Climate finance programme funnelling billions of dollars back to rich countries

In recent years, wealthy countries sent climate funding to the developing world with interest rates or conditions that benefited the lending nations.

Published : May 27, 2024 16:15 IST - 15 MINS READ

Ecuador has sought funding to fight the effects of climate change, like this June 2023 flood that followed heavy rains in Esmeraldas. However, it has only received expensive loans instead of grants.

Ecuador has sought funding to fight the effects of climate change, like this June 2023 flood that followed heavy rains in Esmeraldas. However, it has only received expensive loans instead of grants. | Photo Credit: SANTIAGO ARCOS/REUTERS

Japan, France, Germany, the United States, and other wealthy nations are reaping billions of dollars in economic rewards from a global programme meant to help the developing world grapple with the effects of climate change, a Reuters review of the UN and Organization for Economic Cooperation and Development data shows.

The financial gains happen as part of developed nations’ pledge to send $100 billion a year to poorer countries to help them reduce emissions and cope with extreme weather. By channelling money from the program back into their own economies, wealthy countries contradict the widely embraced concept that they should compensate poorer ones for their long-term pollution that fuelled climate change, more than a dozen climate finance analysts, activists, and former climate officials and negotiators told Reuters.

Wealthy nations have loaned at least $18 billion at market-rate interest, including $10.2 billion in loans made by Japan, $3.6 billion by France, $1.9 billion by Germany, and $1.5 billion by the United States, according to the review by Reuters and Big Local News, a journalism program at Stanford University. That is not the norm for loans for climate-related and other aid projects, which usually carry low or no interest.

At least another $11 billion in loans—nearly all from Japan—required recipient nations to hire or purchase materials from companies in the lending countries. Reuters identified at least $10.6 billion in grants from 24 countries and the European Union that similarly required recipients to hire companies, nonprofits, or public agencies from specific nations—usually the donor—to do the work or provide materials.

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Offering climate loans at market rates or conditioning funding on hiring certain companies means that money meant for developing countries gets sent back to wealthy ones. “From a justice perspective, that’s just deeply reprehensible,” said Liane Schalatek, associate director of the Washington, DC, branch of the Heinrich-Boll Foundation, a German think tank that promotes environmental policies.

Analysts said grants that require recipients to hire wealthy countries’ suppliers are less harmful than loans with such conditions because they do not require repayment. Sometimes, they said, the arrangements are even necessary, especially when recipient countries lack the expertise to provide a service. But other times, they benefit donors’ economies at the expense of developing nations. That undermines the goal of helping vulnerable nations develop resilience and technology to cope with climate change, the climate and finance sources said.

“Climate finance provision should not be a business opportunity,” Schalatek said. It should “serve the needs and priorities of recipient developing countries”.

Many of the conditional loans and grants Reuters reviewed were counted toward developed nations’ pledge to send $100 billion a year by 2020 to poorer countries disproportionately harmed by climate change. First made in 2009, the commitment was reaffirmed in the 2015 Paris climate agreement. Roughly $353 billion was paid from 2015 through 2020. That sum included $189 billion in direct country-to-country payments, which were the focus of the Reuters analysis.

More than half of that direct funding—about 54 per cent—came in the form of loans rather than grants, a fact that bothers some representatives from indebted developing nations such as Ecuador. They say they should not have to take on more debt to solve problems largely caused by the developed world. Countries of “the global south are experiencing a new wave of debt caused by climate finance”, said Andres Mogro, Ecuador’s former national director for adaptation to climate change.

At the same time, several analysts said, rich countries are overstating their contributions to the $100 billion pledge, because a portion of their climate finance flows back home through loan repayments, interest, and work contracts. “The benefits to donor countries disproportionately overshadow the primary objective of supporting climate action in developing countries,” said Ritu Bharadwaj, principal researcher on climate governance and finance at the International Institute for Environment and Development, a UK policy think tank.

Rich nations defend their climate funding

Representatives of the main agencies that manage climate funding for Japan, Germany, France, and the United States—the four countries reporting the most of such funding to the UN—said they consider the amount of debt a country is already carrying when deciding whether to offer loans or grants. They said they prioritise grants to the poorest countries.

About 83 per cent of climate funding to the lowest-income countries was in the form of grants, the Reuters review found. But those countries also received, on average, less than half as much climate funding as higher-income nations that mostly received loans.

