“Greening” PFM – We Need to Do Better

The integration of climate considerations into public financial management (PFM) has gained significant momentum in the past few years. Several approaches have been developed, in practical applications, though, challenges have emerged. These highlight the need for further refinement, both conceptually and operationally, to enhance the effectiveness of climate-responsive PFM approaches. A few key lessons can be distilled from the global experience of climate-responsive PFM reforms:

1. Shifting from technical fixes to institutional change

It has long been acknowledged in the broader PFM literature, for example, Richard Allen (2013), that the institutional design of budget systems shapes both the process and operational efficiency. This insight is especially relevant now, as climate-responsive PFM places greater emphasis on achieving real outcomes. Recent climate governance literature reinforces this perspective (e.g. Hallegatte et. al., 2024), identifying low institutional capacity and poor governance as considerable barriers to climate policy implementation.

At the outset of climate reforms, it is therefore essential to apply diagnostic tools that can guide this process. Instruments such as the World Bank’s Climate Change Institutional Assessment (CCIA) should be used in conjunction with PFM-specific diagnostics like the PEFA Climate and Climate-PIMA. The CCIA, for example, recognizes that PFM must be understood within the broader context of national climate governance. In many countries, governance landscape has evolved organically over time. Therefore, mainstreaming climate into PFM should begin with a deliberate effort to design the optimal organizational and institutional architecture from the very beginning. If we want PFM to serve as a strategic tool for climate policy implementation, its governance can no longer be treated as a secondary issue.

2. Building climate fluency of PFM practitioners

A core obstacle is that PFM practitioners still lack sufficient climate intelligence, which extends to the frameworks, diagnostics, and guidance they depend on. One example relates to terminology; terms such as climate change, environment, sustainability, and even green are often used interchangeably, despite having distinct meanings. In particular, the term green is a widely used catch-all phrase lacking a standardized definition. This can result in directing efforts to “green” PFM functions, such as public procurement, whose actual impact on carbon emissions may be less clear (Ramsden 2021). If the intended development outcome is to tackle climate change, we must consistently apply terminology of official climate change frameworks to ensure accurate data collection, robust policy design and to prevent policy failure.

Another challenge lies in the prioritization and sequencing of interventions aimed at making PFM systems climate-responsive. Both practitioners and governments often gravitate toward measures that are more familiar or widely established, such as climate budget tagging. Identifying sensible country-specific entry points for climate mainstreaming requires cross-cutting expertise. Practitioners must be able to interpret diagnostic findings in the context of a country’s specific climate profile while also balancing the requirements and constraints of its PFM system. To deliver real climate outcomes, we must build climate fluency into the people and stakeholders that shape public finance.

3. Strengthening the financing function of PFM

Another key lesson learned concerns the persistent ambition-delivery gap, largely driven by the heavy reliance on external financing for climate commitments. As demand for climate finance grows, so too does the need for stronger governance of these funds. This highlights the importance of recognizing and strengthening one of the core functions of PFM, which is its role in financing.

Traditional debt-financing mechanisms are usually well-integrated into PFM systems. In contrast, the national climate finance landscapes remain highly fragmented. Depending on the funding source, different institutions are involved, and the absence of strategic direction has led to parallel financing processes for climate-related activities not overseen by the central finance agencies (CFAs). Evidence suggests that a significant portion of climate finance is often managed off budget, even from domestic sources (UNDP, 2022).

This undermines the ability of CFAs to perform critical functions such as maintaining fiscal space for climate policy and ensuring efficient resource allocation. Therefore, all matters related to the mobilization of public resources, including climate finance, should fall within the mandate of CFAs. At a minimum, CFAs should have oversight and strategic leadership responsibilities for climate finance. This requires structures that both meet fiduciary integrity requirements and safeguard interoperability with the existing PFM system.

Ultimately, we need to understand climate-responsive PFM as a holistic and dynamic system. Only through this lens can we enable climate finance to be effectively mobilized, allocated to climate action, and directed toward the intended beneficiaries.

References

Allen, R. (2013). Challenges of Reforming Budgetary Institutions in Developing Countries. In: M. Cangiano, T. R. Curristine, & M. Lazare (Eds.), Public Financial Management and Its Emerging Architecture (pp. 21–78). Washington, DC: IMF.

Hallegatte, Stéphane, Catrina Godinho, Jun Rentschler, Paolo Avner, Ira Irina Dorband, Camilla Knudsen, Jana Lemke, and Penny Mealy (2024). Within Reach: Navigating the Political Economy of Decarbonization. Climate Change and Development Series. Washington, DC: World Bank.

Ramsden, A., & Grafl, A. I. (2021). The interplay of climate change and public financial management: Greening public procurement (PEFA Research Paper Series). Washington, DC: Public Expenditure and Financial Accountability (PEFA) Secretariat.

United Nations Development Programme. (2022). Global climate public finance review. New York: UNDP.