Why climate grants go to the needy and vulnerable countries but climate loans don’t
The world’s poorest and most climate-exposed countries are more likely to receive climate grants than loans or equity investments, according to a decade-long analysis of global adaptation and biodiversity funding.
The research, based on funding flows to 124 countries between 2013 and 2022, shows a sharp divide in how “grant-based” and “return-based” (loan or equity) climate finance is distributed.
In theory, the higher a country’s vulnerability to climate change, the more aid it should receive. In practice, however, the study finds that this logic only applies to grants. For grants, higher climate vulnerability increased both the chance of selection and the amount of funding per capita.
For return-based instruments, the relationship was rather inverted, such that the more vulnerable a country, the less likely it was to receive loans or investments.
“Study results also underscore the continued value of grant funding, especially for countries with the greatest funding need where return-based investments are less likely, and the need to explore ways return-based instruments might succeed in high-need countries,” the study indicated.
Return-based instruments are typically used by development banks or private financiers who expect at least partial repayment. This, the study revealed, makes them risk-averse; in contrast, grants provided by public donors or multilateral agencies are driven by humanitarian and development goals, targeting the poorest and most exposed countries.
Grants dominate in Africa and Small Island Developing States (SIDS), which are highly vulnerable but considered financially risky.
This story is written and edited by the Global South World team, you can contact us here.
