Funding the Frontlines: Overcoming Barriers to Climate Finance for Local Environmental Stewards

31 Mar 2025

Analysts:

Brendan Toh Wei Xuan, Gabriel Tan Teng Liang

Introduction

Climate finance is intended to empower frontline communities, particularly Indigenous Peoples, smallholder farmers, and other marginalized groups, to build resilience against climate impacts. International pledges from governments, multilateral institutions, and private sector actors have resulted in substantial financial commitments, yet a persistent issue remains – these funds often fail to reach the local communities that need them the most. 

Systemic barriers have created bottlenecks that prevent the equitable distribution of these funds. Recent studies highlight that less than 17% of international climate adaptation finance is specifically allocated to projects focusing on local communities (Canales & Savvidou, 2023). This financial gap disproportionately affects those who contribute the least to climate change but bear its most severe consequences. 

This paper explores the underlying reasons why climate finance is not adequately reaching local communities, identifies key institutional and structural barriers, and draws lessons from successful initiatives that have managed to navigate these challenges. In doing so, it also looks ahead to emerging approaches—such as biodiversity credit mechanisms—that seek to complement existing climate finance tools. While promising, these instruments must be designed with greater inclusivity and accessibility in mind to ensure they do not replicate the same exclusions that have historically prevented local communities from benefiting from climate finance.

The Structural Barriers Inhibiting Effective Climate Finance Distribution

1. Bureaucratic and Institutional Bottlenecks

Climate finance is primarily disbursed through multilateral development banks (MDBs), international organizations, and national governments, creating a multi-tiered funding distribution system. While these entities play an essential role in oversight and governance, they also introduce significant inefficiencies. The Green Climate Fund (GCF), for instance, relies heavily on accredited entities such as the World Bank and UN agencies to manage funds, making it difficult for local organizations to access direct financing (Soanes et al., 2017).

Delays in fund disbursement, a lack of streamlined processes, and excessive administrative overhead reduce the effectiveness of these funding mechanisms. The reliance on intermediary institutions often results in financial leakage, where a substantial portion of climate finance is absorbed by administrative costs before reaching the intended beneficiaries. Research from the Stockholm Environment Institute (SEI) suggests that national governments and large NGOs absorb the majority of adaptation finance, leaving minimal resources available for direct local action (Browne, 2023).

2. Complex Compliance and Eligibility Requirements

Accessing climate finance requires navigating complex regulatory frameworks, including extensive documentation, risk assessments, and financial disclosures. These requirements are often beyond the capacity of community-based organizations and Indigenous groups that lack financial literacy or legal support (Chausson et al., 2023).

For example, many climate finance initiatives require applicants to demonstrate detailed financial projections, multi-year impact assessments, and alignment with national policies. While these requirements are designed to ensure accountability and effectiveness, they inadvertently exclude grassroots organizations that lack the necessary expertise to compile such documentation. Consequently, large consulting firms and international NGOs dominate the climate finance landscape, perpetuating a cycle where local actors remain sidelined (GIZ, 2023).

3. Over-Reliance on Market-Based Mechanisms

Market-driven mechanisms, such as carbon credits and biodiversity offsets, have become dominant financing tools for climate action. While these instruments aim to mobilize private sector investment, they often fail to deliver meaningful benefits to local communities. Reports from the Food and Agriculture Organization (FAO) emphasize that less than 2% of global climate finance reaches smallholder farmers and Indigenous Peoples (FAO, 2022). Moreover, market-based financing mechanisms frequently prioritize short-term economic gains over long-term sustainability, reinforcing existing economic disparities rather than addressing systemic climate vulnerabilities (Schulte et al., 2022).

4. Lack of Local Participation and Ownership

A major challenge in climate finance distribution is the limited involvement of local stakeholders in decision-making processes. Many funding mechanisms adopt a top-down approach, where projects are designed and implemented by external actors without meaningful engagement from local communities (Whitt, 2022). In many cases, projects are developed with little consideration of traditional ecological knowledge or local governance structures. This disconnect results in interventions that are poorly adapted to the specific needs and contexts of communities, leading to low levels of local ownership and weak long-term sustainability of projects. Moreover, excluding local voices exacerbates power imbalances: foreign donors and international NGOs often dictate climate finance priorities without consulting those most affected by climate change. The political nature of this challenge means that representation is crucial, yet it is often lacking.