“A mix of loans and grants ensures that public donor funding can be directed to countries that need it most, while economically stronger countries can benefit from better-than-market rate loan conditions,” said Heike Henn, director for climate, energy and environment at Germany’s Federal Ministry for Economic Cooperation and Development. Germany has contributed $45 billion in climate funding, 52 per cent of it loaned.

The French Development Agency (AFD) offers developing nations low interest rates that would normally be available only to the richest countries on the open market, said Atika Ben Maid, deputy head of the AFD’s Climate and Nature Division. About 90 per cent of France’s $28 billion contribution came in the form of loans–the highest share of any nation.

A US State Department spokesperson said loans are “appropriate and cost-effective” for revenue-producing projects. Grants typically go to other types of projects in “low-income and climate-vulnerable communities.” The United States provided $9.5 billion in climate funding, 31 per cent of it loaned.

“It should also be emphasised that the climate finance provisions of the Paris Agreement are not based on ‘making amends’ for harm caused by historic emissions,” the spokesperson said when asked whether collecting market-rate interest and other financial rewards contradicts the spirit of the climate finance program.

Short on specifics

The Paris Agreement does not state outright that developed nations should make amends for historic emissions. It does reference principles of “climate justice” and “equity” and notes countries’ “common but differentiated responsibilities and capabilities” to grapple with climate change. It makes clear that developed countries are expected to provide climate finance.

Many interpret that language to mean that wealthy nations have a responsibility to help solve climate-related problems they had an outsized role in creating, said Rachel Kyte, an Oxford University climate policy professor who was the World Bank’s special envoy for climate change in 2014 and 2015.

Filipino environmental activists march during a protest on the Global Day of Action for Climate Justice, in Quezon City, Metro Manila, Philippines, December 9, 2023.

Filipino environmental activists march during a protest on the Global Day of Action for Climate Justice, in Quezon City, Metro Manila, Philippines, December 9, 2023. | Photo Credit: LISA MARIE DAVID/REUTERS

But the agreement was short on specifics. The pledge said nations should mobilize climate finance from “a wide variety of sources, instruments and channels.” It did not define whether grants should be prioritized over loans. Nor did it prohibit wealthy nations from imposing terms advantageous to themselves.

“It’s like setting a building on fire and then selling the fire extinguishers outside,” Ecuador’s Mogro, who was also former climate negotiator for the G77 bloc of developing countries and China, said of the practice.

Reuters and Big Local News reviewed 44,539 records of climate finance contributions reported to the UN Framework Convention on Climate Change (UNFCCC), the entity in charge of keeping track of the pledge. The contributions, from 34 countries and the European Union, spanned 2015 through 2020, the most recent year for which data are available.

The UNFCCC does not require countries to report key details of their financing. So reporters also reviewed 133,568 records collected by the Organisation for Economic Cooperation and Development (OECD) to identify hiring conditions tied to climate-related finance over the same period.

The review confirmed that developed countries counted some conditional aid toward their $100 billion climate finance commitment. Because the UNFCCC records lack detail, Reuters could not determine if all such aid was counted.

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To better understand the funding patterns revealed by the data, reporters consulted 38 climate and development finance analysts and scholars, climate activists, former and current climate officials and negotiators for developing nations, and representatives of development agencies for wealthy nations.

The Reuters findings come as countries try to negotiate a new, higher climate financing target by the year’s end. The UN has estimated that at least $2.4 trillion a year is needed to meet the targets of the Paris climate agreement, which included keeping the average global temperature from rising more than 2°C above pre-industrial levels.

Recent spending pales in comparison. Wealthy countries likely met the $100 billion annual goal for the first time in 2022 through direct contributions from country to country as well as multilateral funding from development banks and climate funds. The OECD estimates that wealthy nations funnelled at least $164 billion toward the climate finance pledge via multilateral institutions– about 80 per cent of it loaned–between 2015 and 2020, in addition to countries’ direct contributions.

Reuters was unable to determine the percentage of those loans that carried market interest rates or hiring conditions, due to uneven reporting by multilateral groups. At least $3 billion of the direct spending went to projects that did little to help countries reduce emissions or guard against the harms of climate change, a June 2023 Reuters investigation found. Large sums went to a coal plant, a hotel, chocolate shops and other projects with little or no connection to climate initiatives.

