Transformation of Climate Peril into Financial Advantage by Developing Nations

Transformation of Climate Peril into Financial Advantage by Developing Nations

In the heart of eastern India lies Jharia, a region grappling with the daunting challenge of underground coal fires that have been burning for over a century. The Jharia Master Plan, approved by India's cabinet for approximately £511m ($692m), aims to extinguish these fires, stabilise the land, and relocate at-risk communities. However, the plan is not formally designated as a climate finance project, and its climate impact remains invisible in formal reporting.

The Jharia Master Plan straddles risk management, mitigation, and adaptation in ways the current climate finance architecture is not designed to accommodate. This is a common challenge faced by developing countries, which are increasingly turning to integrated approaches to fund and report complex climate-related actions that span or blend these categories.

Developing countries are implementing climate interventions that combine climate risk management, mitigation, and adaptation, often in integrated projects addressing sustainable development goals. For instance, interventions may include land restoration, agroforestry, and soil conservation techniques that reduce risk while also improving resilience and carbon sequestration, thus crossing traditional finance classification boundaries.

Improved tracking methodologies are another key component in bridging the gap. Specialized organizations like the Climate Policy Initiative (CPI) have developed comprehensive datasets and methodologies to track climate finance flows by sector, theme, and geography, improving how interventions that do not conform to conventional mitigation or adaptation categories are accounted for.

Broad definitions of climate finance needs are also crucial. Reports from expert groups consider a wide range of climate finance needs beyond classic categories, including loss and damage, natural capital financing, just transition costs, and adaptation embedded within wider development frameworks.

Coordination among development banks and climate funds is essential for addressing complex and multi-dimensional climate projects. There is reinforced collaboration between multilateral development banks, vertical environmental and climate funds, and national development banks that ensure alignment with country priorities and local contexts. These institutions facilitate financing instruments tailored for integrated climate interventions that may not fit traditional classifications.

Transparent risk assessment and integration are also urged to better estimate project viability and mobilize appropriate finance. Traditional credit rating and risk assessment methods do not fully capture climate-related risks and opportunities, especially for integrated interventions.

The Jharia Master Plan is funded through public expenditure and led by national and state institutions. Despite not being formally designated as a climate finance project, the plan's potential includes reducing fugitive emissions and reshaping spatial governance. The avoided emissions from suppression efforts in Jharia are not quantified or monetised, highlighting a missed opportunity in the current climate finance framework.

On a global scale, less than 20% of total climate finance reaches low- and lower-middle-income countries, despite their acute exposure to climate risk. This underscores the need for a more integrated approach to climate finance that captures risk management, mitigation, and adaptation holistically rather than in isolation.

Examples of this integrated approach can be found in countries like Rwanda, where the national Green Fund has supported the development of local financial instruments aligned with climate goals. A green bond issued by Prime Energy Plc in 2023 raised £5.5m on the Rwanda Stock Exchange.

In Kenya, over 326,000 farmers have adopted improved agricultural practices through public initiatives, leading to an average 41% increase in yields. In South Africa, Colombia, and Mexico, carbon pricing and environmental fiscal reforms are now embedded within their national revenue systems. The national agricultural research system in Ethiopia has developed rust-resistant wheat varieties that have delivered productivity gains of up to 40% in targeted areas.

These examples demonstrate the potential of integrated climate finance approaches to fund and report complex climate-related actions effectively, bridging the gap in the current climate finance architecture and ensuring a more equitable distribution of resources to those most in need.

1. The Jharia Master Plan, while not formally designated as a climate finance project, encompasses risk management, mitigation, and adaptation, a challenge common in developing countries.
2. Integrated climate interventions in developing countries often address sustainable development goals, merging risk reduction, carbon sequestration, and resilience enhancement in unconventional ways.
3. Specialized organizations like the Climate Policy Initiative help bridge the gap by tracking climate finance flows, accounting for interventions that do not fit conventional mitigation or adaptation categories.
4. Broad definitions of climate finance needs are necessary, as experts acknowledge a wide range of finance needs, such as loss and damage, natural capital financing, just transition costs, and adaptation within wider development frameworks.
5. Collaboration among development banks and climate funds is essential to fund and report complex, multi-dimensional climate projects, ensuring alignment with country priorities and local contexts.
6. Transparent risk assessment and integration are vital for estimating project viability and mobilizing appropriate finance, as traditional methods often overlook climate-related risks and opportunities.
7. The Jharia Master Plan is funded through public expenditure and is led by national and state institutions, whose potential contributions to reduced emissions and improved spatial governance are currently undervalued in the climate finance framework.
8. Less than 20% of total climate finance reaches low- and lower-middle-income countries, emphasizing the need for an integrated approach that addresses risk management, mitigation, and adaptation holistically.
9. Countries like Rwanda and Kenya have successfully implemented integrated climate finance projects, such as green bond issuances and farmer support programs, demonstrating increased efficiencies and equitability.
10. In South Africa, Colombia, and Mexico, carbon pricing and environmental fiscal reforms have been incorporated into national revenue systems, promoting sustainable business and finance practices.
11. Examples from Ethiopia show the effectiveness of integrated climate finance approaches in developing rust-resistant wheat varieties, increasing productivity and improving food security for at-risk communities.

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