German climate finance / Adaptation / Transparency

Adapting to climate change: portfolio analysis highlights scope for improvement in climate finance

German climate finance needs to better target the most vulnerable countries and population groups. Photo: J.Grossmann, Brot für die Welt

From 2011 to 2017, Germany supported climate change mitigation and adaptation with about a quarter of all development funds, pledging to provide four billion euros per year in climate aid from its budget by 2020. Adaptation to climate change in particular is an area of action and policy in development cooperation (DC) that is developing dynamically and is playing an increasingly important role in many DC sectors. The German Institute for Development Evaluation (DEval) launched a large-scale evaluation of German adaptation finance in 2019. The first step was a portfolio and allocation analysis that examined the distribution patterns of German adaptation finance from 2011 to 2017. This analysis will be complemented by further studies on support for adaptation-related processes, structures and engagement in key sectors of German DC, as well as on measures to address residual climate risks.

Key findings of the portfolio analysis

Germany is the third largest donor in the area of adaptation after Japan and the EU. Most of this support flows through bilateral funds and only a small portion through multilateral climate funds and other multilateral actors. Germany also primarily finances projects within a framework of bilateral cooperation with partner countries rather than programs financed by multiple donors and coordinated by the partner country. The bulk of the funds come from the budget of the German Federal Ministry for Economic Development and Cooperation (BMZ), followed by the German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU) through the International Climate Initiative (IKI). Climate funds in the bilateral sector are identified through the assignment of Rio markers, with a Rio marker 2 identifying projects that define climate change mitigation or adaptation as their primary objective, while a Rio marker 1 indicates that these are a secondary objective. Looking only at budgetary resources (i.e. disregarding development loans, etc.), Germany is approaching the internationally targeted balance between mitigation and adaptation. However, significantly more market funds leveraged via private actors are flowing into mitigation. Awards through civil society channels have amounted to 16 percent over the past several years for grant funds, or 10 percent when including loans.

Critical review of crediting practice for adaptation is lacking

The politically intended balance of adaptation and mitigation in the overall view (budget and market funds) was not confirmed by the analysis. In addition, projects funded in the field of adaptation mainly have climate change adaptation only as a secondary objective. From 2011 to 2017, adaptation projects accounted for 54 to 65 percent of all projects with climate as a secondary objective and 28 to 44 percent of those with climate as a principal objective. The bulk of Germany’s adaptation funding goes toward the environmental protection, agriculture and water sectors. However, it is not clear from the portfolio analysis how high the share of projects with climate change adaptation as a principal or significant objective is in the individual sectors and whether differences can be observed between the sectors.

It is also not possible to tell from the portfolio analysis what share of projects that state adaptation as a significant objective have actually integrated adaptation to climate change into their implementation. This criticism has been brought repeatedly (by Adaptation Watch and others, as well as in a study we published in 2017), because in practice, many projects classified and counted as climate finance are insufficiently focused on climate change risks and targeted adaptation. The three-step approach developed by the multilateral development banks for classifying adaptation measures provides an improved way of evaluating and verifying the degree to which projects:

  1. reflect climate change-related risks in their context,
  2. align their (sub-)objectives with the identified risks, and
  3. plan their measures accordingly to reduce these risks.

The procedure is also recommended by the OECD-DAC for the application of Rio markers. However, this review of German adaptation finance hat still not been addressed in the portfolio analysis.

Limited reflection of the needs of partner countries

The application of the three-step approach is also relevant with regard to DEval’s evaluation questions about the extent to which the portfolio is aligned with development partner priorities and scientific findings, as well as the climate vulnerability of partner countries. The alignment of adaptation finance with partner country needs should be based on factors such as climate vulnerability, as measured by the exposure to climate risks, sensitivity and adaptive capacity. The portfolio analysis comes to the conclusion that increased climate vulnerability increases the likelihood of a country receiving German adaptation finance. The allocation also seems to be based on the needs of the partner countries, because adaptation pledges are more likely to go to countries with low adaptive capacity. This is generally correct. At the same time, however, the particularly vulnerable group of the small island developing states (SIDS) receives below-average levels of adaptation finance. Moreover, the analysis shows that Germany finances adaptation primarily in countries in which many donors are already active. This carries the risk that extremely vulnerable countries fall through the cracks of adaptation finance. Germany should work within the group of donor countries to prevent this and, if necessary, provide targeted support to such countries.

