How to tackle corruption risk in climate finance

Address the fraud and corruption risks within the climate finance supply chain, to solve the potential climate crisis. Know more about the risks and key considerations.

We all recognise the threat that climate change poses. With each passing year we see an ever-growing number of increasingly severe natural disasters. In 2020 a record 55 million people were displaced. For over 30 million, displacement was driven by natural disasters such as unusually intense tropical cyclone seasons, monsoon rains and floods. Climate change is a likely cause.

Further climate finance commitments will no doubt be made at the COP26 summit in Glasgow this November. In June, G7 leaders committed to increase their contributions to meet the overdue goal of mobilising $100bn in climate finance to developing nations annually – and called on other developed nations to do so. Further climate finance commitments will no doubt be made when 190 world leaders arrive in Glasgow for the COP26 summit later this month. This funding is welcome, necessary and urgent. It is critical in catalysing projects that will help mitigate climate change and support developing nations to adapt to its consequences.

But the provision of climate finance is not without risk. The World Bank estimates that 7.5% of foreign aid to aid-dependent countries is captured by corrupt elites. The U4 Anti-Corruption Resource Centre has noted that the top 10 recipients of climate finance score below the global average in tackling corruption. This risk is exacerbated by the complex mechanisms used to issue climate finance, which engage multiple stakeholders with varying degrees of effectiveness in their controls around fraud, bribery and corruption – and a lack of consistent standards to define, measure and track climate finance flows globally.

“The words ‘climate’ and ‘corruption’, people see these as two different worlds, but there is a lot of overlap.”
- Brice Böhmer, Head of Climate Governance Integrity, Transparency International

Multilateral climate funds (MCFs), which push out billions in funding for climate mitigation and adaptation projects, have been hit by corruption and mismanagement allegations. The UN Development Programme (UNDP) - the biggest implementing partner of both the Green Climate Fund (GCF), the world’s largest climate fund, and the Global Environment Facility (GEF), both of which are accountable to COP - has been accused of corruption and misappropriation of funds in projects in Russia, Armenia and Samoa.

And these inherent risks will be significantly amplified as more money is pushed through the system with greater urgency than ever before.

Billions are at stake. If fraud and corruption risks within the climate finance supply chain are not effectively addressed, it is highly likely that even if the world commits the right level of investment to solve the potential climate crisis, it will not deliver the outcomes we all want.

The primary impacts of fraud and corruption in climate finance are clear: reduced effectiveness in projects to help nations mitigate and adapt to climate change. But there are secondary impacts deserving of consideration too; donor countries could be discouraged from providing investment, undermining consensus and the collective will to act, and the corrupt networks abusing climate finance will be further enriched at the expense of local and global communities.

There are interesting parallels to be drawn with the COVID-19 pandemic – the last time the global community had to push unprecedented amounts of funding through the financial system at pace. Fraud against UK COVID relief schemes alone are conservatively estimated at £3.5bn (Coronavirus: Up to £3.5bn furlough claims fraudulent or paid in error - HMRC - BBC News). In South Africa, funds equivalent to 10% of GDP may have been stolen. Were checks in place in government agencies to mitigate against fraud and error? Yes. Were they able to cope effectively when demand and urgency changed? No.

And risks in relation to climate finance are similar - unprecedented demand and urgency. Except unlike COVID-19, this time we have forewarning.

As Transparency International, the global anti-corruption organisation, identifies: increasing transparency, accountability and integrity in the climate finance supply chain is critical. An urgent focus by all those in the supply chain to consider how to enhance capability and capacity around key controls, including risk assessment, project integrity, audit and asset tracing would help build resilience in the climate finance system. It would help global stakeholders to get ahead of the risk - and, ultimately, help to ensure that the investments we make deliver their intended impact against the deepening climate crisis.

It would be tragic if despite collective determination and spending to combat climate change we failed, because criminal abuse of climate finance undermined our ability to turn our investment and willpower into effect.

We will explore some of the ways to tackle this collectively in future issues.

References

Kate Whiting, Why 40.5 million people had to flee their homes in 2020 | World Economic Forum (weforum.org)', World Economic Forum, May 20, 2021

https://www.bbc.co.uk/news/business-54066815" Coronavirus: Up to £3.5bn furlough claims fraudulent or paid in error - HMRC - BBC News’, BBC, September 8, 2020

Noma Maseko, Coronavirus in South Africa: Misuse of Covid-19 funds 'frightening' - BBC News, BBC, September 2, 2020

Jorgen Juel Andersen, Niels Johannsen, Bob Rijkers, Elite-Capture-of-Foreign-Aid-Evidence-from-Offshore-Bank-Accounts.pdf (worldbank.org), World Bank Group, February 18, 2020

Michael Nest, Saul Mullard, Cecile Wathne, Corruption and climate finance (u4.no), U4 Anti-Corruption Resource Centre, Chr. Michelsen Institute, December 2020

Edward White, Leslie Hook, https://www.ft.com/content/054a529c-e793-489b-8986-b65d01672766, Financial Times, November 30, 2020

Chloe Farand, https://www.climatechangenews.com/2021/10/04/gcf-considers-renewed-partnership-undp-amid-corruption-investigations/, Climate Home News, October 4, 2021