In regions such as Sabah and Sarawak in Malaysia, climate finance decisions often bypass local governance structures, preventing Indigenous communities from voicing concerns about development projects (Diplomacy Training Program, 2024). Indigenous organizations such as Jaringan Orang Asal SeMalaysia (JOAS) and the Asia Indigenous Peoples Pact (AIPP) have raised alarms over major initiatives, including carbon trading schemes and renewable energy projects, that frequently proceed without obtaining Free, Prior, and Informed Consent (FPIC) from affected communities. FPIC is a key human rights principle, grounded in the rights to self-determination and freedom from discrimination, which ensures that Indigenous Peoples and local communities have the right to fully understand, voluntarily agree to, or reject any project affecting their territories or resources (UN Human Rights Council, 2018). The controversial Nature Conservation Agreement (NCA) in Sabah, which granted monopoly rights over two million hectares of land without adequate Indigenous consultation, exemplifies how global climate finance mechanisms can undermine local political agency.

5. Corruption and Elite Capture

Elite capture is a well-documented issue in climate finance, wherein funds intended for local adaptation and resilience efforts are diverted by political elites, large NGOs, or private sector actors. Weak governance structures and lack of transparency create opportunities for misallocation of funds, further marginalizing vulnerable communities (Whitt, 2022).

Without stringent accountability measures, climate finance is susceptible to exploitation by powerful actors who use these funds to advance their own agendas rather than addressing grassroots climate challenges. A 2021 report from the International Institute for Environment and Development (IIED) suggests that increasing transparency through community-driven monitoring systems and participatory budgeting can help mitigate elite capture and ensure funds reach their intended beneficiaries (Roe et al., 2021).

Lessons from Successful Climate Finance Models

While the barriers to effective climate finance are substantial, there are examples of initiatives that have successfully overcome these challenges by prioritizing equity, community ownership, and accountability. Below, we highlight several models and approaches that have bridged the gap between high-level funding and local impact:

1. Decentralized Climate Finance in Kenya

Kenya’s County Climate Change Funds (CCCF) have demonstrated the power of decentralized finance models. Under this framework, climate finance is directly allocated to local governments and communities, allowing them to determine their own climate adaptation priorities (Soanes et al., 2017). By integrating local decision-making structures, this approach has improved resource allocation, reduced administrative inefficiencies, and ensured that funds are used for locally relevant projects.

Beyond Kenya, decentralized finance models have been effectively implemented in other regions. In Bangladesh, local adaptation plans have been embedded in national budget frameworks, ensuring sustained funding allocation for community-led climate resilience projects (Browne, 2023). Similarly, in the Philippines, community-based adaptation planning is supported by national climate funds, reinforcing local governance structures and increasing adaptive capacity at the grassroots level (Roe et al., 2021).

2. The Role of Performance-Based Finance

Performance-based financing, where funds are disbursed based on measurable social and environmental outcomes, has emerged as an effective alternative to conventional financing. For example, projects that integrate Indigenous land management practices into climate adaptation have been found to yield better ecological and social outcomes while ensuring that funds directly benefit frontline communities (Schulte et al., 2022).

In Costa Rica, the country’s Payment for Environmental Services (PES) program rewards landowners, including Indigenous communities, for conservation efforts that maintain forest cover and enhance carbon sequestration. The initiative, funded by a combination of international donors and domestic carbon tax revenues, has resulted in significant biodiversity conservation while directly benefiting local land stewards (GIZ, 2023).

Figure 1: Costa Rica’s Payments for Ecosystem Services (PES) Programme

Source: Porras and Asquith (2018)

3. FPIC as a Safeguard

The integration of FPIC into climate finance mechanisms has been instrumental in ensuring that Indigenous and local communities retain control over how funds are used. FPIC operates not merely as a procedural checkbox but as a substantive human rights safeguard. It is fundamentally a process of dialogue and negotiation that ensures meaningful participation, enabling communities to genuinely influence the outcomes of projects affecting them. Effective FPIC processes must be culturally appropriate, begin early in the project lifecycle, and provide clear, accurate, and understandable information to communities (UN Human Rights Council, 2018).

