Tracing Funds and Impact: Digital Assets and Climate Finance

By Blake Goud, CEO at RFI Foundation

As digital assets grow to become a more important part of the financial sector, it will be important that they bring something new besides just ‘digitalization’ of the status quo. At COP16 in 2010, developed countries pledged to mobilize $100 billion in climate finance per year by 2020. A recent status update based on data through 2018 concluded that “climate finance counting towards the $100 billion had been on an upward trajectory, but still falling short of the $100 billion per year by 2020 target.

The Independent Expert Group on Climate Finance, which wrote the status report, reiterated that the commitment from developed countries should be a floor and not a ceiling. Even so, it remains difficult to track how much funding has been provided, let alone how much impact it has created. There remains disagreement about what types of funding should be counted towards this pledge, and how much has been mobilized. The G7, in its Communique released after its Carbis Bay Summit in 2021, reiterated the commitment to $100 billion per year and extended the time frame through 2025, but did not increase its annual commitment.

On the allocation side, although there have been efforts to speed up disbursement, official sources of climate finance, such as the Green Climate Fund (GCF), remain torn between capabilities of project partners and stringent due diligence requirements for donors. The GCF disbursed a record of $2 billion in 2020, an amount that is unlikely to increase to the realistic funding needed to address climate mitigation and adaptation needs for developing countries.

Digital assets could provide a way to increase flows of climate finance while improving transparency about how the funds are being used. For example, donor countries could introduce tracking of funding allocation by linking disbursements with digital traceability on blockchain, whether these funds are disbursed through international institutions like the GCF, through direct bilateral efforts, or through development financial institutions.

The issue today that is holding back development is not a lack of funding. The crucial challenge is the information asymmetries to track supply and demand, and the ability to use finance for nature-based solutions. Unlike direct greenhouse gas mitigation projects, such as renewable energy projects where tracking project impacts is relatively straightforward, there is still an acute shortage of data to demonstrate the degree to which nature-based projects are bankable.

In the wake of the COVID-19 pandemic, the world saw climate change rise on the global agenda. The far-reaching and severe impacts of the current public health crisis raises our awareness of how pervasive global issues can be in everyone’s lives.

Climate change, which is currently affecting regions of the world that is home to 85% of the global population, can no longer be dismissed as a far-off problem as it had been previously. The problems we are already facing as a result of climate change are acute and growing exponentially.

The risks will continue to increase so long as climate change mitigation is slowed by the ability to take financing from willing investors and donors, and use it in a way that makes a difference. The current ways of connecting sources and uses of climate finance do not show indications of being scalable or efficient enough, and fall short in their ability to track different sources of public and private funds.

Technology such as blockchain, which underpins digital assets, provides some of the key characteristics needed to help build traceability into investment flows for climate mitigation. Currently, these efforts have largely been demonstration projects, or confined to limited investment flows. The digital asset sector has a role to play, but they cannot do it alone.

Digital assets have the potential to contribute to improving the efficiency of fund mobilization and distribution for climate finance. They can enable us to know where funds are available, where they are needed, and how to unlock flows from one place to another more smoothly and quickly.

Public funding is a catalyst for a lot of climate investment, whether through direct grants or loans, blending finance with private investors, or projects initiated by development financial institutions. These institutions can be catalysts for investing more in climate finance and tracking how much is mobilized every year. Incorporating blockchain and digital assets in that process can enable a common understanding and measurement of where committed flows are coming from and what they’re funding, helping us to up the volume of climate finance going to emerging and developing countries.

Read more from the report, Digital Assets: Laying ESG Foundations