Synergising Sustainable Development Goals Finance with Climate Finance
This article has been written as a part of the report “Think20 India 2023: Critical, Constructive, Conclusive” . Read the full report here.
Sustainable development and climate change are two pressing and interconnected issues that countries have committed to address at the international level. The 2030 Agenda for Sustainable Development, with the 17 Sustainable Development Goals (SDGs) including climate action, at its core was adopted by the United Nations (UN) in 2015. The same year, the Paris Agreement was adopted by Parties of the UN Framework Convention on Climate Change. Both instruments have clear global and national targets in the medium- and long-term that are still far from being met.
Progress towards SDGs and climate objectives is hindered by the same crucial challenge—the sheer size of the funding gap. Significant investments are needed to achieve the SDGs and climate goals. Yet experts agree that current financial flows towards these objectives are hugely inadequate. The financing gap to achieve the 2030 Agenda, which increased by 56 percent following the COVID-19 outbreak, reached US$3.9 trillion in 2020. And when it comes to achieving climate objectives, only about 16 percent of the estimated US$3.8 trillion needed annually through 2025 are currently being met. Additionally, international adaptation financial flows to developing countries are five to ten times below estimated needs, and the gap is widening, with annual adaptation needs estimated at US$160-340 billion by 2030 and US$315-565 billion by 2050. If nothing is done, the situation is expected to worsen in the current challenging macroeconomic conditions.
The implications of this funding gap are compounded by the fact that costs are unevenly borne by countries. Climate change impacts are disproportionately borne by developing countries, particularly least developed countries and small island developing states (SIDS) . These countries are already paying for losses and damages due to climate disasters, estimated at over US$500 billion between 2000-2019 for the 55 most vulnerable countries. With increasing climate impacts, needs for adaptation finance are expected to exceed 1 percent of GDP in low-income and developing economies, and up to 20 percent of GDP for SIDS. Failure to halt climate change will, thus, negatively affect the achievement of the SDGs for developing countries, while failure to advance on other SDGs will increase their vulnerability to climate impacts and exacerbate the climate crisis.
Risks of a disjointed approach to climate and SDG finance
The SDGs and climate are interrelated, yet they have been tackled in a disjointed manner for too long, prompting competition for financial resources. While the SDG framework promotes an integrated approach, the focus of financial flows has been on one SDG at a time, and mostly on ‘bankable’ activities. This is also the case across climate objectives, with over 90 percent of climate finance going to mitigation, despite growing needs and an increasing gap in adaptation finance. And although the commitment of developed countries was to provide ‘new and additional’ finance for developing countries to tackle climate change, only 6 percent of climate finance provided from 2011 to 2018 is considered as new and additional to official development assistance. Filling the climate finance gap cannot continue to come at the expense of the SDGs, or vice versa.
Continuing with this disjointed approach threatens the achievement of the SDGs and climate objectives, increasing the risk of negative side-effects and jeopardising potential co-benefits across objectives. For instance, industrialisation projects targeted by SDG-9 may lead to technological lock-in that may be harmful to climate objectives, as in the case of building industrial plants reliant on fossil gas instead of using renewable and clean energy sources. Similarly, actions to adapt to climate change may have detrimental impacts on efforts to reduce inequality (SDG-10) if adapted infrastructure is only built in wealthy areas. In contrast, massive investments in renewable energy can lead to improved energy access and a reduction of energy poverty, thereby contributing to building sustainable territories (SDG-11), increasing opportunities for economic growth (SDG-8), and reducing inequalities. Considering these risks and opportunities, leaving the silo perspective behind by moving towards an integrated approach in the way SDGs and climate are financed is a necessary step forward.
Towards an integrated approach
Recent initiatives bring sustainable development and climate objectives together at the policy level; these are a good starting point but do not provide a comprehensive perspective on funding and financing needs.
- Green and SDG budgeting: Over 70 countries have embarked on some form of green budgeting, and many go beyond climate considerations. Green or environmental budget tagging cover additional dimensions that are also SDGs, and thematic budgeting more broadly considers social dimensions, as in the case of gender budgeting. A proposal to bring both social and environmental issues together, the Socio-Climate Budget Tagging tool, has been developed by I4CE, and SDG budgeting has been promoted by the international community as a step towards an integrated approach.
- Integrated national financing frameworks: This tool, applicable at the country level, provides a framework for financing sustainable development and achieving the SDGs. It notably allows countries to lay out the best use of development cooperation resources and the appropriate mix of public and private finance to support their national sustainable development priorities over time.
- Long-Term low emissions development strategies: The Paris Agreement invites countries to develop long-term low emissions development strategies (LT-LEDS), or LTS , to provide a long-term view on pathways to achieve climate and key national development objectives. Over 60 countries have released their LT-LEDS as of June 2023; 71 percent of the first 53 referred to linkages with the SDGs. Yet LT-LEDS often lack estimates of investment needs and details on how they will be financed over time. An LTS dashboard for finance ministries, developed by I4CE, proposes to translate LT-LEDS into investment needs, policy levers to trigger investments, and overall economic implications.
Beyond the policy level, just energy transition partnerships (JETPs) are an important step to leave the silo approach to project financing, but still miss the mark given their sectoral focus. Initiated in 2021, JETPs are a funding model designed to support the phase out of fossil fuels in developing and emerging economies while tackling the social consequences of the transition, notably addressing issues such as job losses in highly emitting sectors. JETPs typically lay out priority investment requirements and match them with funding in various forms. Pioneered in South Africa and followed by Indonesia and Vietnam, JETPs recently expanded to Senegal and are expected for other countries such as India. Yet the scope of JETPs does not allow for a comprehensive overview of the amounts and types of financing needed for the achievement of climate and sustainable development objectives.
Developing a national financing plan for the transition to achieve climate and development targets will help countries channel financial resources where most are needed rather than where it is easiest (for instance, investments in sustainable agriculture versus in renewables). A financing plan for the transition will point at financing needs and public policies to achieve objectives. It will also point at investment needs from private entities and levers to trigger them, and will indicate how much funding is needed from international lenders. A financing plan can be developed based on green budgeting initiatives or integrated national financing frameworks, and will benefit from being complemented by other tools such as climate finance landscapes or economic modelling including climate risks.
Role of international financial institutions in synergising climate and SDG finance
But countries cannot make it on their own. Synergising climate and SDG finance will require efforts from international financial institutions (IFIs). The broad development mandate of IFIs and local public development banks and the required additionality of their intervention (i.e., only funding projects that are either too risky or not profitable enough to attract private finance) make them key players in synergising SDG and climate finance. Their contribution to countries, through financial or non-financial support (such as capacity building, tools development), should be demand-driven, with a long-term perspective, and based both on national development and climate priorities maximising opportunities for co-benefits, ideally following national financing plans. Additionally, IFIs and public development banks should systematically strive for real economy impacts and deflect from projects with limited potential for change.
Ongoing discussions on the reform of the international financial architecture are the perfect opportunity to move towards an integrated approach for climate and SDG finance. International efforts in several forums can foster the required changes to advance in this direction. The Summit for a New Global Financial Pact, held in Paris in June 2023, was the opportunity to stress the need “to address joint nature, climate, and development challenges through increased global cooperation”. Upcoming international agenda milestones, such as the Finance in Common Summit, the G20 Summit, the UN SDG Summit, the International Monetary Fund and World Bank annual meetings, and COP28 need to keep up the momentum and propose real-economy, technical solutions to ensure (i) that countries are equipped with a long-term integrated view on their climate and development needs, and (ii) that development institutions offer relevant, long-term, and demand-driven support to countries.