The Smoke and Mirrors of Climate Finance
By Nelson Izah and Yulidsa Bedoya Zúñiga
In the high-stakes theater of climate negotiations, where promises cascade like confetti and buzzwords fill the air, the 29th United Nations Climate Change Conference (COP29) in Baku, Azerbaijan, offered a familiar spectacle. Lofty declarations. Grand pledges. Yet beneath the surface, critical questions linger: Where does the money go? Who truly benefits? And are Multilateral Development Banks (MDBs) the heroes we hope for or just another cog in a complex, opaque system?
As global leaders spotlighted climate finance, MDBs such as the World Bank and the European Investment Bank stood front and center. Their commitments were ambitious—$120 billion annually by 2030, with a focus on climate adaptation for vulnerable countries. But amid the applause and photo ops, one truth was undeniable: if we don’t follow the money, we risk being deceived by the smoke and mirrors of climate finance.
MDBs: The Backbone of Climate Finance
For decades, MDBs have been pivotal in international development, channeling funds through loans, grants, and equity investments. At COP29, they emphasized their strategy to mobilize an additional $65 billion annually from private sources. These figures are impressive, but do they tell the full story? Critics argue that the reliance on loans over grants risks plunging vulnerable countries into deeper debt, undermining the resilience these funds aim to build.
The Transparency Conundrum
MDBs tout frameworks like the "Common Approach to Measuring Climate Results," which aims to standardize and enhance climate finance reporting. Yet discrepancies persist. What exactly counts as climate finance? Civil society organizations and analysts have flagged inconsistencies, with some projects labeled as “climate-friendly” while yielding questionable benefits or, worse, adverse environmental impacts.
While MDBs’ annual reports detail allocations and outcomes, the lack of a universally agreed-upon methodology complicates accountability. This opacity fosters doubt: are the funds truly reaching those most in need? Or are they quietly diverted to projects that prioritize political convenience over climate impact? Crucially, those on the ground in the climate circuit report that MDB side events are increasingly closing spaces for confrontation and questioning. Events with no closing Q&A session are becoming the norm, and this is a response to the mere possibility that their role might be questioned. From an outside perspective, MDBs don’t need to be part of the climate financing ecosystem, but (for them) cementing their role is crucial for their survival and future relevance. In the face of increasingly constricting spaces, all we can do is continue to question and investigate. The role of civil society is increasingly emerging as a watchdog role: witnessing, questioning, and documenting.
The “Climate Debt Trap”
MDBs’ reliance on investment loans raises another red flag. While loans enable large-scale infrastructure projects, they can create a “climate debt trap” for poorer nations already struggling with fiscal constraints. This raises two intertwined points. First, in order to understand the role of debt in financing discussions, we must take a minute to ask ourselves what MDBs are. Multilateral Development Banks are, at their core, banks. Why do banks exist as institutions to borrow money? The truth is that banking is immensely profitable in the era of global financial capitalism. In order to be profitable, banks evaluate the likelihood that a borrower will be able to pay back the money they receive. In the context of climate finance, this becomes a point of concern, because countries are quite literally facing existential threats. Arguably, these countries can benefit from a different form of finance, such as grants, but this does not solve the issue at hand. A development bank is still a bank, and it is still concerned with profitability and revenue even if under a different set of principles.
The second point that must be brought up is that a loan is a tool that creates a cycle where the money must always return to its origin. When a developing country borrows money from an MDB, the journey of this cash begins, it is invested and then within a period, it is paid back. For example, 10 years later the money should return to the bank (often accompanied by the accrued interest). In the case of climate finance, this is an interesting pathway because it shows us that the money being counted as “climate finance” is only temporarily flowing through the Global South. It is bound to return to the hand of the Global North. And crucially, if it fails to do so, the developing countries defaulting are sure to be held responsible for their inability to repay. Ultimately, grants, not loans, are the lifeline these countries need to adapt and thrive without the burden of repayment or debt.
The Numbers Tell a Story
What’s at Stake? In 2022, Multilateral Development Banks (MDBs) committed $60.7 billion to low- and middle-income economies and $38.8 billion to high-income economies to address climate change. While the numbers are high, the heart of this story is how these funds are being distributed, what areas they are tackling, and how much of an impact they are making. Here we simplify this complex picture to understand how MDBs are responding to the climate crisis.
Where Is the Money Going?
Targeted Regions: MDBs spread their climate finance commitments across the globe. However, certain regions received significantly more funding than others: Sub-Saharan Africa: $16.3 billion, Latin America and the Caribbean: $14.3 billion, East Asia and the Pacific: $10.0 billion, South Asia: $7.4 billion. Interestingly, Europe alone (including EU and non-EU countries) received a combined $41 billion, the largest regional allocation. While this demonstrates MDBs' presence in wealthier nations, it raises questions about whether funding for the most vulnerable countries aligns with their urgent climate needs. Will it be profitable to borrow climate finance to vulnerable developing countries?
How MDBs Deliver Climate Finance: MDBs use a mix of financial tools to support climate projects. Here's the breakdown:
Investment Loans: $67.8 billion (the majority of financing comes in this form).
