Read this blog post by ICAT Director, Dr. Henning Wuester.

Understanding climate finance needs and flows is crucial for countries working to meet their climate objectives. Climate finance transparency can help governments to take control of a crucial element of their climate agenda, align investments with national priorities and accelerate effective climate action.

Achieving the goals of the Paris Agreement requires significant, urgent and sustained climate action – action that supports fundamental economic transformations by the middle of this century. To be successful, change on this scale needs to redirect significant flows of investment, turning existing financial flows into climate finance. Investments are needed both immediately and over the longer term, to enable an effective and just transition. 

“To be most effective, climate finance must be approached holistically, to ensure that all possible resources are harnessed: public budgets and private investments, domestic and international finance.”

Why is understanding the climate finance landscape important?

For decision-makers and policymakers, understanding the climate finance landscape is essential to develop a financial strategy that can effectively drive the national climate action agenda. If decision-makers do not have a clear and comprehensive picture of their country’s climate finance flows and needs, they will not be properly equipped to implement the ambitious climate action that is needed to reach the goals of the Paris Agreement. 

Climate finance transparency can help governments to reach a better understanding of the needs, gaps and opportunities in climate finance in their country. This allows them to attract and direct investments from national and international financial institutions and donors towards their country’s climate priorities. Blending finance from both public and private sources constitutes a significant development opportunity. It is an opportunity to modernize the national economy and address climate and development priorities in tandem. 

For developing countries in particular, a stronger understanding of the national climate finance landscape can put them in the driver’s seat: helping them to become proactive decision-makers, strengthening their position in negotiations, and empowering them to manage stakeholders effectively. Ultimately, this could also equip developing countries to play a prominent role in shaping the international climate finance agenda. The outcome of COP29 in Baku has recognized that climate finance is multi-dimensional, and international support needs to complement other financial flows to reach the scale that is required.

How can climate finance transparency support climate action planning? 

Climate action in line with global climate objectives needs to have three key components: ambitious targets, a realistic implementation plan complemented by an investment plan. These three elements are fundamentally connected. Once a country has developed Nationally Determined Contributions (NDC) targets – that, ideally, are both ambitious and achievable – it needs to consider what actions and policies can achieve those goals to create an effective implementation plan. Crucially, policymakers should also know and be able to present the impact these policies could have, in order to attract investment. For all of this climate finance transparency is vital.

To establish a sound climate finance transparency framework in support of effective climate action strategies, as one of the first steps, each country must agree on a climate finance definition to be applied domestically. In addition they need to map the main stakeholders in the national climate finance landscape, including those from the government and the private sector. Next, governments should assess their climate finance needs – based on a costing of the actions required to implement the country’s NDCs – and then estimate current financial flows, which will finally enable them to calculate the financing gaps. 

Based on all this information, governments will be in a position to develop meaningful, targeted strategies to bridge these gaps, enabling a more strategic and informed approach to mobilizing finance and climate action planning. In this way, climate finance transparency enables a thorough understanding of financial flows, gaps and needs, for strategic and impactful climate action. This does not constitute a one-off exercise, but rather a framework for regular monitoring of the changes in the flows and implementation, enabling better management and continuous improvement.

ICAT supports climate finance transparency

Every country faces specific issues in climate action and climate finance and they start from a different starting point. ICAT offers a flexible approach that can be tailored to each country’s unique context and needs. ICAT’s step-by-step Climate Finance Transparency Guide helps to lead countries through the process of developing and implementing a climate finance transparency framework. The guide covers five phases, from planning to evaluation, and offers a choice of levels of complexity to meet the needs of countries that are at different stages of readiness to track, measure, manage and report on climate finance. Once implemented, this approach helps governments to take greater control of their climate finance agenda, leading to more targeted investment strategies, in alignment with national climate and development goals.