Against the complex backdrop of global climate finance – an arcane network of multilateral funds, development banks and bilateral commitments – the Green Climate Fund risks being lost in the throng. The proliferation of climate finance mechanisms increases the challenges of coordinating and accessing capital, while a growing number of recipient countries have set up their own national climate change funds in an effort to align donor interests with their priorities.
The Green Climate Fund is meant to be different.
First of all, it is bigger. Regardless of whether it actually meets its aspiration to channel US$100 billion a year to funding in emerging markets, it is still going to be the largest climate finance fund in the world.
Secondly, it specifically targets partnership with the private sector. Understanding that commercial investment and expertise is essential to scale up low carbon development, the GCF Secretariat aims to leverage its donor capital to attract private funds into adaptation and mitigation activities. Its early establishment of the Private Sector Facility, a dedicated department to focus on this, sends a strong signal to the financial world.
Thirdly, and most importantly, the Green Climate Fund aims to go beyond business as usual in its own funding operations. Specifically, the GCF “intends to be an institution that takes risks that other institutions or funds are not willing or able to take.” (GCF board decision B.13/36)
Critics of the GCF are quick to point out that the fund is failing on the latter two of these counts, and that this may constrain its ability to attract significant public funding in future, thereby jeopardising its status as the preeminent climate finance vehicle.
There are some grounds to say that engagement with the private sector has been inadequate to date, and that there is a troubling communications disconnect between the GCF and commercial financial institutions. The Secretariat needs to appreciate that the prominence of concepts such as “paradigm shift” within the GCF lexicon is offputting to mainstream investors, and that flexibility is necessary to encourage them to consider going through the onerous processes of becoming accredited agencies and submitting projects.
More fundamentally – if the Green Climate Fund is to differentiate itself truly from its peers in the low carbon financing world – project proponents and investors need to see real evidence of aggressive risk appetite. Of course, this must be balanced against fiscal prudence and fiduciary common sense, but if the GCF cannot step up to fill the risk gaps and explicitly to support the more demanding aspects of developing projects in challenging emerging markets, it will not be fulfilling its purpose.
There is over US$100 trillion to play with in the global capital markets, and a growing interest on the part of institutional investors in infrastructure sectors. The GCF has therefore ample opportunity to marshal additional private funding flows and to facilitate their application to mitigation and adaptation globally.
Actually seizing this opportunity requires the Green Climate Fund to be bold. It is not enough to talk about being a risk taker, but in practice to be tentative when it comes to using its balance sheet. There is no need for the GCF to duplicate the activities of governments, development banks and NGOs. What could make a real impact on the efforts to transition to a low carbon economy would be targeted use of GCF capital to catalyse incremental public and, especially, private funding flows.
This means taking the tried and tested risk mitigation and credit support mechanisms (about which so much has been written by other experts over many years) and creatively applying them to circumstances in least developed countries. It means being prepared to stand behind counterparties in these countries that are not currently viewed as creditworthy by the international financial community. It means being willing to take the chance that individual projects will fail, if by doing so the GCF provides a catalyst to stimulate product innovation and market development.
It also requires the Green Climate Fund to be unapologetic about its promotion of private sector involvement in climate finance. There should be no reticence about extending all available forms of support to private actors, including grant funding and concessional finance, if these will lead to greater expertise on the ground, successful deal pipelines and economies of scale. For the GCF to be oversensitive about the motivation of profit making enterprises would be a mistake – after all, the development of the railways made Cornelius Vanderbilt a very rich man, but it also fostered a century of economic growth and paved the way for the creation of America’s financial system.
The Green Climate Fund has the potential to be a leader in a global economic transformation on an equally grand scale. The courage to acknowledge that risk should be managed and not avoided, and that some degree of loss is an integral part of lasting success, will be a key driver for scaling up climate finance and accelerating climate resilient development in emerging markets where it is so greatly needed.
Written by: Alexandra Tracy, President of Hoi Ping Ventures, CMIA Board member and CMIA’s Active Private Sector Observer at the Green Climate Fund.