2nd Report – UK International Climate Finance: Sustaining Commitments and Impact Amid a Shrinking Aid Budget

The government has prioritised maintaining headline ICF3 spending commitments under the constraints of its ODA budget, as opposed to striving to deliver genuine climate and nature outcomes. The government’s changes to ICF accounting methodology have undermined the impact, additionality and credibility of ICF3, and any future commitments, by counting reclassified humanitarian ODA towards UK ICF – despite the United Nations Framework Convention on Climate Change (UNFCCC) requirement for climate finance to be new and additional. We are concerned that these changes—in conjunction with the scale of ODA cuts and inflation—risk compromising the UK’s ability to: • meet its legal obligation under the UNFCCC to provide new and additional resources to low- and middle-income countries; • meet its fair share of the New Collective Quantified Goal and its commitment to tripling adaptation finance by 2035; • maintain its international leadership role and political capital on climate and nature; and • retain partner countries’ trust in the UNFCCC negotiation process. (Conclusion, Paragraph 17)

The committee recognises that classification of humanitarian spending as ICF is not uncommon practice among the UK’s international counterparts. Nonetheless, we urge the government to minimise its use of this approach, where it arbitrarily classifies a fixed proportion of humanitarian spending as ICF, including projects already assessed for their ICF contribution. The committee is also concerned that we were unable to verify the £11.6 billion that the government states it has spent between 2021–22 to 2025–26 in climate finance due to lack of available evidence, and we would urge them to publish a full breakdown. (Recommendation, Paragraph 18) 52

Where humanitarian ODA spend is classified as ICF in the latest programming cycle, we recommend that the government develop clear guidance and criteria for staff responsible for programme design and assessment to ensure that such spending delivers genuine climate or nature outcomes. Alongside this, we urge the government to establish clear targets for the amount of humanitarian ODA that can be classified as ICF and ensure better transparency through data publication of this spend. (Recommendation, Paragraph 19) Access, balance and reach of the UK’s ICF

ICF programming is most effective when it is long-term, country-led, and aligned with the needs and priorities of partner countries’ existing national plans, for example their Nationally Determined Contributions. It is most transformative when it incorporates locally led principles and local leadership at the sub-national government, community and civil society level. We are encouraged by examples of innovative ICF programmes the government has implemented and delivered at the local level. However, the UK’s ICF remains overly complex, bureaucratic and risk-averse – particularly funding delivered through multilateral institutions. This means that funding is not sufficiently flexible for, or accessible to, those who need it most. (Conclusion, Paragraph 32)

We recommend that, through its limited concessional resources, the government seeks to scale innovations and the funding models that work, particularly from the perspective of those most in need. (Recommendation, Paragraph 33)

The government should use its standing as a significant shareholder to lead multilateral partners and push for institutional reform to: • simplify access to UK ICF for local activities at the lowest appropriate level with a focus on gender-responsiveness and inclusivity. This must include streamlining the application, accreditation and reporting processes across funds; • strengthen and scale-up structures for country ownership, for example through country platforms; and • increase multi-year, programmatic funding, allowing partner countries to better integrate climate investments into their national planning systems and cycles. (Conclusion, Paragraph 34) 53

The government should ensure that local voices are embedded in all stages of UK ICF programming, from design to delivery, across the portfolio. It should systematically collect and publish disaggregated project-level data to track, monitor and report on the extent to which this has been achieved over time. (Recommendation, Paragraph 35)

It is well established that women and girls are disproportionately affected by the impacts of climate change, particularly those who experience multiple forms of marginalisation such as age, disability and ethnicity. Being situated at the forefront of the climate crisis means that women and girls are uniquely positioned to act as agents of change. This means that women and girls’ active participation in the design and delivery of ICF programmes is more likely to drive longer-lasting and meaningful climate and nature outcomes against the priorities of the communities they serve. We therefore welcome the government’s reassurance that it is committed to gender responsiveness and inclusivity across the UK’s ICF portfolio. (Conclusion, Paragraph 36)

The government should prioritise direct financing, ideally highly concessional resources, such as grant-based public UK ICF, to women-led organisations embedded in local networks. (Recommendation, Paragraph 37)

