By Alexandra Tracy, president and founder of consultancy Hoi Ping Ventures, serving as a private sector observer to the Green Climate Fund for the Climate Markets and Investors Association (CMIA)
It has to be said that the last meeting of the board of the Green Climate Fund did not go well. Everyone in the climate finance world has been made fully aware of the unedifying spectacle of some of the world’s leading climate diplomats being most undiplomatic: position-taking trumped compromise and pragmatism was overwhelmed by obstinacy.
It is clear that there needs to be a fundamental overhaul of the governance and decision making processes at the GCF, not least to avoid a repetition of the current impasse, which has left nearly $1 billion of potential project funding in 17 countries hanging in limbo. This disgraceful outcome delays and may even threaten the implementation of much needed climate projects.
THE BIG QUESTION
But meanwhile, the work of the GCF Secretariat continues, and we should not become so distracted by the fireworks at board level that we lose sight of what is important – does the GCF actually have the capacity to fulfil its mandate of exponentially scaling up private investment in climate action in developing countries?
Successful partnership with the private sector is essential, not only for the GCF to mobilise institutional and corporate funding for mitigation and adaptation projects, but also to capitalise on the expertise of businesses which actually operate on the ground in challenging markets.
STICKING WITH TRADITIONAL PARTNERS
Through the GCF’s dedicated Private Sector Facility, a number of projects involving commercial funding have been structured and approved, although many of these involve a typical multilateral intermediary.
For example, the GCF will provide $150 million in loans to support a programme spearheaded by the European Bank for Reconstruction and Development to increase the number of renewable energy projects in Egypt by facilitating $1 billion of investment. Blended GCF and EBRD financing will be used to leverage further lending from international and development financial institutions and, at a later stage, from commercial banks and private investors.
In a similar partnership, the GCF will work with the African Development Bank in Zambia to catalyse private investment in the renewable energy sector. Zambia’s electrification rate is nearly 30%, but relies almost entirely on hydro power, leaving its electricity supply extremely vulnerable to weather shifts. This project will support the government of Zambia’s Renewable Energy Feed-In Tariff policy to develop 100 megawatts of renewable projects, mostly solar power. Technical assistance will be provided to local financial institutions so that they can participate in project financing.
These are good projects, definitely, but they do raise questions. Might not the EBRD or African Development Bank have undertaken them anyway, without the need for GCF involvement? How could the GCF work more directly with banks and investors to engage those not already involved in climate finance, and thereby fill crucial funding gaps?
SOME PROGRESS ON PRIVATE PROJECTS
Only eight of the 59 entities accredited as partners by the GCF are from the private sector, including the global banks HSBC, Deutsche Bank and Credit Agricole. Of these three, Deutsche has so far had a project approved by the GCF.
Its Universal Green Energy Access Programme centres around a $300 million investment fund covering five countries in Africa. The fund will provide financing for decentralised energy service companies supplying off grid and mini grid systems for rural households and communities. The GCF will be an anchor investor in the fund, which is also expected to attract capital from foreign and local private equity investors.
But for the GCF, the private sector cannot be limited to the multinational investment banks. One of its overarching goals is to maximise its interaction with so-called direct access entities (national level institutions located inside developing countries) so that finance can be channelled to countries directly. Its engagement with XacBank in Mongolia – though yet to be replicated elsewhere – demonstrates how the GCF has been able to work successfully with a local privately run institution.
XacBank was accredited by the GCF in 2016 and since then has received approval for two projects. The first of these was a business loan programme for greenhouse gas emissions reduction which targets micro, small- and medium-sized enterprises in Mongolia. These companies typically struggle to raise capital on acceptable terms for energy efficiency and renewable energy investments. At least half of the financial support will be allocated to women-led businesses.
BUT WIDER OUTREACH STILL NEEDED…
The example of XacBank is an encouraging case study, but it is not a typical one. The majority of private sector entities are likely to view the process of gaining approval for accreditation by the GCF as prohibitively onerous. There is already a long pipeline of applicants, meaning that new candidates are likely to face substantial delays before receiving board approval.