In Nicaragua, the Cacao Oro Project has embedded FPIC principles into its financing model, ensuring that community members have a say in how climate funds are invested (IDH, 2023). The project’s financing model combines long-term debt from the LDN Fund with technical assistance from the LDN Technical Assistance Facility (TAF), which supported business model development and participatory land-use planning. Uniquely, the FPIC scoping mission was integrated upstream in the investment process—rather than treated as a procedural afterthought—ensuring that Indigenous communities shaped land use decisions from the outset.

Figure 2: Cacao Oro Project Financing Model

Source: IDH Sustainable Trade Initiative (2023)

Similarly, UN-REDD projects in Indonesia have mandated FPIC as a prerequisite for project approval, ensuring that Indigenous knowledge and perspectives are central to climate finance decision-making (UN-REDD, 2018). In Cameroon, FPIC has been integrated into forest conservation projects, preventing land dispossession and fostering stronger relationships between local communities and climate finance initiatives (Roe et al., 2021).

A comparable evolution has taken place in Indonesia, where FPIC has been tested and formalized through provincial-level guidelines and sub-national REDD+ initiatives. The UN-REDD Programme’s pilot in Central Sulawesi developed and trialed FPIC processes with local Indigenous communities, producing one of the most detailed, government-backed FPIC protocols in the region. These efforts included participatory land use mapping, negotiation frameworks, and village-level consent agreements that shaped how REDD+ activities were implemented (Boer, 2019). While not without critique, the Indonesian model demonstrated that FPIC, when treated as more than a procedural checkbox, can legitimize project implementation and protect customary rights even in complex governance environments (Boer, 2019).

4. Blended Finance for Local Resilience

Blended finance, which combines public, private, and philanthropic capital, has shown promise in bridging funding gaps for local climate projects. 

New Forests’ Tropical Asia Forest Fund 2 (TAFF2) serves as a strong example of blended finance being used to scale sustainable forestry investments while delivering social and environmental benefits. TAFF2 invests in sustainable plantation forestry and conservation initiatives across Southeast Asia, integrating carbon sequestration goals while promoting local community development and economic resilience. Importantly, the fund prioritizes partnerships with local stakeholders, ensuring that investment flows are aligned with the needs of Indigenous and rural communities while maintaining high social and environmental governance standards (Convergence, 2023).

Figure 3: Capital Structure of New Forests’ TAFF2 Fund 

Source: Convergence Blended Finance (2023)

Another successful blended finance initiative is the Mesoamerican Reef (MAR) Insurance Programme, which leverages private-sector investment to finance rapid reef restoration following extreme weather events. By securing insurance payouts linked to environmental performance (parametric insurance), the initiative ensures timely ecosystem recovery while benefiting local tourism-dependent communities (GIZ, 2023).

5. Transparency and Inclusive Benefit-Sharing

To address corruption and elite capture, several organizations have developed integrity principles for climate finance distribution. For instance, WWF’s Integrity Principles for Benefit Sharing in Forest NbS outline the need for strong governance, participatory decision-making, and mechanisms to transparently track how funds are allocated (Whitt, 2022).

Practical examples of transparent and inclusive benefit-sharing are emerging on the ground. In Peru, Indigenous federations have successfully negotiated benefit-sharing agreements that allocate a portion of carbon credit revenues from REDD+ projects directly to local communities. These agreements, supported by transparency frameworks, have empowered Indigenous groups to invest in health, education, and sustainable livelihoods (FAO, 2022). Similarly, the Acorn-Kaderes agroforestry initiative in Tanzania employs a revenue-sharing model where smallholder farmers receive direct payments for carbon sequestration through agroforestry practices. The initiative integrates mobile payment platforms to ensure financial transparency and accountability, reducing the risk of fund misallocation (Roe et al., 2021).

6. Scaling Up Locally Led Adaptation

Recent research underscores the importance of scaling up locally led adaptation efforts to enhance climate resilience at the community level. The Adaptation Fund, which prioritizes direct access for local entities, has been instrumental in channeling resources toward projects designed and implemented by local stakeholders (Browne, 2023). In Nepal, climate adaptation funds are allocated to local governments under a decentralized framework, enabling communities to address site-specific vulnerabilities (Roe et al., 2021).

The conversation around scaling up adaptation finance has evolved, particularly following discussions at the World Economic Forum in Davos. New proposals have emerged to introduce water and biodiversity credits alongside carbon credits, expanding market-based approaches to better reflect a broader range of ecosystem services. 

