THE UK’S INTERNATIONAL CLIMATE FINANCE

Written evidence submitted by Mercy Corps to the International Development Committee

January 2026

Introduction & About Mercy Corps

Mercy Corps is a global organisation working in over 35 countries, responding to conflict, climate change and instability. For over four decades, we have worked at the frontline of crises, supporting communities to emerge from those crises more secure, productive and resilient.

There is no greater threat to growth and economic stability in the UK and globally than climate change. Climate-related disasters and environmental degradation are devastating communities, weakening critical infrastructure, threatening lives and livelihoods, and forcing millions to flee their homes. Globally, climate action is woefully underfunded to make the seismic changes required to effectively mitigate, adapt, and address loss and damage. Geopolitical tensions have intensified this challenge, driving greater need while reducing funding and political attention to aid, development and climate action. The recent US Government withdrawal from international climate finance, including stepping away from the Paris Agreement and terminating major climate programmes, represents a significant setback.

Climate finance is the backbone of global climate action. Adequate, predictable, and accessible funding is essential. The UK’s new International Climate Finance commitment (ICF4) comes at a vital time, but with shrinking overseas development aid, it stands little chance of meeting the needs of the moment. The solution is not reclassifying existing funds or increasing reliance on loans, which deepen unsustainable debt.  Instead, the UK can and must demonstrate climate leadership by fulfilling its existing commitments, making a bold ICF4 pledge, and ensuring finance is spent well; on what works and at the local level.    

Response to Key Questions

What impacts will the reduction of Official Development Assistance have on the UK’s ability to deliver its ICF commitments?

Cuts to international development funding by most major donor governments have forced a drastic reprioritisation of aid towards the most immediate life-saving response. Around the world, people are experiencing the shocks and reverberating impacts of climate change and instability with the costs of inaction rising sharply. These shocks are eroding development gains and pushing more people into resource competition and humanitarian need, creating a vicious cycle of poverty and instability. While providing lifesaving assistance is a moral imperative, cutting back on prevention, recovery, and resilience only increases future needs and long-term costs. The triple dividend of climate adaptation: economic and development gains, social and environmental co-benefits, and avoided losses, underscores the imperative for the UK to scale up adaptation investments.

The vast majority of UK climate finance is drawn from the ODA budget, (rather than being ‘new and additional’ to existing ODA commitments, as promised to lower-income countries under the Copenhagen Accord and Cancun Agreement[1]). The UK initially justified double- counting ODA as international climate finance (ICF) on the basis that ODA – set at 0.7% of GNI of a growing economy - was growing and therefore was not diverting funds from other development priorities. Following two rounds of cuts, this is no longer the case and cuts to ODA will likely mean cuts to international climate and nature finance.

Just fifteen developed countries provided their fair share of international climate finance in 2023 including, for the first time, the UK. However, forward-looking analysis, which considers the impact of reduced development spending on donors’ future ability to meet climate-finance commitments, paints a less promising picture. We are concerned that the ongoing reductions in ODA have made it impossible for the UK to make and deliver a pledge that is in line with its ‘fair share’[2] whilst meeting other obligations.

A smart UK aid portfolio leans into effective approaches where the UK has proven expertise, prioritising climate action that builds resilience and self-reliance. The UK’s new ICF commitment (ICF4) should providing a meaningful increase on ICF3 to:

• Account for inflation, as the £11.6bn ICF3 commitment made in 2020 is equivalent to £14.87bn today;
• Contribute to meeting the NCQG target of $300bn/year by 2035; and
• Meet the commitment to at least triple adaptation finance by 2035, with an increased trajectory.

How transparent is the UK Government about its ICF commitments? What processes are in place to oversee the UK’s ICF expenditure and impact?

The UK’s transparency around its ICF commitments remains limited. First, the Government has delayed both the decision and announcement on ICF4. Although the current commitment ends in March 2026, the UK has yet to publish plans for the next five years and has offered few opportunities for consultation with civil society and delivery partners.

Second, as highlighted by ICAI, there has been insufficient transparency around changes to the methodology used to calculate ICF. These shifts, described as ‘moving the goal posts’ include reclassifying existing ODA as ICF, applying a fixed proportion of ICF to humanitarian programmes, and recalculating the BII contribution ratio. These changes have made it significantly harder to hold the Government to account and have weakened the UK’s ability to meet core ICF objectives, including improving access to finance for those hardest hit by the climate crisis, such as least developed countries (LDCs) and fragile and conflict-affected states (FCAS).

Going forward, the UK must prioritise improving the quality and impact of climate finance, by reversing the previous government’s methodological changes and by increasing ICF spending predictably across the five-year period to ensure impactful implementation and avoid the unrealistic end-loaded spending pattern seen in previous rounds.

What difference has ICF from the UK had on your community’s ability to address the problem of climate change? How might such finance be made more effective?