We urge the government to establish clear targets for Gender Equality, Disability and Social Inclusion (GEDSI) integration, underpinned by a robust monitoring and reporting framework. The government should also write to the committee within six months of this report’s publication, setting out any data it holds on the proportion of new ICF programmes that have been assessed or targeted for GEDSI since publication of its updated guidance. (Recommendation, Paragraph 38)

Least Developed Countries (LDCs), Small Island Developing States (SIDS) and Low-Income Countries (LICs) are among the hardest hit by the impacts of climate change and are the least responsible for causing it. These countries’ high exposure to climate change impacts partly stems from a combination of characteristics, for example their limited financial capacity, and a ICF architecture predicated on policy and economic stability. Current ICF mechanisms are therefore often ill-suited and inaccessible to these already debt-distressed countries. Without clear spending targets or better geographic prioritisation, the government risks sidelining low-income and other highly climate-vulnerable countries, and leaves the UK’s ICF susceptible to being diverted for domestic and other political priorities. A stark demonstration of this is the government’s £400 million reprioritisation of the UK’s ICF budget to loans in July 2026. This reprioritisation will likely reduce grant-based funding for the most vulnerable and make the UK’s ICF less effective and impactful as a direct 54 result, at least in the absence of further measures to support the financial capacity-building of these countries and their resulting ability to access climate finance. (Conclusion, Paragraph 45)

We urge the government to set geographic targets for the UK’s limited, highly concessional ICF resources to avoid deepening climate-vulnerable countries’ debt distress. Specifically, for LDCs, SIDS, LICs and other highly fragile countries, it should set a minimum share of the UK’s grant- based public ICF, to meet countries’ non-revenue generating needs, such as resilience building and adaptation. We urge the government to further write to this committee to clarify whether the converted ICF loans in question meet the Organisation for Economic Co-operation and Development concessionality requirements to remain classifiable as ODA. (Recommendation, Paragraph 46)

Adaptation finance is chronically under-resourced, and the gap is widening. The government has not been able to sustain a balance between mitigation and adaptation in previous cycles of the UK’s ICF spending. More concerning still is its persistent lack of data transparency, which undermines clear reporting on adaptation and resilience outcomes, thereby substantially limiting parliamentary scrutiny. (Conclusion, Paragraph 54)

The government should ensure that it maintains sufficient focus on scaling up the quality and volume of financing for the poorest and most climate-vulnerable countries throughout ICF4. We therefore urge the government to establish a high-minimum share of the UK’s public ICF for adaptation finance. To drive data transparency, the government should report annually against this target through “adaptation finance, only” data tagging, as is common among international counterparts. (Recommendation, Paragraph 55)

We welcome the government’s recognition of the centrality of nature to tackling the climate crisis in its 2026 iteration of the ICF strategy. We also acknowledge the government’s intention to take a more integrated approach to nature spending going forward to ensure a more coherent offer to partner countries. However, we are concerned that in retreating from nature and forest sub-pledges the government risks: • removing the principal mechanism for meeting its legal obligations under the Convention on Biological Diversity (CBD) and the Global Biodiversity Framework (GBF); • compromising partner countries’ trust in the CBD/GBF negotiation process; and 55 • its ability to secure buy-in on the climate and nature outcomes from countries that hold most of the world’s most critical ecosystems, which underpin UK security and prosperity. (Conclusion, Paragraph 65)

We urge the government to build on the precedent it has set for previous ICF cycles and set sub-pledges for nature and forest spending as part of ICF4. (Recommendation, Paragraph 66

In response to this report, the government should write to the committee by November 2026 outlining: • how it plans to measure and evaluate the effectiveness of its integrated approach to nature in ICF4; and • the timeline and conditions under which it might re- consider committing to nature and forest sub-pledges. (Conclusion, Paragraph 67)

Where possible, the FCDO should look to the latest evidence on locally- led and shock-responsive social protection systems to deal with the impact the climate crisis is having on agriculture as a driver of instability. (Recommendation, Paragraph 68)