The portfolio analysis also does not allow conclusions on the degree to which climate vulnerability at the subnational level or with regard to particularly vulnerable groups is reflected in German adaptation finance. Women and girls are often extremely vulnerable to climate change impacts. The gender orientation of the funded projects is reflected in OECD-DAC statistics via a gender marker, but this was not taken into account in the portfolio analysis. An analysis by CARE shows that gender has been integrated to some degree in only 61 percent of German adaptation finance so far, and that it is not a priority even there.

Similarly, the sectoral consistency with nationally determined contributions (NDCs) identified in the portfolio analysis does not allow conclusions as to whether the specific projects actually promote the implementation of the national climate goals and the measures and sectors prioritized in the NDCs. However, it is the declared goal of the BMZ and other bodies to comprehensively align their complete climate and climate-related development finance with NDC implementation.

Lack of coherence and complementarity in German adaptation finance

The portfolio analysis also concludes that German DC does not yet have a systematic adaptation strategy. The BMZ and BMU implement their individual thematic and regional priorities for adaptation within their respective profiles. Apart from an increasing exchange of information, however, there is no systematic coordination between the ministries, nor is there a publicly available climate or adaptation strategy, as demanded by civil society.

The lack of a comprehensive strategy also affects the role that German civil society can play in supporting adaptation to climate change. Civil society organizations often promote approaches complementary to those of the governmental implementing partners that are also accessible to smaller civil society actors in partner countries, improving their access to climate finance. Climate finance could thus be a means of strengthening civil society organizations in partner countries to better reach particularly vulnerable groups and improve their participation in national processes to develop and implement NDCs and national adaptation plans (NAPs).

However, with the allocation of adaptation funding through civil society actors stagnating, such a strategic orientation cannot be discerned, despite – in the estimation of the authors of this article – continued high interest in adaptation measures by German civil society. Regarding this, the DEval study states: “From the point of view of the ministries, the civil society’s capacities to implement further funds are currently exhausted. From the point of view of civil society, there is a lack of suitable funding lines.” (p. 23) In its statement, the BMZ sees a need for further analysis of the current situation and the causes and starting points. Barriers to access in the existing guidelines according to which climate funds are allocated are a subject of discussion: The development policy umbrella organization VENRO, for example, called for greater flexibility (e.g. in carrying over project funds to the next budget year) in an opinion in March 2020 before the background of the COVID-19 crisis. VENRO also called for a reduction in the relatively high own contribution from the standard value of 25 percent to 10 percent in a further statement on the 2021 German federal budget.

Conclusions from a civil-society perspective

DEval’s portfolio and allocation analysis confirms the scope for improvement in many elements of German climate finance that have already been addressed elsewhere by civil society. Positive aspects are the fundamental importance of adaptation in German climate finance, even if a true balance in the allocation of funds between climate protection and adaptation has not yet been achieved, and the consideration of the vulnerabilities of partner countries to the climate crisis when allocating funds. Negative aspects include the lack of an overall strategy, insufficient prioritization of extremely vulnerable country groups such as the SIDS, high donor concentration, and stagnant levels of funding for civil society actors.

The portfolio and allocation analysis thus provides a good foundation for discussing German adaptation finance using a better data basis. However, it leaves some questions unanswered. These include the question of whether the focus on projects with adaptation as a secondary objective really means mainstreaming adaptation in development cooperation, or rather a generous coding with the Rio markers without the corresponding orientation in the measures. Similarly, the strategic focus of climate finance on particularly vulnerable groups (such as women and girls), and the actual alignment of development cooperation with national climate plans, remains unclear.

A systematic survey and evaluation of German climate finance is still needed to answer these questions. DEval should, if possible, take up these issues in future evaluations. Key actors, especially the BMZ and BMU, should actively address the questions and problems raised and develop strategies to further improve adaptation finance with the involvement of civil society.

Sven Harmeling / CARE
Christine Lottje