MDBs shouldn’t compromise on standards for tracking adaptation finance.
A couple of weeks ago, more than two dozen development finance institutions (DFIs) agreed to a common set of principles for tracking mitigation finance. Work is also underway to develop principles for tracking adaptation finance and the ability to leverage finance. Both the MDBs and IDFC have existing approaches for tracking adaptation finance.
But one of the key questions moving forward will be what compromises are necessary to bring the two approaches together into a common framework?
I have spent the last two years tracking adaptation finance flows to Nepal, the Philippines, Uganda, and Zambia through the Adaptation Finance Accountability Initiative. That work has illustrated the importance of guidelines for tracking climate finance like those currently under discussion. Here are three key issues that the DFI team needs to consider as they set out their common principles:
1. A positive list for adaptation just won’t work.
On the mitigation side, the common principles include a list of activities eligible for classification as mitigation finance. Controversies about the mitigation list aside, this approach doesn’t work for adaptation. On the surface investing in drought resistant seeds may seem like an adaptation activity. However, if climate change will result in increased rainfall or flooding in the specific location, drought resistant seeds wouldn’t be an appropriate adaptation response. Plus, the impacts of climate change are felt across a wide range of sectors making it difficult to come up with a good list anyway. The WRI adaptation continuum is instructive in this regard.
2. Context is key when determining adaptation relevance
The impacts of climate change are location specific, so rather than making a blanket statement that certain types of activities can be counted as adaptation finance, we need to make sure that activities are responding to the location specific impacts of (and vulnerability to) climate change. This is where the three design criteria used by the MDBs is critical. In order for an activity to be counted as adaptation, the MDBs require that the design process must:
- Set out the climate vulnerability context that includes both impacts and risks;
- Include a statement of purpose or intent to address or improve climate resilience (in order to differentiate between adaptation and good development); and,
- Link activities to the climate vulnerability context, reflecting only direct contributions to climate resilience (not indirect contributions).
The common principles must include these criteria.
3. In the context of the $100bn commitment, if parties agree to count climate related development finance towards this commitment, the reporting must be more nuanced
- The flows need to be counted for in grant equivalent terms. Counting the face value of loans (and other financial instruments) isn’t fair when accounting for North-South climate finance flows since these need to be repaid;
- External funds that are accounted for elsewhere, like climate trust funds, need to be separated out to reduce the risk of double counting; and,
- Activities that have both mitigation and adaptation relevance need to be reported carefully so that they aren’t accounted for twice when adaptation and mitigation numbers are added together.
The existing MDB approach to tracking adaptation finance is already pretty good. My bigger concern is how adaptation related development assistance is accounted for in the OECD Creditor Reporting System (CRS). In Nepal we found that only 46% of financial commitments were related to adaptation despite being tagged as adaptation relevant by donors. But that’s another blog for another day. With the climate talks in Paris in December and the Financing for Development Conference in Addis in July, let’s see if we can move beyond accounting tricks and bring greater transparency and accountability to the climate finance discussions.