The Climate Policy Initiative (CPI) is urging a critical shift in the global climate finance discussion -moving beyond the sheer volume of investment to strategically focusing on its effectiveness and long-term impact. A new report, “Understanding the Quality of Climate Finance,” emphasizes the urgent need for a stronger evidence base to identify which climate interventions truly work, for whom, and how they can be scaled for sustained, transformational change, especially as public budgets face increasing constraints.
The study aims to establish a common understanding and language for climate finance quality, proposing a framework for integration into project appraisal and design. CPI plans to apply this framework empirically to various sectors using real-world quantitative and qualitative data to track quality at project, market, and system levels.
While much attention has been paid to the persistent climate investment gap, CPI argues that the strategic quality of finance has been overlooked, often assessed through inconsistent, institution-specific methods that hinder collective action.
A Three-Tiered Framework for Quality
The report introduces a conceptual framework for public climate finance providers, proposing three analytical levels for understanding quality:
- Project Level: This focuses on direct, measurable, short-to-medium-term results (outputs and outcomes) typically tied to a specific location or community.
- Market Level: This examines how climate finance stimulates demand and supply for climate solutions, leading to indirect, ripple effects beyond immediate beneficiaries and contributing to market development over the medium to long term.
- System Level: This assesses whether finance induces structural shifts toward low-emission, climate-resilient, and equitable economies, influencing political, social, and economic systems, policies, and institutional arrangements over the long term.
Transformational Climate Finance
The report defines “transformational climate finance” as funding that delivers positive and sustained change at both the market and broader system levels, moving beyond isolated project interventions. While immediate contributions to market and system-level change (e.g., policy reform) are possible, the full realization of outcomes takes time.
To guide public climate finance toward this transformational goal, CPI identifies ten key dimensions, considering both finance providers’ and beneficiaries’ perspectives. These dimensions are crucial for catalyzing market and system-level changes, for instance, through programmatic approaches offering coherent, multi-year, and scalable funding.
Measurement Challenges and Future Directions
The report notes some convergence in measurement approaches at the project level, with certain actors developing relatively sophisticated methods for assessing transformational potential. However, public climate finance providers currently exhibit more limited approaches or scope for indicators when assessing market-level outcomes.
CPI intends to explore various explanatory approaches, including quantitative indicators, qualitative scores, and case studies, to inform efforts for standardizing climate finance quality metrics across multiple public providers.
Baysa Naran, a Senior Manager at CPI and co-author, emphasizes that “A better understanding of the quality of climate finance is essential to ensure that limited resources are used optimally to catalyze sustained, transformational change—rather than one-off, incremental improvements.” This work is poised to significantly contribute to the global discourse on climate finance quality, fostering consensus in measurement approaches among public providers and informing discussions within the New Collective Quantified Goal (NCQG) on Climate Finance and the emerging Baku-to-Belem Roadmap.
