Financing the socioecological transformation

Overarching priority area for the International Climate (last updated: September 2024)

The availability of financial resources, whether for the dissemination of innovative, sustainable technologies, the design and scaling-up of climate- and biodiversity-friendly business models or the expansion of climate-friendly and resilient infrastructure, is decisive for the success of the transformation in developing and emerging countries throughout all funding areas of the International Climate Initiative (IKI).

As a consequence, the IKI will be placing a stronger focus on the steering of global finance flows in line with the Paris Agreement and the establishment of the green financial sector as well as the mobilisation of private investment.

This will include efforts to improve general conditions in the financial and manufacturing sectors of partner countries, with the aim of enabling higher levels of investment in climate change mitigation and biodiversity conservation. Activities will also be pursued for the introduction and strengthening of instruments for greenhouse gas pricing. Funding will also support the integrated use of carbon markets, including voluntary carbon markets within the framework set out by Article 6 of the Paris Agreement on international cooperation.

In addition to improving these general conditions, targeted incentives will also be used to leverage private investment across all funding areas of the IKI. In doing so, the IKI will on the one hand be focusing on the direct mobilisation of private investment by establishing and participating in financial instruments. On the other hand, the IKI will also be working to accelerate other investment by providing advice on greenhouse gas pricing instruments to banks, regulatory authorities and policymakers.

International agreements on the financing of climate change mitigation and adaptation to the impacts of climate change

Back in 2009, the world’s advanced economies signed the Copenhagen Accord, undertaking to collectively mobilise USD 100 billion annually by 2020 to support climate change mitigation and adaptation measures in developing and emerging countries. In 2015, at the UN Climate Change Conference in Paris, this commitment was extended to 2025 and was achieved for the first time in 2022. Germany now makes an annual contribution in this context of more than EUR 6 billion. A new climate finance goal (New Collective Quantified Goal, NCQG) of more than EUR 100 billion, intended to target the needs and priorities of developing countries in particular, will be negotiated as part of the programme for COP29, which will be held in Baku, Azerbaijan in November 2024.

However, this new goal will not be financed solely by means of public funds from previous donor countries, but from a range of sources stemming from bilateral and multilateral cooperation, and with a particular focus on private climate finance. Accordingly, public funds must also be deployed effectively so as to mobilise and catalyse private finance for climate change mitigation.

At the 2021 UN Climate Change Conference in Glasgow, developed countries were also called on to at least double the funding collectively provided for adaptation measures in developing countries by 2025 compared to the 2019 baseline – also to ensure a balance between international spending on climate change mitigation and adaptation.

”The Paris Agreement sets out a total of three long-term goals: limiting the global temperature increase to 1.5 C, adaptation, and ‘making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.’ (article 2.1c of the Paris Agreement). This long-term goal highlights the fact that, in order to limit global warming to 1.5°C and achieve better adaptation to climate change, global finance flows – both public and private – must be harmonised with these goals.”

Multilateral funds play an important role in climate finance, with one important fund in this context being the Green Climate Fund (GCF) set up in 2020. The second replenishment for 2024–2027 has reached a funding level of USD 14 billion to date, EUR 2 billion of which is from Germany. Other notable funds include the Global Environmental Facility (GEF), the Adaptation Fund (AF) and the Climate Investment Funds (CIF). During COP27, the parties to the UNFCCC also agreed to create an international fund for responding to climate-related loss and damage, officially known as the Fund for Responding to Loss and Damage. To date, this new fund has attracted commitments of more than USD 660 million.

The Paris Agreement also envisages the introduction of instruments for market-based cooperation. Article 6 establishes the legal basis for introducing cooperative mechanisms that enable an international transfer of mitigation outcomes between countries and which are intended to strengthen the ambition of nation states to take action on climate. Article 6.2 permits UNFCCC parties to cooperate directly with one another. This means that mitigation measures can be implemented in one country and the resulting mitigation outcomes can be transferred to another country, where they can be credited towards the nationally determined contribution. The ‘Paris Agreement Crediting Mechanism’ set out by Article 6.4 of the agreement also envisages the issuing of emission reduction credits that can be utilised for a range of purposes (such as the voluntary carbon market). The voluntary carbon market (VCM) can help mobilise private capital for climate change mitigation projects, which is used to strengthen NDC implementation and helps raise global ambitions. However, this is conditional on the emission reduction credits being of high integrity and, at the same time, on the fact that their use does not replace or delay a company’s own internal efforts to reduce its emissions.