Policy-Based Financing: $9.2 billion (supporting governments to drive climate action).
Grants: $6 billion (direct financial aid, often critical for vulnerable regions).
Guarantees, Equity, and Technical Assistance: Smaller portions of financing that help de-risk private investments and provide expertise. Investment loans dominate, which often raises concerns.
While loans drive large-scale projects, poorer nations may struggle to pay them back, creating a “climate debt trap” that hampers development.
Should regions most vulnerable to climate change, like small island nations and drought-prone Sub-Saharan Africa, not receive a larger share of the pie?
Mitigation vs. Adaptation
MDBs’ investments lean heavily toward mitigation—projects aimed at reducing emissions—such as renewable energy and sustainable transport. Adaptation efforts, which directly address the needs of climate-vulnerable regions, receive far less funding. This imbalance leaves the most affected communities ill-prepared to face the intensifying impacts of climate change.
Private Sector: Partner or Competitor?
A notable feature of MDBs’ climate finance strategy is the mobilization of private investments. In 2022, MDBs attracted $16.9 billion in private co-financing for low- and middle-income economies. However, private capital flows remain concentrated in wealthier nations, highlighting the challenges of de-risking investments in poorer regions. The growth of private money also ties back to the transparency conundrum, as private financiers are accountable to the shareholders rather than to civil society or other relevant stakeholders. Until MDBs address this imbalance, private sector involvement may widen, rather than bridge, the global climate finance gap.
Human Stories Behind the Numbers
Behind every dollar spent lies a human story:
In Kenya: Solar power projects funded by MDBs have brought affordable energy to rural communities, reducing reliance on polluting fuels and improving livelihoods.
In South Asia: Investments in water infrastructure have enhanced resilience to droughts, securing access to clean water for millions.
In cities worldwide: Sustainable transport initiatives are cutting emissions while providing reliable mobility options.
Yet these successes remain uneven. Local communities and climate activists often decry their exclusion from decision-making processes, arguing that top-down projects fail to address their most urgent needs.
A Call for Balance and Accountability
MDBs are part of the fight against climate change, but their approach needs recalibration. To truly make a difference, they must:
Prioritize Adaptation: Increase funding for adaptation projects in climate-vulnerable regions.
Shift to Grants: Provide more grants instead of loans to avoid exacerbating debt burdens.
Enhance Transparency: Standardize reporting and ensure funds reach those who need them most.
Amplify Local Voices: Engage communities in project planning to ensure initiatives are impactful and equitable.
Every Dollar Counts—Every Community Matters
The fight against climate change is a shared responsibility, and MDBs have a crucial role to play. The 2022 MDB Climate Finance Report shows that MDBs are stepping up to address the climate crisis. However, the road ahead demands greater ambition, equity, and accountability. MDBs must bridge the gap between promises and impact, ensuring climate finance truly transforms the lives of those most affected by climate change.
By prioritizing adaptation, mobilizing private investments in vulnerable regions, and amplifying the voices of local communities, MDBs can make climate finance a tool for real and lasting change. In this fight against climate change, every dollar counts—and every community matters.
References
African Development Bank. "Joint MDB Climate Finance Report 2022." https://www.afdb.org/en/documents/joint-mdb-climate-finance-report-2022
COP29 sees MDBs climate finance take centre stage
Key Outcomes from COP29: Unpacking the New Global Climate Finance Goal and Beyond
Posts on X discussing MDBs and transparency issues
https://x.com/TardFoundation/status/1867168948514681166
https://x.com/brettonwoodspr/status/1867574789629784148
https://x.com/KristofDecoste1/status/1868511071570637164
https://www.afdb.org/en/documents/joint-mdb-climate-finance-report-2022
Kenya Economic Update: Transforming Agricultural Productivity to Achieve Food Security for All
Corruption and climate finance: The risks facing... - Transparency.org
About the Writers
Nelson Izah
Nelson Izah is a dynamic youth leadership professional and social impact advocate, pursuing a Geology and Mineral Exploration degree at Kazakh British Technical University. As National Country Coordinator for the Hult Prize in Kazakhstan, he drives entrepreneurial initiatives across universities. With five years of cross-sector leadership experience, Nelson has mobilized youth programs through Voluntary Service Overseas (VSO), STEMi Makers Africa, and the Autism Awareness Foundation. Through DoTheDream Youth Development Initiative, he has empowered over 3,000 students in Lagos state. Currently, he volunteers as a writer for Re-Earth Initiative, focusing on policy and education.
Yulidsa Bedoya Zúñiga
Yulidsa Angie Bedoya Zúñiga is a Peruvian student at Utrecht University, where she studies Politics, Philosophy, and Economics (PPE). She has completed a minor in International Relations and holds an academic interest in Global Justice and International Governace. She is currently receiving the Utrecht University Excellence Scholarship, a mark of academic excellence and promise in her field of study. Her experience includes an internship at the Sexual Violence Research Insitute, and a role as a research assistant at the MERL Tech Initiative.
