2nd August 2017 by CMIA

The 17th GCF Board meeting (“B.17” in GCF jargon, held in Incheon and broadcast live, had no funding proposals to approve. Not because there weren’t any – it seems half a dozen were ready – but because (not without dissent from a number of members) the Board decided it had to focus on clearing its policy logjam instead.

This logjam had become all too evident at the April Board meeting, where some testy exchanges on two controversial projects exposed quite sizeable gaps between the positions of the various constituencies represented on the Board on some fundamental issues.

Nor, it appears, were the two days of the official Board meeting going to be enough to “unpick all the spaghetti”, as one Board member quite memorably referred to the process. Many of the policy papers were given a preliminary airing during informal discussions over the two days preceding the Board.

There was, to be sure, a fair amount of spaghetti to unpick, and much of it of a rather dense, wholemeal variety. Policy papers and decisions were presented on risk management; the GCF’s ‘accredited entity’ and project approval processes; ‘coherence and complementarity’ with other climate funds; how to approach REDD+*; barriers to crowding in private finance; and strategy to strengthen and scale up the Fund’s portfolio.

There were also some knotty administrative matters, not least the Korea-based Fund’s difficulties with recruitment in a country where there are obvious security concerns.  US consultant Dahlberg has been brought in to advise on “accelerating the capacity of the Secretariat” via capacity and structural changes.

There’s no way in even a quite extended blog to cover the detail of any of these discussions  – for those interested, the papers are all on the GCF website.

The good news is that there was much that was sensible and progressive in what was discussed and decided.  For example, the Fund is inching towards what would effectively be the kind of two-stage application process that virtually every other fund uses (and that we called for in our note on the April meeting). This would give the Secretariat and the (still mysteriously staffed) Independent Technical Advisory Panel the ability to stop ‘low-quality’ applications coming to the Board. There was even mention of a discretion ladder for approvals, based on application size or complexity, that would allow smaller/simpler projects to be approved lower down the governance chain than the Board. This is also, of course, utterly traditional practice for finance applications.

It’s also a good, if not exactly giant, first step in terms of aligning with other climate funds for the GCF to be proposing to host an annual meeting between it and three other UNFCCC-related funds (the Adaptation Fund, the Global Environment Facility and the Climate Investment Funds).  Not mentioned, however, were relations with the DFIs* and MDBs*, which are of course much bigger deployers of climate finance.

Reading the Board papers and watching the (public) discussion, however, it is difficult to escape the overall conclusion that the GCF is still trying to do too much; to be all things to all people.  At present its resources barely allow it to do the basics, but in the paper on removing barriers to private finance, to give just one example, the Fund appears to be putting itself forward as a global enabler of government capacity-building for climate finance.  In some ways, this over-achiever status has probably been forced on it by weight of expectation, as the GCF has come to be seen as the prime channel for the ‘$100 billion’; at some point, those expectations will have to be reigned in.

Heavy (and Unnecessary?) Baggage

It was also hard, watching this Board meeting, to shake the impression we formed watching the April meeting, namely that the Fund is freighting its balloon with some very heavy and unnecessary baggage.  Chief among the leaden portmanteaux is the requirement that every GCF counterparty become an ‘accredited entity’ before it can start doing business with the Fund. (The accredited entity approvals item caused the only overt row of this particular Board meeting, when co-Chair Ayman Shashly refused to allow civil society objections to the approval of two Japanese entities – because of their fossil fuel activities – to be heard before the Board vote [1].)

The accreditation process is a vast consumer of resources, not just at the GCF but also at the would-be accredited entities.  It has devoted to it at the GCF a whole staff unit, a Panel that reviews applications put forward, and a Board committee.  To date, from some 200 initial application received since the process started in 2014, just 25 have been fully signed up.  A further 23 have been approved but are still going through the lengthy post-approval process before signing the final ‘Accreditation Master Agreement’.  Quite a number of projects put forward by entities that are at this interim stage can’t have their funding released because their sponsors are effectively in limbo.

Obviously, when public funds are being disbursed, there need to be high standards. But what in truth does this enormously cumbersome process achieve?  If its aim is to avoid counterparty credit risk, there are ready-made assessments of that via rating agencies. If it’s to avoid reputational risk, this could be dealt with by a standard due diligence process – which had indeed revealed that the two Japanese institutions the civil society observers objected to have been financing coal; but this didn’t stop them being approved. If it’s to guard against operational risk from inexperienced counterparties, then it would surely be better to focus resources on capacity building for those parties, the need for which could be established by a short institutional review.