The UK has considerable capacity and credibility on climate adaptation, including in fragile contexts. This is emphasised through its commitment to evidence-based programming that strengthens long-term resilience to climate impacts, alongside effective climate diplomacy to advance global ambition. This includes the UK’s Resilience and Adaptation Fund (RAF), of which Mercy Corps is a recipient, even though the Fund has yet to reach its initial commitment of £150m per year. The Fund was designed to address climate and fragility risks together, maximise sustainable impact, and position FCDO as an innovative development actor; however, to truly deliver on climate resilience objectives, it needs to provide long-term, flexible funding.

UK climate finance has supported proven approaches such as climate smart livelihoods, improved access to critical information, energy access to support adaptation for hard-to-reach communities and strengthened natural resource management to build resilience to current and future climate shocks. For Mercy Corps, this includes:

Building Economic Resilience to Conflict and Climate Shocks in Burkina Faso 

The FCDO-funded Participatory and Inclusive Land Conflict Management programme improved equitable land governance in the southwest, where pressure on natural resources has fuelled conflict. Mercy Corps supported communities to strengthen conflict and grievance management and build economic resilience through investments in solar motor pumps, improved seeds and fertilizers, and agricultural processing units. Communities saw enhanced food security and livelihood opportunities and adopted sustainable agricultural practices, improving land use and mitigating the risk of resource-based conflict. 

Increasing Adaptive Capacity through Clean Energy Access in Ethiopia 

Through the FCDO-funded Enter Energy Initiative, Mercy Corps partnered with a local private energy company to deliver Ethiopia’s first solar-powered mini-grid at the Sheder refugee camp. As a result, 17,600 refugees and 3,000 host community members gained access to clean, reliable energy, supporting households, small businesses, community services, and humanitarian operations. The project reduced reliance on polluting fuels, strengthened food security and disaster preparedness, and supported refugee economic inclusion, while contributing to Ethiopia’s universal electrification target.

Improving Stability in a Changing Climate in the Sahel

The Central Sahel illustrates the devastating intersection of climate change and fragility. The Justice and Stability in the Sahel programme has delivered significant results in both conflict reduction and strengthened climate resilient agricultural practices. At mid-term, 85% of land disputes were resolved by the local land commissions, the perceptions of safety and security amongst participants increased from 50% to 94%, and climate-smart agriculture and livestock interventions improved yields for over 7,000 farmers and herders, reducing competition over resources.

How has the UK’s 2026-2030 ICF commitment been decided? Is it adequate to comply with the obligations of the Paris Climate Agreement and support its objectives?

As stated above, both the decision-making process and outcome remain unclear. At the time of writing, the UK has not announced its 2026-2030 ICF commitment (ICF4).

However, Mercy Corps and other civil society organisations have been calling for ICF4 to:

• Represent a substantial increase from the current commitment, in line with the rapidly increasing impacts of climate change and the urgent action needed this decade if the world is to limit global temperature rise to 1.5°C.
• Fulfil the UK’s fair share of the New Collective Quantified Goal (NCQG) and the needs gap in mitigation, adaptation, and loss and damage finance. This would equate to at least £47bn over the five years of ICF4[3].
• Ensure that the UK meets calls to at least triple adaptation finance by 2035, in line with the new adaptation finance commitment made at COP30.
• Prioritise grant finance that reaches the most vulnerable communities. In the context of even more limited public resources this must go where it is most needed and not unfairly burden countries least responsible for climate change or exacerbate the interconnectivity between the debt and climate crises. This should include new contributions to the Adaptation Fund, the Fund for Responding to Loss and Damage, and the Green Climate Fund (GCF), noting that an NCQG commitment is for finance to triple to these funds.
• Prioritise and reach those who are most marginalised and have been made most vulnerable to climate change, to leave no one behind in the face of climate change.

What is clear is that the UK’s ICF4 commitment should increase the quantity and quality of finance available to meet the demands of a rapidly changing climate.

Is the UK using the right and most effective financial instruments to deliver ICF? What opportunities and risks do alternative funding instruments, such as private or blended finance, pose for the UK’s ICF?

As adaptation needs continue to grow, aid budgets are shrinking, sovereign debt levels are rising, and fiscal space is tightening. Annual adaptation needs, estimated at a minimum of $320 billion per year, are approximately 10 times higher than current international public adaptation flows. The current architecture is not mobilising the scale of support needed and limits the ability of the most vulnerable countries and communities to take the lead in adaptation efforts.

There are high expectations that private finance can meet a major proportion of the climate finance gap, but it is not a silver bullet. Our new research, based on and disaggregated analysis using the Adaptation Gap Report database, shows that currently just 3% of adaptation finance needs are met by the private sector. While this could rise to 15-20%, representing a significant scale-up, but the private sector cannot and will not meet the adaptation finance gap, the private sector cannot meet the gap alone, particularly in LDCs and SIDs. Further, the private sector is better suited to certain sectors, such as agriculture, water, and infrastructure, but has limited scope in areas sectors like coastal protection and social protection.

