Corruption: a roadblock to climate finance
Among the biggest obstacles to achieving the just transition and tackling climate change is the lack of private capital. While the volume of private investment remains a challenge in the developed world, the scarcity of funds flowing into the developing world is stark. Developing countries often decry the high cost of capital as a major barrier to progress, yet scarcely spoken about is one very costly element that only governments can tackle: corruption. That remains a major factor in geopolitical, project and financing risk.
Corruption can significantly undermine the fairness and effectiveness of climate finance allocation, particularly in the regions most vulnerable to climate change, by distorting how funds are distributed, thereby reducing the effectiveness of the intended flows.
This not only erodes trust, which is key to attracting private capital, but can also result in low-quality climate adaptation and mitigation projects if capital is siphoned off or misappropriated to corrupt or inadequately qualified suppliers. Additionally, projects may be undertaken where political cronies have influence, rather than executed where the need is greatest. Poorly implemented projects with substandard materials may put human lives at risk. Corruption also significantly reduces the likelihood of effectively addressing climate emergencies when they arise.
Combatting corruption
To address this, it is essential to improve transparency, accountability and governance in allocating and managing climate funds. Also essential is a combination of mechanisms and regulatory frameworks across all stages of climate finance, from disbursement to fulfilment to monitoring and reporting.
Technology plays an outsized role in combatting corruption. At minimum, every country should enact a publicly accessible corporate beneficial ownership registry so that civil society and donor organisations can identify the actors behind the recipient corporations. Open-access data and reporting databases should be established with relevant information regarding capital recipients and their partners, whether they be national governments, non-
governmental organisations or private companies. All elements, including project details, plans, allocations and budgets, should be included for ease of monitoring and tracking. Blockchain and distributed ledger technology can ensure that data is trackable and kept secure on immutable ledgers. The use of artificial intelligence can help spot financial anomalies. Public procurement should be digitised to enhance transparency. Satellite imagery can be used to monitor progress and validity. Removing the human element from the process decreases the likelihood of fraud and corruption.
Governance structures that include anti-corruption legislation and robust enforcement mechanisms are also integral to the process. Penalties for non-compliance need to be substantially punitive so they are not simply considered a cost of doing business. Without strong enforcement mechanisms, legal and regulatory frameworks become inconsequential. Consider, for example, red light traffic behaviour. When the risk of detection is low, drivers are more likely to disregard red lights. However, if an intersection is equipped with a red-light camera guaranteeing penalty enforcement, incidents of violation dramatically decrease. When only a small chance of getting caught exists, a person will likely run a red light whenever it suits them; but if there is a red-light camera at the intersection and a 100% certainty that a fine will be issued, only drivers who do not know the camera is there will run the red light. Real deterrence is key, as legal frameworks are ineffective unless enforcement mechanisms are sufficiently rigorous and incorruptible.
Project certification and implementation process accreditation, such as those deployed by the Green Climate Fund and the Green Environment Facility, ensure that funding goes to trustworthy and capable organisations that meet anti-corruption, transparency and environmental standards. Similarly, countries that are signatories to the United Nations Convention against Corruption are more attractive to investors.
Collaboration for integrity
Multistakeholder engagement is also crucial for eliminating corruption in climate projects. By including civil society, local communities and Indigenous groups in decision-making, monitoring and reporting, the overall level of integrity in the allocation of funds is elevated.
Given over-stretched balance sheets, blended finance has become a crucial component in the anti-corruption toolbox to unlock private capital and advance the just transition. Collaboration with multilateral development banks provides donor countries and the private sector greater likelihood that climate projects will be managed with integrity, because MDBs have developed sophisticated anti-corruption frameworks and maintain high levels of transparency and accountability. They carry out rigorous due diligence, are credible and experienced in emerging markets, and use public capital to mitigate risks, offer concessional loans and even technical assistance, which are all attractive to private capital. Blended finance can also contribute to the development of local capital markets in emerging economies, particularly for green bonds and other climate-related financial
instruments.
The carbon credit markets are likewise an integral financing tool for climate-related projects. The
voluntary carbon markets, however, are underdeveloped, unregulated and susceptible to fraud, corruption and greenwashing. Brazil serves as an example, where, in August 2024, police uncovered an alleged fraudulent scheme that involved carbon credits being sold from projects that were located on stolen land in the Amazon.
This underscores the criticality of project validation and certification by reputable third parties to ensure carbon credits are linked to high-quality, high-integrity projects.
Tackling corruption through a multilayered approach that includes transparency, technological innovation, community engagement and legal frameworks is necessary to close the climate finance gap and to achieve a just transition.
