Reform of the international financial architecture and climate finance: What will the year 2024 bring?

The current reform process of the international financial architecture are Reformprozesse für die internationale Finanzarchitektur could yield important contributions to climate finance. Photo: Arek Socha from Pixabay

A new target for climate financing is to be agreed internationally before the end of the year. If it is to meet the challenges of climate change, it must be significantly higher than the previous USD 100 billion target for international climate finance. There are several relevant processes on the international political calendar for 2024 that deal with how more funds can be mobilised and more effective institutions for climate finance can be created. The G20 process, the ongoing processes to reform the International Monetary Fund (IMF) and the World Bank, and the United Nations  Summit of the Future in September are likely to be particularly relevant in 2024.

G20 in Brazil

The G20 process will be chaired by Brazil in 2024. The actual summit of Heads of State will not take place until 18 and 19 November in Rio de Janeiro, but high-level expert groups and ministerial meetings  will be working on key international policy issues throughout the year. Climate finance will be high on the agenda. An initial vote on this by the member states is due to take place at the end of February, before the official meeting of the G20 finance ministers.

The so-called “finance track” is traditionally the most important working area of the G20. The Brazilian Presidency has divided it into three strands of work. Climate finance in the narrower sense is part of the first track on ecological transition. The second strand on reforming the international financial architecture is about better positioning institutions such as the World Bank or the IMF for the challenges of climate change. The third strand on sovereign debt issues will also take up the climate issue. The main aim here is to promote debt-to-climate swaps, i.e. debt conversions in which countries in the Global South have their foreign debt cancelled so that they can use the funds released for climate-related tasks.

As an exclusive club of just 19 countries, plus the European Union and, this year for the first time, the African Union, the G20 cannot make decisions with global reach. However, as these are the most important economic powers, the results of the G20 summits are important in setting the course for many global processes.

IMF and World Bank

The IMF and the World Bank are taking on increasingly important roles in climate financing. The World Bank is already the most important single financier in this area, with an official volume of USD 31.7 billion in 2022. In autumn 2023, two key decisions were taken to further strengthen its role which will be gradually implemented in 2024. At the World Bank Annual Meeting in Marrakesh, the mandate of the World Bank was expanded to three pillars. While it was previously only concerned with poverty reduction (Ending Poverty) and reducing inequality (Shared Prosperity), an explicit mandate to secure global public goods has now been added under the label “Ending Poverty on a Livable Planet“, which primarily refers to the fight against climate change. The German government was and is one of the driving forces behind this reform. Germany was also the first country to pledge funds for the World Bank’s new hybrid capital instrument, which is intended to finance the new agenda.

In addition, at the last UN climate summit in Dubai, the World Bank was also designated – at least temporarily – as the host organisation for the new Loss and Damage Fund. This has led to the displeasure of many non-governmental organisations (NGOs) and activists, for whom the World Bank is either considered a climate sinner because of its funding for fossil fuels and/or undemocratic because of the dominance of rich countries in its decision-making bodies. The new fund must be operationalised in 2024 in order to become functional. More importantly, it needs to be filled. So far, it is little more than an empty shell, as the climate summit was unable to agree on a financing mechanism beyond “voluntary contributions”. The voluntary contributions of 792 million US dollars so far only cover a fraction of what is needed. Germany pledged 100 million euros in Dubai.

The IMF has only been active in climate financing since December 2022 through its new Resilience and Sustainability Facility (RSF). To date, over 40 billion US dollars have been pledged to the trust that finances the RSF, with China being the largest contributor. The credit volume is still modest. Although agreements totalling over 5 billion special drawing rights have been concluded with 16 countries by January 2024, only just over 1 billion have been disbursed. The IMF’s entry into climate financing was also not without controversy. On the one hand, the IMF has so far built up little expertise in this area, while on the other hand it finances exclusively through loans, which is why the recipients are inevitably driven deeper into debt. The IMF itself wants to review its commitment; the first official evaluation of the RST is due in 2024.

Milestones on the IMF and World Bank calendars are traditionally the joint spring meeting in April and the annual meeting in October. However, as the fundamental political decisions have already been taken, the respective Executive Boards will deal with their implementation throughout the year.

UN Summit of the Future and Fourth World Conference on Financing for Development

In 2024, the most important negotiations on climate finance will continue to take place at UN level in the various formats of the UN Framework Convention on Climate Change (UNFCCC). However, at least two other processes are relevant. The United Nations Summit of the Future will take place in New York in September. The ambitious goal is to fundamentally reform the UN system in order to make it fit for the challenges of the present and future almost 80 years after the United Nations was founded. Climate change is obviously a key one. Both development financing and the reform of the international financial architecture are explicitly on the agenda. The first negotiation draft of the planned pact for the future was published at the end of January.

In addition, the preparatory process for the Fourth International Conference on Financing for Development (FfD4) will begin in 2024. Since the FfD3 conference in Addis Ababa in 2015, climate finance has been one of the pillars of the process. The actual FfD4 conference will not take place until 2025 in Spain, but the groundwork is already being laid this year. To this end, two negotiating sessions will be held throughout the year in full UN format, the first of which is provisionally scheduled to take place in Addis Ababa in July and the second at UN headquarters in New York in December.

The relevance of these UN processes running parallel to the UNFCCC should not be underestimated. After all, experience with the never achieved 100 billion target and, more recently, with the Loss and Damage Fund, which was set up as an almost empty shell, has shown that the UNFCCC is good at setting funding targets, and intends to do so again in 2024 with the New Collective Quantified Goal. But it has failed profoundly in securing the appropriate funding channels. If the mobilisation of the necessary funds is to be secured, the climate movement must therefore also become active at the other international policy levers.

Guest article by Bodo Ellmers, Global Policy Forum and Ute Straub, Bread for the World