As global temperatures inch beyond 1.2C above pre-industrial levels and countries witness increasing instances of record-breaking heatwaves, storms, droughts, floods, and forest fires, 2023 is shaping up to be a critical year for climate action. Climate is on the agenda at the G20 Summit, the SDG Summit, the World Bank Annual Meetings, and COP 28 (including the first Global Stocktake of progress since the Paris Agreement), among others.

Fundamentally, climate action needs to be facilitated by large amounts of finance and investments. Some estimates indicate that the world needs up to USD 130 trillion in total to decarbonise by the middle of the century, with additional finance required to build resilience, adapt to unavoidable impacts, and deal with loss and damage. Currently, the amounts of finance flowing towards climate action, particularly in developing countries, fall far short of these needs[1]. Further, as many – led by Barbadian Prime Minister Mia Mottley – are pointing out, developing countries are also facing a cost of living crisis and a debt crisis, in addition to the climate crisis, and the global financial system is not currently equipped to adequately address these interconnected problems.

Responding to growing calls for change, one crucial event this year was the June 22-23 Summit for a New Global Financial Pact, hosted in Paris by France and Barbados, together with a broader steering committee. It was presented as an opportunity to build a new contract between the global north and south, and was ushered in by a joint statement by 13 world leaders (including those of the US, Germany, France, EU, and Japan) committing to use the Summit to accelerate progress towards the SDGs.

What did the Summit cover, and did it achieve any of its objectives?
Discussions largely fell under three broad and interrelated themes. The first was on reforming multilateral financial institutions (MFIs), such as the World Bank and the International Monetary Fund (IMF), which provide financial assistance towards climate, development, and macroeconomic stability. These MFIs – set up 80 years ago when most developing countries didn’t exist and guided by the priorities of the largest shareholders – aren’t seen as being fit-for-purpose, often offering high interest loans that are conditional on opening domestic markets to foreign competition and on increasing fiscal austerity. Progress however fell short of the ambition of creating a new ‘Paris Consensus’ to reform MFIs. Against the developing countries’ calls for a complete overhaul of these institutions or the creation of new institutions, developed countries offered only moderate changes. Calls to increase the capitalization of MFIs were resisted, and MFIs are only expected to modestly increase lending capacity through tweaks to their balance sheets. The World Bank launched a Private Sector Investment Lab to help remove barriers to private climate finance, although private finance mobilization is not a new – or uniformly desirable – ambition, and in place of more concrete outcomes, the Summit was at best able to issue a statement supporting a call to action to evolve MFIs.

A second set of discussions was around easing indebtedness. The high levels of developing country indebtedness (with an average debt-to-GDP ratio of 207%) and repayment burdens – aggravated by the higher interest rates they face – reduce the resources available towards climate and development action, and become an additional burden in the event of other crises. Discussions on indebtedness saw comparatively more progress. Among initial proposals such as offering ‘debt-for-climate-action’ swaps (which provide debt relief in exchange for progress on climate objectives), a notable development was the widespread agreement on the need to introduce climate-resilient debt clauses – which would suspend debt repayments in the event of disasters – by the end of 2025. Additionally, the IMF reached a target of making USD 100 billion in special drawing rights (a reserve currency) available to climate-vulnerable countries to ease their immediate liquidity requirements.

Discussions on fostering greater flows of climate finance witnessed the widest variety of proposals and the least tangible outcomes. Much of the focus was on the usual promise of carbon markets, and a Call to Action for Paris-aligned Carbon Markets – expanding carbon pricing coverage to advance progress towards the objectives of the Paris Agreement – was launched. Other proposals included lending in local currencies to reduce exchange rate risks, establishing catastrophe bonds to provide emergency liquidity during crises, mandating big corporate polluters to set aside a percentage of profits for climate finance, and introducing a financial transaction tax to fund climate action. A potentially promising idea, to introduce a carbon tax on shipping, will be debated at an International Maritime Organisation meeting this week.

Overall, the Summit – while recognizing key limitations of the current financial system – was thin on tangible outcomes, and points towards incremental progress rather than a systemic transformation, illustrating the lack of consensus that persists around the way forward. Although it was attended by the heads of state of over 30 countries, the leaders of the biggest economies – China, India, and the US – were also notably absent from the stage, with Finance Minister Sitharaman representing India at the discussions.

Nevertheless, the Summit has infused a sense of momentum and urgency into these critical discussions, proposing a roadmap of actions to take conversations forward, and the symbolism of a global conference on financial reform attended by several heads of state should not be underestimated. President Macron is to be commended for sparking this conversation and creating a platform for such north-south engagement. As attention turns to advancing the roadmap through future global events, this Summit can be seen, at the very least, as a necessary political stock-take of how much remains to be done.

[1] Financial flows from developed to developing countries were reported at USD 83 billion in 2020 – itself a disputed figure. In 2022 in contrast, global fossil fuels subsidies were USD 1 trillion, and the combined profits of the top five oil companies were about USD 200 billion.