A deepening hole

Heavily indebted countries face a vicious cycle: Debt payments limit their ability to invest in climate solutions, while extreme weather causes severe economic losses, often leading them to borrow more. A 2022 report by the United Nations Development Program (UNDP) found that more than half of the 54 most severely indebted developing nations also ranked among the most vulnerable to the effects of climate change.

With the amount of financing for climate projects still far from what’s needed, however, some analysts argue that lending needs to be part of the climate finance equation. Development aid representatives from the US, Japan, France, Germany and the European Commission say loans enable them to funnel far more money to significant projects than they could if they relied solely on grants.

In interviews with Reuters, eight representatives who have worked on climate issues in developing nations said they consider loans to be necessary to fund ambitious projects given the limited funding wealthy nations have allocated for climate finance. But they said future pledges should require rich nations and multilateral institutions to be more transparent about the lending terms and offer guardrails against loans that create suffocating debt.

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“The way the international financial system works at the moment… is to dig even deeper a hole,” said Kyte, the former World Bank climate envoy who recently advised Britain in climate negotiations. “We have to say, ‘no, no more digging, we’re going to fill the hole and lift you up.’”

A bad loan

Echoing years of pleas from developing nations, UNFCCC Executive Secretary Simon Stiell has publicly urged wealthy nations to offer so-called concessional loans, with very low interest rates and long repayment periods. This makes them less costly than those sold on the open market. UNFCCC and OECD had no comment for this report. UNFCCC instead referred Reuters to Stiell’s past remarks.

About 18 per cent of climate loans from wealthy countries, or $18 billion, were not concessional, the UN reports from 2015 through 2020 show, including more than half of the loans that the United States and Spain each reported. These totals are likely underestimated, given that it is voluntary for wealthy nations to report to the UN whether their loans were concessional.

France gave a $118.6 million non-concessional loan to Ecuador’s port city Guayaquil in 2017 to build an aerial tramway. The loan, which France counted as part of its climate finance pledge, shows how the global program can create expensive debt in developing countries in exchange for few environmental gains, while lending nations benefit.

A view of the Aerovia cabled gondola in Guayaquil, Ecuador, January 11, 2024. Everything from the contract to building the Aerovia to the materials used came from developed nations, making it a white elephant for the municipality.

A view of the Aerovia cabled gondola in Guayaquil, Ecuador, January 11, 2024. Everything from the contract to building the Aerovia to the materials used came from developed nations, making it a white elephant for the municipality. | Photo Credit: HENRY ROMERO

Dubbed the Aerovia, the cabled gondolas were billed as a climate-friendly alternative to the congested bridges connecting industrial Guayaquil to a neighbouring city where workers live. Four years after its inauguration, the Aerovia transported roughly 8,300 passengers per day. That was one-fifth of the ridership projected in early planning documents–resulting in lower-than-expected revenue and environmental benefit.

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Debt from the loan has added to Guayaquil’s $124 million budget deficit. Guayaquil is expected to pay 5.88 per cent interest, according to early planning documents. France was projected to earn $76 million in interest over the 20-year repayment period. That interest rate would be unusually high for a climate-related loan, finance analysts said. A 2023 OECD analysis of concessional loans from 12 developed nations and the European Union found they offered an average interest rate of 0.7 per cent in 2020. Guayaquil and France declined to disclose the interest rate of the final loan agreement for the tramway.

“This is a classic example where a bad loan, which has been given to a country in the garb of climate finance, will create further… financial stress,” said Bharadwaj, the climate researcher from the International Institute for Environment and Development.

An overseas contract

The loan agreement did not require Guayaquil to hire a French company. Nonetheless, French transportation company Poma won the contract to build the tramway, along with Panamanian company SOFRATESA, founded by a French citizen. The companies also operate the tramway, so the municipality collects no revenue from passenger fares to help repay the loan. Neither company responded to questions from Reuters.

Nearly all of Aerovia’s components—including its cabins, electrical control panels, and cables—were manufactured in France and Switzerland and then shipped to Guayaquil, according to a slide presentation prepared by the local government before the tramway’s launch.

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To Euan Ritchie, senior policy adviser at Development Initiatives, an international policy organisation, the project amounted to a “transfer of wealth from Ecuador to France”.