The financial world is not populated by saints, and never will be. But there are many parties ‘on the case’ on the topic of financial institutions that misbehave in different ways, from the TCFD* to stranded asset proponents like CarbonTracker to Influence Map and BankTrack to shareholder activists. The GCF may have some influence because it holds some purse strings, though no global bank is really going to change behaviour for the sake of a few GCF projects. But it’s operational capability to track improved performance by entities it accredits conditional on their behaviour improving is doubtful and the methods used currently unclear.  As things stand, approving them in the first place may actually be creating some reputational risk in itself.

Instead of relying on upfront accreditation, the GCF could rely on the same tools to establish standards as other DFIs do when funding projects, namely extensive due diligence on the counterparty ahead of the transaction, and codes of conduct over issues such as gender and environment once funds are disbursed. (Indeed, the Fund already imposes such codes when approving projects.) It could also impose ‘green covenants’, which might extend to the overall performance of the counterparty on matters of concern over time.

Similarly, when dealing with inexperienced counterparties there will inevitably be the occasional failure and consequent losses. That comes with the territory of being a vanguard risk-taker trying to de-risk for others, and indeed should be seen as a badge of honour, not shame.  By all means, help to capacity-build at inexperienced counterparties, but why make this a matter of formal accreditation? Why not do what other financial institutions have to do – and live with – which is to build up a track record with a counterparty over time, and increase transaction sizes along the way, as that record develops?

Key Discussions

Covering other discussions briefly before finishing with some observations on the GCF portfolio:

  • risk management framework was presented, which seemed sensible and comprehensive in terms of the risks being addressed, but left us (and we suspect many present) no clearer on what the GCF’s actual risk appetite is, or how this will be assessed at a project level.
  • The paper on barriers to crowding in co-financing was again a comprehensive, indeed textbook, round-up of the difficulties of investing in emerging markets, arranged under five headings ranging from Policy and Regulation to Knowledge and Education. As we noted above, though, there is no way that the GCF could itself address all these barriers globally.  Instead, this kind of analysis surely provides an overarching agenda around which all those with concessional funding should coalesce and agree their respective roles – see our third piece on the landscape of climate finance for some ideas on how this could be done.

(One of the GCF’s active Private Sector Observers, Alexandra Tracy, made some highly relevant comments addressing both these topics during the meeting – see Box).

  • very thorough paper comparing the approaches of four important climate funds, referred to above, suggested that the Board might want to “establish fund-to-fund arrangements, [which] could include memoranda of understanding, accreditation, co-financing, joint activities (such as capacity-building).” And the Fund has indeed already done some work on harmonisation of arrangements, for example on capacity building for GCF readiness. Not addressed (or even contemplated), however, was the true “big picture” question here, which is why something like 30 climate funds are out there when amalgamating them into something like 10 would provide deeper pockets in the continuing funds while reducing the paperwork needed to bring projects together, which very often involves accessing a number of financing providers.  Done well, such consolidation (a fact of life everywhere else after all) would still provide the necessary global and sectoral coverage and diversity. It might also reduce transaction costs: if we read the GCF paper correctly, these are something like 9% on average in the funds covered, which is at least 3 times more than even the highest private sector transaction costs [2].  There is typically a direct correlation between fund size and transaction cost as a percentage of transaction size. Obviously, there would need to be provision for smaller projects not to be bypassed by these larger funds, but with rational segmentation, some could even specialise in such projects.
  • There was an extensive discussion on a REDD+ pilot, which reached no decision. The Third World Network has produced a summary.

Extract from comments by Alexandra Tracy, Private Sector Observer:

“There is a clear opportunity for the GCF to facilitate private sector investment in [more difficult emerging markets], which is currently not flowing, but could be encouraged to flow with targetted support for commercial and political risks from the Fund.  These risks are not new, and the potential support mechanisms – partial risk guarantees, subordinated financing tranches and so on – are not new.  I think we should be cautious about placing too much emphasis on innovation.  There is significant scope to replicate and scale up existing solutions and adapt and apply them to new circumstances.  It is a matter of appetite and bold decision making – to allow some of these markets to develop, and to encourage private sector participation, the Fund has to take on some of this risk exposure.  I agree with others that we might expect multilaterals and other institutions to be doing this work – but if it is not happening on the ground, as is the case in [these markets] – the GCF must take the initiative. It is important to note that markets are evolving.  The level of risk exposure that may be required in the short term will not be constant over time.  As more participants enter the markets and a successful pipeline of deals is developed and executed, greater expertise is developed and economies of scale improve.  GCF risk support should be viewed not as a long-term commitment necessarily, but as an essential catalyst to stimulate market maturity and climate finance.”

Note:  The full comments can be found seen on the webcast at minute 63

Disclosure:  Alexandra Tracy is an (unpaid) member of’s panel of Advisers

Portfolio and Pipeline

The most important paper considered at B.17 – because it’s the one over which the Fund has the most direct and immediate control – was on the GCF portfolio and pipeline.

