

Significant infrastructure investments are needed for the world to achieve the Sustainable Development Goals (SDGs) and Paris Agreement targets. However, there is a significant gap between investment requirements and actual current global investments. To close this gap, both public and private sources of finance are required. Additionally, more climate finance should be channeled from the national and international levels to the local and regional levels where project implementation takes place.

Healthy ecosystems like forests, wetlands, and farms are nature's water infrastructure. They are essential for buffering against floods and the provision of clean, ample water around the world – feeding growth in agriculture, industry, and cities. But unlike traditional pipes and pumps, “natural” infrastructure projects are rarely able to take advantage of bond financing by cities, companies and utilities.

Over the past decade and especially in the past five years, industrialized governments and development finance institutions have launched a multitude of dedicated climate change funds and initiatives intended to mobilize private sector investment in mitigation and adaptation projects in developing countries. This paper examines this increasingly used model to channel climate finance, hereafter referred to as public and public–private climate funds and initiatives (PPCFIs).

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The climate finance architecture—the system of specialized, public funds that help countries implement climate mitigation and adaptation projects and programs—is crucial if the world is to meet the climate change challenge. Over the past 25 years, many national, regional and international climate funds have been created. Each new fund responded to needs and gaps that existed at the time, but this has led to a rather complex system.

In recognition of the importance of public finance, the global community has established several “climate funds.” These funds are designed to disburse funding to developing countries to help meet the cost of climate change mitigation and adaptation. Capitalized primarily by developed countries, the funds also serve as recognition of the greater historic responsibility these countries have for current atmospheric greenhouse gases.