Climate Finance Challenges

As the multilateral order comes under growing strain, several trends are becoming increasingly clear. International development assistance and climate finance appear to have peaked, even as global needs continue to evolve. At the same time, international institutions, faced with mounting pressure to prove their efficiency and cost-effectiveness, are reassessing their operations. But today's climate-finance challenges demand more than introspection; they call for structural change, decisive action, and - above all - coordinated leadership.

- Archi Rastogi

Climate finance is currently delivered through a broad array of institutions: multilateral bodies like the Green Climate Fund (GCF), the Global Environment Facility (GEF), and the newly established Fund for Responding to Loss and Damage (FRLD); multilateral development banks (MDBs); and an ever-expanding network of philanthropic, national, and regional initiatives. Each was created to fill a perceived functional or political gap. Collectively, however, they form a sprawling and often unwieldy arrangement.

Institutional sprawl creates two major challenges. First, it fosters unhealthy competition. Many of these institutions draw on the same pool of donors, serve similar recipient countries, and have overlapping mandates. The result is a bureaucratic maze and high transaction costs, with recipient countries often spending more time navigating the system than accessing its benefits. As a 2024 report by the G20's climate-finance working group warned, fragmented and inefficient access mechanisms are among the most significant obstacles to effective climate action.

Second, and paradoxically, this competition also leads to inertia, because institutions, protective of their respective niches, become increasingly reluctant to depart from established practices. While differences in size and financial terms should enable climate funds and MDBs to serve distinct, complementary roles, in practice their policies and portfolios often converge. The FRLD is a striking example. When the need for a dedicated mechanism to address loss and damage became urgent, no existing institution was equipped - or willing - to take the lead, so a new entity had to be established.