However, perspectives from local communities caution against an over-reliance on these imperfect market mechanisms. While carbon and nature markets offer opportunities, they must be carefully structured to avoid excluding Indigenous and local communities from the financial benefits (Tan, 2025).

Design Principles for Equitable Climate Finance

Across the case studies, several shared conditions underpin successful climate finance models. Chief among them is genuine community ownership, where local actors help shape priorities and implementation from the start. Many initiatives also use performance-based or transparent structures to tie funding to outcomes and promote accountability. Blended finance models, like TAFF2, further enhance effectiveness by combining capital with technical support and risk-sharing. Crucially, projects that embed rights-based safeguards, such as FPIC, and offer equitable benefit-sharing tend to build trust and legitimacy. What links all these models is their adaptability to local contexts, allowing climate finance to support solutions that are not only effective, but equitable and enduring.

Looking Forward: Addressing Inclusion Challenges in Biodiversity Credit Markets

Integrating Biodiversity Finance into Climate Finance Strategies

Given the interconnectedness between biodiversity conservation and climate resilience—where thriving ecosystems underpin effective climate mitigation and adaptation—it is crucial to examine biodiversity finance in tandem with climate finance. The structural challenges identified earlier, such as complex market mechanisms, inadequate local involvement, and inequitable benefit-sharing, similarly affect biodiversity-focused initiatives. Thus, addressing these issues in biodiversity finance can also offer insights into overcoming parallel challenges in climate financing more broadly.

One notable barrier is the complexity and exclusionary nature of market-driven financing mechanisms, such as carbon credits. Biodiversity finance encounters similar challenges, often amplified due to biodiversity’s inherent complexity. Unlike carbon, biodiversity is not fungible—losses in one ecosystem cannot simply be offset by gains elsewhere (World Economic Forum, 2025). This complexity poses additional difficulties for local communities, who often lack the resources and technical expertise necessary to engage with sophisticated biodiversity credit systems.

To overcome these challenges, biodiversity finance should move toward simpler and locally accessible credit mechanisms. Such approaches can reward community-led conservation, directly channeling financial benefits to those actively managing and restoring ecosystems.

Biodiversity credit models vary in complexity. Comprehensive credit systems measure multiple ecological factors to provide a precise view of biodiversity health, but these models require significant technical expertise and resources (WEF, 2025). In contrast, simpler models—such as keystone species tracking—allow local communities to participate more easily by monitoring specific biodiversity indicators, such as forest cover or key wildlife populations. For example, projects in the Amazon have successfully used hummingbird population tracking as a biodiversity health metric because it is easy to measure and reflects overall ecosystem stability (WEF, 2025).

To increase accessibility, biodiversity credit methodologies should align with global reporting frameworks like the Taskforce on Nature-related Financial Disclosures (TNFD) and the Science-Based Targets for Nature (SBTN). These frameworks, when simplified appropriately, can enable community-based projects to meet reporting requirements, facilitating their access to broader institutional funding pools. Such alignment can bridge the gap between market expectations and local realities, addressing the persistent structural barriers in climate finance that exclude communities due to complexity and resource demands.

Integrating these accessible and locally driven biodiversity credit approaches within climate finance strategies is critical not only for the effectiveness of conservation initiatives but also for ensuring equity, transparency, and meaningful local participation—addressing directly the barriers identified throughout this report.

Conclusion

Addressing the structural barriers to climate finance distribution requires systemic reforms that place inclusivity, equity, and transparency at the center. This means decentralizing financial mechanisms, simplifying compliance requirements, and embedding local knowledge in decision-making processes—so that climate finance becomes not only more efficient, but more just and responsive to community realities. As demonstrated by successful initiatives across diverse contexts, three conditions consistently stand out: community-led governance, performance-based financing, and transparent, inclusive benefit-sharing. These are not peripheral features—they are essential to ensuring that climate finance delivers real impact on the ground.

To move from intention to transformation, policymakers and financial institutions must take deliberate steps to ensure that climate finance reaches those who need it most. Only by doing so can we enable communities to lead their own climate solutions in ways that are sustainable, just, and grounded in local priorities. Ultimately, bridging the gap in climate finance is not only a matter of effectiveness—it is a question of climate justice, and of recognizing the vital role that local stewards play in safeguarding our collective future.

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