Contesting that claim, a spokesperson for the French development agency said that the tramway belongs to the city and that the agency assessed the risk of financial stress before approving the loan. The aerial tramway has already resulted in a “significant greenhouse gas reduction”, despite low ridership, said the spokesperson, who provided no estimates. The spokesperson said the agency does not participate in selecting contractors.

Still, France’s development agency trumpeted the successes of French companies in landing such contracts. The agency’s 2022 annual report said that more than 71 per cent of its projects that year involved “at least one French economic actor”, garnering them €2 billion in “economic benefits”. The spokesperson declined to provide estimates on how French suppliers benefit from climate-related funding. French companies often win bids because they have “in-depth knowledge and local presence” in regions where AFD sends significant aid, the spokesperson said, adding that it “in no way favours any entities based on their nationality”.

Strings attached

Almost 32 per cent of all Japanese climate loans required borrowers to use at least some of the money to hire Japanese companies, OECD records show. Those loans have funnelled at least $10.8 billion back into the Japanese economy, the Reuters review found.

The loan requirements helped Sumitomo Corp. and Japan Transport Engineering Co. win three contracts worth more than $1.3 billion to supply 648 train cars for electrified railway and subway projects in the Philippines. A Sumitomo sister company, Sumitomo Mitsui Construction Co., won two contracts worth more than $1 billion to build rail expansion and station buildings.

A Sumitomo Corp. spokesperson said that though the loans required the main contractor to be Japanese, they did not require the use of Japanese subcontractors. The spokesperson did not reply when asked if the company used local subcontractors for the Philippine rail project. Japan Transport Engineering Co did not respond to questions.

Aid with hiring conditions robs local companies of business opportunities and eliminates chances for developing countries to build expertise in sustainable technologies, said Erika Lennon, senior attorney at the Center for International Environmental Law. Eleven sources said the requirements contradict Paris Agreement clauses that urge parties to prioritise “technology transfer and capacity-building” for developing countries.

Asked by Reuters about Japan’s conditional loans, Kiyofumi Takashima, a spokesperson for the Japan International Cooperation Agency (JICA), said they carry very favourable terms for borrowers and usually involve local consultants, contractors, and workers. Japanese consultants and contractors make “full efforts to transfer technology and skill” to local actors, he said.

Japanese climate loans are helping the Philippines transition into an electric transport system.

Japanese climate loans are helping the Philippines transition into an electric transport system. | Photo Credit: LISA MARIE DAVID/REUTERS

JICA’s policy, during the period Reuters reviewed, required that this type of loan carry an interest rate of 0.1 per cent and a 40-year repayment period.

Conditional aid can carry additional costs because recipients can’t consider cheaper contractors. The OECD in 2001 recommended a halt to such requirements, citing that they can increase costs for recipient nations by up to 30 per cent.

Saori Katada, a Japanese foreign policy expert at the University of Southern California, cited academic research that has found that Japanese companies usually charge more than their counterparts from neighbouring countries, like China, Korea or Taiwan. “Maybe it’s a good quality, but it’s always very expensive,” Katada said.

Other countries frequently impose similar hiring requirements on grants. Reporters found that 18 per cent of all climate-related grants reported to the OECD between 2015 and 2020 carried such requirements for all or part of the grant. The European Union extended $4 billion in grants that required recipients to hire companies or agencies from specific countries. The United States reported $3 billion and Germany $2.7 billion in grants with similar strings attached.

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A spokesperson from Germany’s Ministry for Economic Cooperation and Development said that their grants do not require hiring German companies and that there is no policy to favor national suppliers. However, they frequently require recipient countries to pay Germany’s international development agency, GIZ, for consulting and other technical services, the spokesperson said. Nearly all of the European Union’s aid since 2021 has been free of such hiring requirements, an EU spokesperson said.

All aid, regardless of who gets the contracts to do the work, benefits recipient countries, a US State Department spokesperson said. The spokesperson contested the notion that the US had imposed grant conditions that funnelled $3 billion back to its own economy. The aid might have required hiring of companies or agencies from other countries–not just the US–said the spokesperson, who did not offer any specific examples.

OECD data lists US companies, nonprofits or governmental agencies as the main entities receiving money from at least 80 per cent of the US conditional climate grants, totalling $2.4 billion. This is “part of the same story of the financing going in the wrong direction,” Kyte said.

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