The first thing to note here is that, although some $2.4 billion has been approved, as far as it’s possible to tell (and then only by hunting through documents, as there is nothing upfront on the website) only a tiny amount had actually been disbursed by the time of this Board meeting – some $6.5 million, plus a further $6.3 million in application readiness grants [3].  Note that this is getting on for two years after the first projects were approved, just ahead of the Paris COP.

The main reasons for this approval vs disbursement gap are twofold.  First, many projects are approved when the Accredited Entity sponsoring them hasn’t signed the final accreditation agreement. Second, there are often multiple conditions attached by the Board to project approvals, so extensive further negotiations are required before final project agreements can be signed.  Dealing with the conditionality issue does now seem to be on the GCF radar, by means of the two-stage approval process the Fund is moving towards.  This should drastically reduce the number of under-cooked proposals reaching the Board, and thus the number of over-conditioned approvals.

The second key issue for the GCF is the imbalance of the portfolio.  In the chart below, the first four sectors (or “results areas” as the Fund calls them) represent the GCF’s mitigation portfolio, and the second four its adaptation portfolio. As can be seen, the vast bulk of the projects approved so far have been in the energy space, and sponsored by the private sector. There have been no projects at all in the transport sector, very few in energy efficiency and those in the forestry/land use sector have been mainly public projects.  Conversely, in the adaptation areas, almost all the projects have been public sector ones, presumably entirely grant-based.

While the same chart for the application pipeline shows a more balanced picture (though still dominated by private sector energy), this is a pipeline and many projects are at an early stage, so ‘low hanging fruit’ such as renewables may still win through compared to more complex projects. Instrument, geography and mitigation vs adaptation splits are also a bit more mixed in the pipeline than in the portfolio.

The Fund’s main response to these sectoral imbalances is to look at issuing targeted RFPs* for areas where they are underweight.  This is a route the Fund has already taken, with two RFPs (for micro, small, and medium-sized enterprises, and mobilizing funds at scale) already launched.  Other ideas include prioritising existing pipeline in underweight areas and various measures to engage more with Accredited Entities (AEs) and countries, attract in AEs with experience in underweight areas, and promoting partnerships with non-AEs with such experience. All these seem sensible approaches, though the chances and the timeframes to achieve them will, of course, be significantly affected by the insistence on accreditation.

In terms of financial instruments, the main portfolio instruments are grants (42%) and loans (39%), with equity counting for 18% and guarantees just 1%. (In the pipeline, grant applications are nearly 2/3rds of the total.)  The Fund only publishes an overall ‘co-financing’ (or leverage*) figure, which is about 3x its own funding.  There is no immediate visibility, therefore, on what the equity and loan finance was applied to and, if this was used in structured vehicles, what leverage this created. The GCF may be doing itself a disservice by not calculating and showing these more relevant leverage measures, because grants, unless used for first loss positions, clearly create less leverage than equity or mezzanine loans.

More Guarantees?

There seems to be recognition at the Board that the use of guarantees needs to be expanded, but it is to be hoped that if this becomes the case, these guarantees will be fully risk-bearing or – as recent research by the Milken Institute has shown – these instruments will not be successful in changing partner bank behavior in getting behind more difficult projects, in part because these banks get no regulatory credit for partial guarantees.

In terms of geography, with one exception the Fund seems to be achieving some success in spreading its approvals around, with Africa receiving 45%, Asia-Pacific 29%, LAC 22%, but Eastern Europe only 4%.  The virtual absence of Eastern Europe continues in the pipeline, so there is clearly something ongoing that is affecting applications – perhaps the long involvement of the ‘local’ DFI, the EBRD, in climate finance has some part to play.  LDCs*, SIDS* and Africa have received 84% of funding overall to date.

Finally, in terms of mitigation and adaptation, in both the portfolio and the pipeline it is hard to gauge how the Fund is doing on its 50/50 target, as a large proportion of projects are ‘cross-cutting’.

In Conclusion …

Although this Board meeting was devoid of project proposals, the impression we have is that the GCF inched forward on a number of fronts, but still hasn’t built a clear picture of its role in the grand scheme of things.  In this respect GCF is not alone among climate funds, DFIs and MDBs.  One thing it deserves credit for doing, which its peers generally don’t, is to be transparent at the Board level.  Let’s hope that the consultants the Fund hires to advise it on structure and capacity have a brief to look at positioning (not least risk positioning) and focus as well.

[1] The exchange can be found here at 27:30.  There has also been a statement from several Japanese CSOs

[2] 2014 analysis by the ODI seems to confirm these fee levels – see p34

[3] We have not received any response to requests to the GCF to confirm these figures

By: Ian Callaghan

Taken from