In March, the board members of the UN Green Climate Fund gathered in Berlin for the third meeting since their appointment, tasked with planning for the mobilisation by 2020 of $100bn per year in long-term financing for climate action in developing countries.
The Green Climate Fund was conceived during the Copenhagen COP in 2009 as the main multilateral financing mechanism to support emerging markets to respond to climate change, and represents a significantly higher commitment than the $6.5bn pledged to the Climate Investment Funds, the largest multilateral climate funds existing, or to the Global Environment Facility, the longest standing source of climate finance.
At COP17 in Durban, the parties agreed to a transitional process for full operationalisation of the fund by 2014 – a not inconsiderable challenge for the 24 new board members, many of whom have limited finance experience. In addition to considering the financial and risk issues involved in supporting mitigation and adaption in emerging markets, they are faced with the difficulties of communication between the public and private sectors, and sometimes virulent political arguments involving developed and developing countries, civil society and NGOs.
The Green Climate Fund has lofty aspirations. Its stated purpose is “to make a significant and ambitious contribution to the global efforts towards attaining the goals set by the international community to combat climate change”. In order to do this, the fund “will play a key role in channelling new, additional, adequate and predictable financial resources to developing countries and will catalyse climate finance, both public and private, and at the international and national levels”.
We have all heard that enormous investment is needed to enable the global community to restrict temperature rise to 2°C (the level beyond which scientists believe climate change becomes catastrophic and irreversible). According to the International Energy Agency, investment of nearly $40trn – the equivalent of 1-2.5% of global GDP per year – will be required to halve global greenhouse gas emissions by 2050 relative to 2005.
Mobilisation of private capital is essential to the achievement of the 2°C target. While public funding is constrained, the financial services and investment sectors control trillions of dollars that could potentially be directed towards a green economy. It is the hope of the United Nations that the Green Climate Fund be a vehicle to channel some of these financial resources towards low carbon investment in the near term.
One of the most important points for consideration by the board in Berlin is the “business model framework” of the Green Climate Fund. Discussions will cover the basic structure and organisation of the fund, the mix of financial instruments the fund could offer, ways in which developing countries can access the fund and methods of monitoring and evaluation. A key part of the agenda will be the Private Sector Facility, which is intended to leverage private sector investments in low carbon activities.
The very existence of the Private Sector Facility has caused controversy. Some developing countries and NGOs have expressed strong views that any involvement by the private sector undermines the purpose of the fund, which is to maximise funding for clean development, and introduces a dangerous element of profit motivation. Since the first meeting of the Green Climate Fund’s transitional committee (the precursor to the board), a consensus view has developed that it will be impossible to raise sufficient funds without private financial institutions, although some civil society groups are still calling loudly for their exclusion.
Securing adequate and sustained funding is the greatest challenge for the Green Climate Fund. Successful involvement of the private sector in this process will require the fund to be accessible and to establish straightforward – and timely – procedures, communication channels and approval processes. Financial institutions may appreciate the fact that the Green Climate Fund will, as stated in its Governing Instrument, “promote the paradigm shift towards low-emission and climate-resilient development pathways”, but they want to know what this means in practice.
Investors will put funds into low carbon development when projects are bankable, scalable and offer acceptable risk adjusted returns. Insufficient capital is currently being directed towards these projects for many reasons, including structural ones such as regulatory concerns with regard to liquidity (Basle 3 for banks, Solvency 2 for insurance companies) and quantitative restrictions on risky asset classes for Asian pension funds. For many funders, green infrastructure is loaded with uncertainties about technology, policy and operating risks. For others, the project size is too small to meet their benchmark.
The Green Climate Fund has the potential to help to address some of these barriers to investment and encourage the commitment of different types of capital at various stages of development for different technologies and project types. Through the Private Sector Facility, financing instruments can be made available to help mitigate specific risks associated with investments in climate change projects, such as insurance or guarantees or to lower the cost of capital required by these projects.
It should not be necessary to reinvent the wheel – non-recourse project finance, for example, is a proven structure for channelling private capital into infrastructure projects and many of the lessons learned here can be applied to low carbon development efforts. However, the Green Climate Fund will operate in a significant and complex climate finance ecosystem, and it is critical that it avoids duplication of existing efforts and addresses the gaps that are not targeted by existing organisations and instruments.
The Green Climate Fund is a bold effort to accelerate the evolution of climate finance in emerging markets and leverage large amounts of private sector capital for green development. Investors are still looking for much greater clarity as to how the fund can support and work with them, and there are many questions in all of our minds. It is to be hoped that after the Berlin meetings, some of the answers will be forthcoming.
Alexandra Boakes Tracy is Chairman of Association for Sustainable & Responsible Investment in Asia.