Capitalisation and mobilisation of financial resources for biodiversity conservation and preservation

Although our prosperity and almost the entirety of our economic activities depend directly or indirectly on biodiversity and its ecosystems, their value is currently not recognised and not appropriately accounted for by economic or political decision-making.

This is primarily because the services that nature provides to us are viewed as inexhaustible and many of them are available to us at no cost. According to figures from Nature, the average annual global financing gap for biodiversity amounts to no less than USD 711 billion.

As public funds cannot be stretched to close this gap, this means that far greater participation is needed from the private sector in particular. The financing of biodiversity conservation is therefore essential for the implementation of the goals of the Global Biodiversity Framework (GBF).

The GBF specifies that the loss of biological diversity must be stopped and reversed by 2030. To achieve this, the international community has decided on four long-term targets by 2050 and 23 medium-term targets by 2030. For example, food waste and the spread of invasive species are to be halved by 2030, and states should be empowered to require businesses and financial institutions to disclose their activities that have a harmful impact on biological diversity.

At the COP16 United Nations Biodiversity Conference, which will be held from 21 October to 1 November 2024 in Cali, Columbia, the financial sector will therefore play a leading role in relation to the implementation mechanism and financing.

Financing mechanisms for biodiversity conservation that are already in place include the Global Biodiversity Framework Fund (GBFF) for the implementation of the Kunming-Montreal Global Biodiversity Framework, or the NBSAP Accelerator Partnership, which is an initiative that provides targeted help to countries for the ambitious implementation of their biodiversity strategies ‑and action plans.

The IKI Strategy

The IKI wants to maximise its impact on climate action and biodiversity conservation. To this end, it concentrates its funding activities on prioritised fields of action within the four funding areas and on three cross-cutting priorities. Another key element is the close cooperation with selected partner countries, especially with the IKI’s priority countries.

Click here for the IKI Strategy

IKI funding areas

IKI approaches to sustainable finance

When financing sustainable projects in emerging and developing countries, typical major obstacles are a lack of technical capacities and financial resources during the project development phase. In climate investment projects – such as those investing in renewable energy sources, energy efficiency and urban infrastructure – a project development credit facility can accelerate project planning during the development phase, improve quality and ensure that these projects also receive corresponding financing from banks. Furthermore, this approach gives potential investors access to a pipeline of technically robust and financially mature climate finance projects.

The spectrum of IKI funding ranges from financial support for feasibility studies and business plans in the pre-investment phase through to the provision of technical support to projects in later stages of project development, or start-up capital investments intended to reduce the high initial costs and risks for clients and investors alike. This helps remove the financial barriers that typically prove to be problematic in the project development phase.

Alongside consulting services for investors, IKI also supports projects that focus on the preparation of climate change mitigation and adaptation investments for political partners and local governments in the critical early phase of project planning.
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A lack of suitable financing options remains a major obstacle to investment in climate action projects and adaptation measures. One important reason for this unavailability is a lack of awareness on the part of banks and investors about the opportunities offered by sustainable investment – in renewables or energy efficiency, for example – which in turn fosters excessive risk aversion.

Accordingly, the IKI promotes measures that are aimed primarily at capacity building in private national financial institutions. This works to increase the readiness of the financial sector to commit to financing climate action projects and adaptation measures, and to develop and roll out new, climate-resilient financial products. Supported measures include activities to improve the general organisational conditions in the financial institutions as well as employee training for the development of climate finance products, the assessment of sustainable investments and the review of loan applications made in the green finance segment.
Selected projects
Achieving climate finance goals as well as a low-carbon, climate-resilient development pathway requires the mainstreaming of climate criteria as part of all investment decision-making. At the same time, political and regulatory frameworks must also be established that create incentives for diverting the large investment volumes.

The IKI is promoting approaches that provide support to policymakers as well as private and multilateral financial institutions for successfully diverting financial flows. This involves modelling the risks associated with switching to a low-carbon economy (transition risks) to make these risks measurable as well as highlighting the potential offered by investment on the part of private and public players in the financial market.
Selected projects
One decisive step to achieve climate finance goals is mobilising a large volume of existing private funds for climate change mitigation. To date, the mobilisation of private investment has failed to meet expectations. Public funds can be used to reduce barriers to private investment in climate action measures while also creating long-term incentives for such private investment. Alongside financial instruments, which result in direct mobilisation, structural changes – primarily by means of regulatory frameworks – also have a significant role to play in promoting the transition towards a sustainable financial market in partner countries.

