COP 28 Finance Day unlocked significant progress on international financial architecture reform to support low-income and vulnerable countries to 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.
COP 28 Finance day 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 AfDB and the 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 COP 28 UAE Declaration on a Global Climate Finance Framework launched at the World Climate Action Summit at the beginning of COP 28. These innovative financial instruments announced at COP 28 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, the UK, the US, Senegal, and Colombia. It lays out defining principles for a climate finance architecture that delivers for all. 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.