This is the first analysis to quantify the private sector’s role and potential in adaptation. While it can provide upfront financing for adaptation (which is ultimately paid back by governments or end users), its role in actually paying for adaptation in developing countries is significantly circumscribed.

Blended finance is often promoted as a solution for scaling private sector engagement by using public funds to support new commercial markets. It plays a strategic role where commercial returns are viable, such as renewable energy, but there is little evidence that it works for most adaptation needs that do not generate returns. Our research finds that £1 of public funding typically leverages £0.51 from the private sector for adaptation projects – while useful, this is lower than is often expected. These findings point to the need for a more nuanced approach to using blended finance, particularly in LDCs and SIDs. Public grant finance remains essential for non-commercial programmes and highly indebted countries.

The UK should continue to provide public finance as the backbone of its international climate finance and use blended finance only where real cash flows exist.

Is the UK’s use of loans, that represented more than two-thirds of the global ICF commitment in 2022, appropriate and, what is its impact on low-income and climate-vulnerable countries?

Debt and climate change are increasingly recognised as interconnected crises. Many low- and middle-income countries face growing debt burdens while simultaneously confronting escalating climate impacts. High debt servicing costs limit fiscal space for climate adaptation, mitigation, and disaster response, while climate shocks deepen debt distress by damaging infrastructure, reducing GDP, and increasing public expenditure. In 2022, half of climate finance allocated to LDCs and Small-Island Developing States (SIDS) was provided as loans, creating a 'climate-debt trap’ in which climate vulnerability and financial fragility reinforce one another.

Developing countries’ debt levels have risen sharply over the past decade, with a growing share owed to private creditors and non-traditional lenders. Rising global interest rates have intensified repayment challenges, while repayments now outstrip disbursements. According to Oxfam, for every $5 developing countries receive in climate loans, they repay $7.

Loans can play a role, but many of the countries least responsible for the climate crisis carry disproportionate debt burdens due to repeated climate impacts. Too much climate finance is being delivered as loans, further increasing debt. ODI research shows most developed countries provide very little of their climate finance – less than 0.5% - as loans to highly indebted countries. By contrast, the UK provides 2.8%, the fourth highest among developed countries, raising serious questions.

Instruments such as debt for climate swaps can free up fiscal space for climate action, but their impact is often modest relative to total debt burdens. Debt relief and restructuring are essential to relieve some of the unjust debt burdens that climate-vulnerable countries are grappling with, but debt swaps alone are not enough. Grants and concessional finance are far more appropriate for climate action in the most vulnerable contexts and should form the majority of the UK’s ICF portfolio.

How should the UK’s ICF be spread between, mitigation, adaptation and loss and damage spend to respond to climate change most efficiently?

It has long been established through UNFCCC agreements, including in the Paris Agreement and NCQG, that climate finance should be balanced between mitigation and adaptation, generally understood as a 50:50 split. Despite this, historically adaptation has been chronically underfunded. When the UK held the COP Presidency in Glasgow in 2021, it fought successfully for the adoption of a commitment to double adaptation finance.

Progress since then has been limited and the adaptation finance gap continues to grow. As climate impacts intensify, communities face rising sea levels, droughts, floods, and heatwaves. As global temperatures rise, the cost of adaptation increases.

In 2022, an estimated maximum of just 1% of total bilateral climate finance was dedicated to addressing loss and damage, which is being borne by those least responsible for climate change and least able to cope with its impacts. The UK should champion a robust NCQG follow-up process that ensures transparency, and prevents double counting, and creates space for meaningful discussion on finance provision. While the NCQG acknowledges the need to dramatically scale up adaptation finance and calls for a balance with mitigation, it lacks a clear roadmap for the delivery.

The COP30 final text calls for efforts to at least triple adaptation by 2035, yet it falls short of meeting the $120bn by 2030 target supported by developing countries. The scale of the challenge demands a pragmatic, ambitious, and collaborative approach.

The cost of inaction dwarfs the investment requirements needed to accelerate climate action, with the High-Level Expert Group of Climate Finance citing the potential of weakly managed climate change to cut global GDP by up to 30% by 2100 under a 3°C scenario.

We know that adaptation is cheaper and more effective when done early and that it is not only possible, but highly effective in the challenging settings. As a longstanding champion of adaptation, the UK should strive to meet this goal as swiftly as possible.

While there are no easy answers, the UK and other developed countries must identify new sources of climate finance. Options such as progressive taxation measures and ending harmful fossil fuel subsidies could generate predictable revenue while also discouraging greenhouse gas emissions. Many countries already apply various forms of wealth taxes and levies. Now, the UK needs to show leadership by doing the same. The UK could be a champion of these approaches, which have the potential to mobilise substantial finance at scale. Climate investment must be treated not as a cost to defer, but as necessity to protect lives, livelihoods, and long-term economic stability.