In the field of international climate and development finance, the concept of blended finance is adopted with the aim of deploying public funds strategically for the mobilisation of flows of private capital in emerging and developing countries. The IKI cooperates with development banks to utilise various financial instruments for risk mitigation so as to orient private finance towards developing countries and significantly increase its volume. In terms of mitigation efforts, well-functioning business models are already available, particularly in relation to energy efficiency and renewable energy sources. Mobilising private investment for adaptation to the impacts of climate change is more challenging, however. Yet some innovative approaches are now available, such as those that help institutions provide microcredit as well as advice for ecosystem-based adaptation measures.

Beyond this, the IKI uses The Currency Exchange Fund (TCX) to address one of the central challenges for climate finance by hedging the currency risk from exchange rate volatility on behalf of international lenders and local borrowers.
Selected projects
The coordinated application of various instruments is a decisive step towards ensuring effective climate change mitigation. Carbon markets can play an important role here by using price signals as a core element of their impact.

With its Article 6, the Paris Agreement marks a significant milestone in the development of international mechanisms for market-based climate change mitigation. This is based on a robust set of policies, which also include a transparent accounting system – the full details of which are still being negotiated by the signatory parties.

Within the context of the IKI, the German Federal Government is prioritising the development and piloting of market-based instruments. As one example, the IKI is promoting capacity building for implementing Article 6. This is because many countries have a strong interest in participating in the cooperation mechanisms, but this requires a solid technical foundation – for instance in order to be able to demonstrate the additionality of measures and ensure environmental integrity. In addition, new governance frameworks – with institutional structures, regulations and strategies – are also required in most cases.

Alongside market-based cooperative approaches, carbon pricing is also critical for the efficient achievement of the goals of the Paris Agreement.

More and more countries are planning or weighing up the deployment of carbon pricing instruments, such as emissions trading schemes or carbon taxes, with the aim of fulfilling their nationally determined contributions (NDCs). The IKI is supporting countries in developing and implementing such instruments both bilaterally and through multilateral initiatives. As one example, the Partnership for Market Implementation (PMI) established by the World Bank with the participation of the German Federal Ministry for Economic Affairs and Climate Action (BMWK) is responding to the increased demand for help in implementing these instruments.

Further information:

BMWK article on market-based instrument (German)
BMWK information portal on global carbon mechanisms – market-based instruments in climate change mitigation
Selocted projects
Low-income and vulnerable developing countries in particular have an enormous need for investment and insurance instruments that can help them increase the resilience of their population, infrastructure and agricultural/ecosystems against the impacts of climate change – and also help reduce both risks and losses.

The United Nations Environment Programme (UNEP, 2022, XIV) estimates that the annual financing requirements for climate adaptation measures in the Global South will be around USD 340 billion for 2030 and as much as USD 565 billion by 2050.

Formed in 2007, the Adaptation Fund supports projects that protect vulnerable population groups in developing countries against the impacts of climate change.
Selected projects
The IKI uses a broad spectrum of approaches to help its partner countries as they capitalise and mobilise resources for the conservation of biodiversity. These approaches include the marketing of biodiversity-friendly products, the integration of biodiversity into the private and financial sectors as well as the promotion of ecotourism.

Since 2012, the German Federal Environment Ministry (BMUV) has partnered with the European Commission, Canada, France, Norway, Switzerland and the region of Flanders to support the Biodiversity Finance Initiative (BIOFIN). BIOFIN is a global partnership that is headed by the United Nations Development Programme (UNDP) and is now active in over 40 countries. The goal of the Initiative is to improve the general conditions for biodiversity finance in its partner countries.

Most nations do not have access to reliable figures about the actual cost of implementing their biodiversity strategies. Nor are they aware of the sources from which they might procure such funding nor of how to then implement their strategies. BIOFIN aims to provide partner countries with support for closing these gaps in their knowledge. In a second phase, financing solutions are then developed and implemented. In addition, BIOFIN supports its partner countries in mitigating the negative impacts of the coronavirus crisis on biodiversity while simultaneously contributing to a sustainable economic recovery.
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