COP28 Finance Day unlocks innovative financial mechanisms to support vulnerable countries fight climate change

COP28 Finance Day unlocked significant progress on international financial architecture reform to support low-income and vulnerable countries fight climate change.

Major international financial institutions and countries made new commitments to offer climate-resilient debt clauses (CRDCs) in their lending. These clauses allow debt service to be paused to provide breathing space when countries are hit by climate catastrophes.

The UK, France, World Bank, Inter-American Development Bank (IDB), European Investment Bank (EIB), European Bank for Reconstruction and Development (EBRD) and African Development Bank (AfDB) made new commitments to expand CRDCs in their lending. In total 73 countries called on donors to expand the use of these clauses by 2025.

Throughout COP28 Finance day, other announcements included:

• The UK announced the first ever climate resilient debt clause to Senegal, the first in Africa.

• The IDB announced it had already offered $1.2 billion of loans covered through CRDCs.

• The World Bank announced it will start offering CRDCs in existing loans, which will pause debt as well as interest for two years in the event of a natural disaster, the World Bank has committed to covering all transaction costs.

• AfDB, EBRD and the French Development Agency also announced plans to integrate these clauses in sovereign loan agreements.

• Japan announced a commitment to support the innovative facility developed by the AfDB and IDB to leverage Special Drawing Rights (SDRs) for climate and development.

• France announced its commitment to support this facility through a guarantee and Spain and the UK indicated their willingness to further explore this solution.

• The African Development Bank (AfDB) and the Inter-American Development Bank (IDB) have developed a hybrid capital-based mechanism to channel unused SDRs through MDBs. Using this model, wealthy countries lend their SDRs to MDBs, who can use them to issue bonds, multiplying the available capital.

This marks significant progress to reform the global climate finance architecture by making climate finance available, accessible, and affordable. This has been the central vision of the COP28 UAE Declaration on a Global Climate Finance Framework launched at the World Climate Action Summit at the beginning of COP28.

These innovative financial instruments announced at COP28 can help provide countries with fiscal space to invest in climate resilience and recovery. These instruments are critical in the context of rising debts as well as needs to address loss and damage.

The Declaration is endorsed by India, France, Barbados, Kenya, Ghana, Germany, UK, USA, Senegal, and Colombia. It lays out defining principles for a climate finance architecture that delivers for all.

Speaking about the significance of including the developing world in climate change solutions, Dr. Sultan bin Ahmed Al Jaber, Minister of Industry and Advanced Technology and COP28 President, said, "The announcement of new SDR pledges for Africa, and the broad adoption of climate-resilient debt clauses is essential. It will help those most vulnerable to the shocks and disasters caused by climate change.” 

"I want to thank you all for the extraordinary courage to do the right thing. We can always bring back our debt, but we cannot bring back our society,” said Mia Mottley, Prime Minister of Barbados, while speaking at the event.

"By delivering new Climate Resilient Debt Clauses in Senegal and Guyana, the UK is allowing affected communities to temporarily pause debt repayments in the wake of a climate disaster, giving them breathing space to recover”, said Andrew Mitchell, UK Minister for Development, at the event.

The event also showcased views from credit rating agencies such as Fitch Ratings, who indicated their intention to consider revisions to credit rating criteria for loans to ensure use of CRDCs does not impose a burden for borrower countries.

Concessional finance will be crucial as developing countries seek to transform their economies and build resilience against climate change. At present, governments of developing countries typically pay much higher interest rates than governments of wealthy countries.

At the event today, speakers discussed progress on SDR lending, and called for additional pledges. A number of countries have already made SDR commitments to support climate action.

At the COP28 World Climate Action Summit, the UAE committed US$200 million to help low-income and vulnerable countries fight climate change through the International Monetary Fund Resilience and Sustainability Trust (RST).

WAM