Independent High-Level Expert Group Review of the Vertical Climate and Environmental Funds

As the pace of climate change accelerates and its impacts rise across the globe, the urgency of responding at scale to the magnitude of the climate and environmental challenge is increasingly clear.

The fast-rising costs of inadequate action were demonstrated in the first half of 2024, with devastating floods in Brazil, unbearably high temperatures in India, and hurricane-wrought destruction in the Caribbean. As the first Global Stocktake of the Paris Agreement underscores, commitments and actions are falling short of what is needed to deliver global climate and nature goals. The large and growing gap for financing the transition to a low-carbon economy, delivering climate resilience, and protecting nature requires an urgent and concerted response from all actors.

While developed countries have attracted 44% of finance for climate action, emerging markets and developing economies (EMDEs) and least-developed countries (LDCs) account for only 14% and 2% of global climate finance, respectively. As a result, EMDEs and LDCs are falling further behind in the transition to low-carbon, resilient economies while being increasingly affected by the impacts of climate change.

In order to meet the goals of the Paris Agreement, climate investment in EMDEs will need to increase more than fourfold to USD 2.4 trillion per year by 2030. This includes an estimated USD 1.6 trillion for clean energy, including to support a just transition, USD 250 billion for adaptation and resilience, USD 300 billion for coping with loss and damage and USD 300 billion for natural capital and sustainable agriculture. After accounting for their own resources, EMDEs will need around USD 1 trillion per year in external finance by 2030. This will require a fifteenfold increase in private finance, a fivefold increase in concessional finance, and a tripling in multilateral development finance as reflected in the Songwe-Stern report on “A climate finance framework” acknowledged by the recent COPs.

In this context, the Brazilian G20 Presidency and the G20 Sustainable Finance Working Group (SFWG) established an Independent High-Level Expert Group (IHLEG) with the objective of providing a set of actionable recommendations to: (i) optimize the operations of the Vertical Climate and Environmental Funds (VCEFs) and to (ii) enhance their contribution to the mobilization of other sources of sustainable finance.

The VCEFs, in sequence of their establishment, include:

• The Global Environment Facility (GEF), which has the broadest mandate serving six different international conventions related to climate and the environment.
• The Adaptation Fund (AF), which supports small-scale, locally-led adaptation with an emphasis on direct access and country ownership.
• The Climate Investment Funds (CIF), which have a long track record of collaboration on climate action with six multilateral development banks (MDBs).
• The Green Climate Fund (GCF), which has a mandate to invest equally across mitigation and adaptation, an emphasis on direct access, private sector engagement, and on scaling projects or programs.

The VCEFs cumulative resources range from USD 1.6 billion for the AF to USD 32 billion each for the GEF and the GCF. The Funds have a collective annual commitment capacity of around USD 4 billion to USD 5 billion, with the GCF accounting for around half of this amount. Annual disbursements were USD 1.4 billion in 2022, with the ratio of disbursements to approvals ranging from 76% for the GEF to 31% for the GCF. All of the VCEFs address climate change, with the GEF Trust Fund also covering biological diversity, international waters, land degradation, chemicals, and waste. The VCEFs have different structures, business models, and approaches to engaging with other actors, including the MDBs and the private sector.

While quantitatively small, both in absolute terms and relative to other public and private sources, these Funds have strengths that enable them to play an important catalytic role in advancing systemic change by working with development partners including MDBs, building markets, and mobilizing additional finance aligned with the Paris Agreement. The VCEFs also play a critical role in reducing the cost of capital, supporting policy work, planning, project preparation, and implementation, as well as mobilizing private sector action.

Given the scarcity of concessional finance—crucial in areas including just transition, adaptation, nature, and biodiversity—the highly concessional funds provided by the VCEFs are essential to support an effective climate transition in EMDEs and LDCs. It is therefore imperative to ensure that these Funds can deliver to their full potential. It is important to also consider their role in relation to ongoing work on the broader architecture of instruments for investment in global public goods and MDB reform and evolution, in particular in the context of the G20 Roadmap on MDB Reform.

To cover the objectives set out in the Terms of Reference, the work and recommendations of the IHLEG are structured across the following levels:

• Level 1 covers the overall climate finance landscape within which the VCEFs operate.
• Level 2 examines how the VCEFs can enhance the mobilization of public and private finance.
• Level 3 outlines potential options to integrate the work of the VCEFs and enhance their collective impact.
• Level 4 identifies measures to harmonize procedures across the VCEFs.
• Level 5 defines measures to further improve access to and the efficiency of individual Funds.

Based on an assessment of the mandate and activities of each Fund, the proposed strategy to enable the VCEFs to deliver at their full potential and enhance their impact includes the following:

• The VCEFs should build on work to date on specific measures to improve efficiency, including in accreditation processes, project approval times, and accelerated disbursements, with particular attention on increasing access for LDCs and Small Island Developing States (SIDs), and on engaging the private sector.
• The VCEFs should collaborate to harmonize procedures in support of their integration and reduction of transaction costs.
• The VCEFs should work together—strategically and sequentially—based on their comparative advantages, leveraging and connecting with existing sources of climate finance, public and private.
• The VCEFs should proactively support country platforms, shifting from a focus on individual projects to country-driven strategies and investment plans for system transformation.
• The VCEFs should seek to operate as a system on upstream country programming and pipeline development, leveraging each VCEF’s comparative advantages, including its monitoring, reporting, and learning.
  
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This report has been prepared by the Independent High-Level Expert Group appointed by the Brazilian G20 Presidency and the G20 Sustainable Finance Working Group to undertake work for this review of the Vertical Climate and Environmental Funds.

Its findings and recommendations reflect a broad agreement within the Independent High-Level Expert Group without entailing agreement on every specific point. Members participated in a personal capacity, and their participation does not imply the support or agreement of their respective institutions.

The report has been drafted independently and does not seek to represent the views of the G20 membership or the Brazilian G20 Presidency. It also does not represent the positions of the Vertical Climate and Environmental Funds or any other external party consulted during the Funds Review.