In an effort to reach a wider private sector audience, and to begin to address the widespread reluctance to go through such a lengthy accreditation process with an uncertain outcome, the GCF has been experimenting with Requests for Proposals.
Its “Pitch for the Planet” RFP, launched in May 2017, was a global campaign to tap commercial funding sources at scale for climate change mitigation and adaptation in developing countries. A total amount of $500 million in GCF capital would be made available to support the successful proposals, which could come from accredited entities or – for the first time – from any private institution potentially interested in partnering with the GCF.
The response to this RFP was considerable, with close to 300 institutions submitting proposals by August. However, the main obstacle still remained – approval of any successful proposal would be conditional on its sponsor becoming accredited by the GCF. Even with the promise that applicants short listed under the RFP process would be fast tracked through the process, a year has gone by and no new entities have been approved.
…AND MUCH GREATER FLEXIBILITY
In order to attract meaningful support from the broader financial community, the GCF needs to show much greater flexibility. If the requirement for accreditation is going to be just as onerous as going through the traditional application route, any private sector response to future RFPs is likely to be less enthusiastic.
One approach, which seems to have been tested with a number of the shortlisted “Pitch for the Planet” contestants, was that the private institution should be responsible for identifying an existing GCF accredited entity with which to partner on its proposal. This is not particularly easy for a business that may not be part of the established climate finance networks. It is also unlikely that an accredited entity will be willing to allow another institution effectively to do projects under its own banner without significant negotiation.
It may be that something along these lines could be workable perhaps at country level, with a greater role potentially for the GCF’s designated government counterparty in that country to assist with matching accredited entities and implementing or executing entities. In the short term, however, it would seem such a requirement of the private sector player risks deterring further engagement.
A more promising idea, which the GCF Secretariat has been developing over recent months, is that of project-linked accreditation. Under this framework, the accreditation process would focus only on the organisation’s ability to implement the specific project or programme being presented to the GCF (in response to an RFP, for example) rather than the institution-wide systems, policies and procedures and general track record that are assessed in the traditional accreditation exercise.
This more streamlined alternative could appeal to a broader range of private sector entities which do not exclusively focus on climate related projects, but which might have an interest to bring one or more specific proposals to the GCF for support. To avoid duplication, there would need to be an expedited process for subsequent project proposals brought by the same entity, which would focus solely on incremental assurance requirements.
REDUCING DUPLICATION WITHIN THE PROCESS
Another potential strategy for simplifying the process of GCF accreditation for private sector organisations would be to make use of existing third party data and verification.
Financial institutions, in particular, at a country level are intensively regulated and subject to the scrutiny of local authorities, auditors and rating agencies. In addition, since the 2008 financial crisis, the international financial community has established specific safeguards to protect the global financial system through preventing the failure of so called “systemically important financial institutions”, which are subject to even more stringent reporting and capital requirements.
Third party oversight bodies, therefore, already verify a substantial subset of the fiduciary standards that are required in the GCF’s accreditation process. Use of their expertise would reduce duplication and could be applied to complement the GCF’s due diligence work. Recognition of national authorities and financial sector regulators would also be consistent with the GCF’s guiding principle of country ownership, in that it relies on the competencies and legitimacy of local bodies (assuming fiduciary standards and expertise are consistent with the GCF’s requirements).
LOOKING FORWARD FOR THE PRIVATE SECTOR AND THE GCF
It is only fair to credit the GCF with a degree of success in meeting its goal to facilitate private investment in climate action in developing countries. Out of around $3.7 billion in GCF funding approved to date, approximately 40% will go to projects defined as private sector (although the majority of these involve a multilateral or development bank intermediary, as mentioned above).
But to capitalise on this promising beginning, and to build the necessary relationships with commercial financial institutions and private businesses, the GCF must find solutions to its current inadequacies. It must demonstrate that it can take decisions in a logical and timely manner, which – if not exactly business like – is at least comprehensible to private sector organisations. And, rather than limiting its pool of potential partners by imposing heavy bureaucratic demands, it must move forward with a more creative approach that will facilitate greater collaboration and attract the incremental capital flows that that are needed to achieve its objective.