We welcome the government’s long overdue decision to invest in the Tropical Forest Forever Facility (TFFF), given the instrumental role the UK has played in designing the fund. The committee understand that the government must take difficult prioritisation decisions in view of its constrained ODA budget. However, we strongly believe that the government’s pending £400 million investment in the TFFF has come at the cost of cutting the UK’s already limited concessional ICF for those most in need. (Conclusion, Paragraph 69)

The government should reconsider its decision to fund its investment in the TFFF by redirecting existing grant-based ICF towards loans, rather than drawing on new and additional sources. Nevertheless, we believe that it should continue to provide technical assistance on innovative finance instruments pioneered by countries at the forefront of the climate crisis. In doing so, it should aim to shift the ICF paradigm away from “traditional aid” towards investment and partnerships, in line with its broader ODA policy commitments. (Recommendation, Paragraph 70) The UK’s ICF architecture

The government is increasingly shifting its focus to using both ODA and non- ODA instruments to unlock an unquantified amount of private finance for climate and nature outcomes. This is in a bid to use the ODA element of its ICF, and other public finance, to leverage private finance to generate greater impact despite reduced resources. However, in pursuing this objective the 56 government must not lose sight of the primary purpose of UK ODA, including ICF, which is to reduce poverty and promote sustainable development and welfare in the poorest and most climate-vulnerable countries. This means that the government should not deploy its public ICF with the sole objective of generating financial return or commercial market building in middle- income countries. (Conclusion, Paragraph 82)

We urge the government to follow the example of British International Investment by establishing a clear, measurable target for the amount of private capital it expects to mobilise for climate and nature outcomes, and the settings in which it intends to do so. This target should be underpinned by evidence reflecting the realities of where such investments can achieve the most value for money and on-the-ground impact. (Recommendation, Paragraph 83)

The private sector can offer innovation, expertise and flow of capital at scale for climate and nature outcomes. It is also evident that, while the two are not interchangeable, public UK ICF and private finance must play complementary roles for the collective advancement of the Paris Agreement goals. We therefore welcome the government’s willingness to explore additional sources of climate finance from public and private sources. We especially note the critical role the UK can play in creating the enabling environment required to encourage the flow of existing and mobilised private capital, and into areas and markets where it is needed but would not ordinarily go. (Conclusion, Paragraph 84)

It is clear that private finance alone is not a panacea, and no single instrument or mechanism can address the scale, urgency and complexity of global climate finance needs. What is clearer is that the effectiveness and alignment of the UK’s ICF tools, whether ODA or non-ODA, varies significantly by context and objectives. The most impactful strategies combine multiple instruments, such as grants, loans, and risk-sharing mechanisms. These instruments each play a role in mobilising private capital through targeted, complementary approaches that address different levels of risk tolerance, funding gaps, and country-specific priorities. (Conclusion, Paragraph 85)

We recommend that the government develop a robust evidence base underpinning its donor to investor model in the delivery of ICF. This should assess: • how ODA and non-ODA instruments can be deployed in a co-ordinated and effective way to mobilise private finance for climate and nature outcomes. This should include an examination of the conditions and contexts in which private capital can deliver the greatest additionality and impact in line with country-specific needs and priorities, particularly the poorest and most climate-vulnerable; and 57 • whether the necessary systems, capabilities and market infrastructure are in place to support the transition to the investor model, particularly in the countries where ODA is being significantly scaled back. This should also include examining whether the model is well aligned with the government’s wider climate and development finance architecture. For example, newly established centrally managed structures, such as the FCDO’s Communities of Expertise, investment through development finance institutions, and efforts to mobilise private capital. (Conclusion, Paragraph 86)

Where private capital is mobilised, we recommend that alongside tracking volumes, the government: • systematically measure the extent to which private capital has reached the areas where it is most needed; and • develop standardised key performance indicators measuring the impacts achieved against stated objectives. (Conclusion, Paragraph 87)

The UK needs to be seen as a reliable partner and recognise that where sudden reductions in ODA have occurred across the portfolio, its credibility and return on investment are likely to be impacted. (Conclusion, Paragraph 88)

