COP26: How remodelling the climate finance supply chain affects corruption risks has been saved
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Read our latest blog on COP’s proposals to reshape the climate finance supply chain to channel more funding to developing countries more effectively.
In our previous blog, we highlighted the corruption risk facing the global climate finance chain. Here, we reflect on how COP26 has moved the picture forward. More climate finance is on its way, with a greater emphasis on empowering developing nations to take direct ownership of the funds that come to them. It is therefore an urgent priority to support these nations in building capacity, whilst also streamlining funding approval mechanisms without compromising controls and leveraging technology to manage these huge sums effectively.
Climate finance is set to increase in quantity
At COP26, much was made of the fact that the pledge by developed nations to commit $100bn in climate finance to developing nations each year was missed. However, the outlook is more hopeful. Ahead of the Conference many countries increased their planned contributions; and the OECD published two forward-looking scenarios for 2021-5, which showed that the $100bn target should belatedly be met, with an annual average of $100–105bn over the period. Around 80% of this is expected to be publicly funded through multilateral and bilateral channels, with the remaining 20% composed of private finance mobilised by public finance, and a small proportion of export credits.
This 2021-25 average would be 1.4 to 1.5 times larger than that seen in 2016-9. This already represents a significant growth in climate finance – but multiples more will be needed in years to come. The UN Conference on Trade and Development recently reported that annual climate adaptation costs in developing countries could reach $300 billion in 2030. And beyond OECD flows to developing countries, it is estimated that an annual average investment of $3.5 trillion between 2016 and 2050 is required to mitigate global warming to 1.5 degrees.
As the political conversation about scaling these flows continues, a supporting conversation must be in train about managing the financial crime risks. The amount of money flowing through the system will be much greater than today – which means that the mechanisms to disburse and protect these funds may no longer be fit-for-purpose.
Climate finance is set to change in quality
“I know it’s nothing personal, but it feels as though [the climate funds] do not like us.” – Nigerian official, interview with Chatham House
The scale of OECD contributions was not the only climate finance issue being discussed at COP; the way in which it is given is equally important. Currently, it can take 1-4 years for a developing nation to access funding; in some cases, application forms are 67 pages long. In the view of developing nations, climate finance must become more easily accessible, predictable, and long-term, buttressing strategic national development programmes rather than a piecemeal patchwork of projects. In March 2021, the Taskforce on Access to Climate Finance (TACF) was established to help with just this problem, and ahead of COP it unveiled its key principles and recommendations.
First among these is the principle that developing nations should have clear country ownership of the work funded through climate finance. This means recipient countries get to decide where they want funding to go, determined by long-term national plans, and can distribute climate finance through their own systems and institutions ‘to the maximum extent possible’. Funding should be large-scale, multi-year, and programmatic, or potentially offered as general budget support to government departments, rather than being earmarked for small-scale projects. A broader range of national and sub-national entities should receive funding so that the money is distributed ‘to the greatest extent possible’, rather than held by a select group of international development organisations. And a more proportionate approach to risk management should be adopted, with a view to simplifying funding approval procedures.
These recommendations represent a clear step towards meeting the needs of developing nations and will be trialled within five pioneer countries – Bangladesh, Fiji, Jamaica, Rwanda and Uganda – to understand how best to implement them. But they could also increase financial crime risks if they are not introduced carefully. Determining the good faith of climate finance recipients will be more difficult when there are more of them, with a wider geographical spread, and the disbursement systems used to reach them are still growing in maturity. Similarly, close thought will be required to make funding approval processes simpler without compromising their rigour.
There are steps we can take to mitigate risks arising from a larger, remodelled climate finance system
Clearly, given the urgency of the climate crisis, it is promising that more money will be channelled to developing nations, and in a form that gives them greater autonomy. But attention must be paid to mitigating financial crime risks, to make sure climate funds are well spent and investors are not deterred from continuing to contribute. A first enabling step will be capacity building support, so developing nations can increase their capability to set and manage national climate plans, and strengthen the financial controls in their national institutions and organisations to fund these plans securely.
For those upstream in the handling of climate finance (e.g. multilateral development banks, multilateral climate funds, bilateral funds), their financial crime control frameworks must be reviewed and refreshed to ensure that they mitigate the risks presented by a larger-scale, more disparate climate finance landscape. Updated risk assessments will need to be carried out, which must then underpin any redesign and simplification of accreditation, approvals and monitoring processes.
Resourcing may at some point become an issue. Approval processes that have been simplified for the benefit of the applicant may not be any less resource-intensive for the approver, and with a proliferation of new, smaller entities to assess, climate funds and the like could face a surge in demand hitting their controls processes. Increasing the size of teams managing these processes is a short-term option, but a sharp focus on information-sharing could yield efficient operations in the long-term. Already some climate funds provide fast-track accreditation to funding applicants if they have been accredited by other funds; the more these funds and others, such as the MDBs, can find regular ways to share information on the risks they are seeing in their portfolios, the more unified and effective their response will be against those seeking to abuse the funding they distribute.
Technology will also be a key enabler. In the past year, the Green Climate Fund has been developing its use of machine learning to monitor its portfolio and proactively identify the projects which pose the most significant integrity risks. These are then subject to an integrity review, allowing for interventions before things go awry. Technological approaches like this can help a relatively small team manage the risk across a large portfolio - and could also be deployed within large projects or programmes.
All the actions above provide ways forward to help climate finance end up in the right hands. And they take on further importance when one considers the future mix of climate finance funding sources: public funds will dominate climate finance over the next 5 years, but developed nations want to increase private flows too, having struggled to unlock them so far. Intelligent public investment in controls now may foster the enabling environments to encourage private investment later, and should be viewed with that potential.
Reshaping the climate finance supply chain to channel more funding to developing countries, more quickly and with greater alignment to their needs is essential – but tackling financial crime must not be an afterthought.
In our next blog we will describe in more detail what a robust financial crime control framework could look like in this context.
Miffy works with organisations across the Economic Crime regime, including government, law enforcement and the private sector, to design whole-system solutions to prevent, detect and disrupt illicit financial flows and protect the public. Miffy specialises in designing operating models to deliver complex, multi-organisation transformation.
Chris is a Director in the Financial Crime team within Deloitte's Forensic practice. He has over 15 years’ experience in intelligence, investigation, policy, and partner support roles within national law enforcement agencies. Chris has worked extensively with overseas law enforcement, industry and regulators to deliver operational objectives and build capability.