The government must factor in considerations around any future funding changes, including how best to mitigate and manage their unintended consequences, both for its international reputation and for the ability of its in-country staff to operate effectively. (Conclusion, Paragraph 89)

Multilateral institutions, including development banks and climate funds, play a critical role in generating climate and nature outcomes at scale. These institutions have an aggregation of expertise, capacity and capability, which cannot be met solely through public ICF programming. However, these institutions require checks and balances to ensure that they are held accountable to the UK taxpayer and can course correct as necessary to ensure they are channelling ICF to those that need it the most. (Conclusion, Paragraph 94)

We recommend that the government ensure that the FCDO is able to retain a set of individuals who can act as an integrity function across its multilateral partners. As a major shareholder of these institutions, this function should enable the government to utilise its convening power to: • push these institutions to become more flexible and responsive with fewer bureaucratic barriers; 58 • work with these institutions to determine how ICF can be deployed innovatively; • hold these institutions to account when they are not generating impact in, or channelling sufficient funding to, the poorest and most climate- vulnerable countries; and • hold these institutions to account on adequately reflecting UK priorities in the spend of ICF. (Conclusion, Paragraph 95)

The government should set out clear, measurable objectives for what it intends to achieve from its convening and influencing role for multilateral institutions on climate and nature outcomes. (Recommendation, Paragraph 96) Transparency, accountability and governance of the UK’s ICF

We welcome the government’s designation of the ICF annual results report as Official Government Statistics for the first time as this marks a positive step on data integrity and transparency. We were also pleased to learn that overall, the UK outperforms in ICF Monitoring, Evaluation and Learning (MEL) relative to its international counterparts. However, it’s clear to the committee that gaps remain in the frequency, quality and disaggregation of the ICF results and spending data currently published. Substantial improvements are required to allow effective scrutiny of the UK’s ICF and enable assessment of whether spending across the government’s full portfolio is cost-effective and generating impact for the most climate- vulnerable countries and groups. (Conclusion, Paragraph 110)

The government should commit, as part of the FCDO’s new strategic MEL programme, to publish an annual report setting out its full ICF portfolio. The report should include disaggregated project-level data, alongside any relevant information on financial cost, linked to ICF key performance indicators. At the minimum, disaggregation should cover delivery channel, funding instrument, geography and demographic characteristics such as gender. (Recommendation, Paragraph 111)

We urge the government to publish more granular data on ICF results and spending through its existing ODA reporting mechanisms, including the annual Statistics for International Development publication and Development Tracker. (Recommendation, Paragraph 112) 59

We welcome the government’s renewed focus on driving results and value for money in its 2026 ICF strategy. By sharing evidence on climate mitigation and adaptation best buys, the government can strengthen UK ICF value for money assessment and encourage its delivery partners to do the same. (Conclusion, Paragraph 113)

To support better assessment of cost-effectiveness and value for money of the ICF portfolio, we recommend that the government update and publish best buy documents for climate mitigation and adaptation programme options. These documents should be used systematically by staff to guide internal cross-departmental ICF4 prioritisation decisions. (Recommendation, Paragraph 114)

Strategic alignment and cross-departmental co-ordination across the ICF portfolio has historically been an area of weakness and often resulted in, for example, siloed learning and fragmented implementation of programmes. Although strong cross-departmental co-ordination is evident in some ICF programmes, this appears to be driven at the programme level rather than formalised centrally. The government has however reassured the committee that it has sought to address these issues for the ICF4 period by, for example, strengthening ICF governance and learning systems. (Conclusion, Paragraph 120)

With a view to maximising the overall effectiveness and value for money of the ICF portfolio, the government should build on any progress it has already made to: • improve cross-departmental coordination by formalising clear lines of responsibility across the four main delivery departments; • better integrate cross-departmental efforts to minimise fragmentation; and • establish robust cross-departmental processes for knowledge sharing to avoid a siloed approach to learning. (Conclusion, Paragraph 121)

In response to this report, we request that the government write to us setting out the full list of changes it has made to its ICF governance structures so far, and how it plans to measure effectiveness of these changes against its objectives for reform. (Conclusion, Paragraph 122) 60