Can the Private Sector save the Green Climate Fund?

Turbulent times at the Green Climate Fund’s twentieth board meeting in Korea last week. Form mightily triumphed over substance, with lengthy arguments over meeting procedure making board engagement somewhat akin to putting cats in a bag!

Observers in the overflow room watched aghast as day one of the four day meeting was lost to heated debate about who should take the chair (after Paul Oquist, developing country co chairman, had announced just a few days earlier that events in Nicaragua would keep him at home) and day two was taken up with wrangling over the agenda.

Business finally began towards the late afternoon of the second day, but soon ran into difficulties again. Amidst extraordinary accusations of inappropriate behaviour among board members, serious concerns about the status of the GCF’s current resources (negatively impacted by foreign currency movements as well as Mr. Trump’s disinclination to provide previously pledged funding), and the vital process of upcoming fund raising efforts to replenish those resources, failed to reach resolution.

The meeting closed with no decisions on core fund business, including important policy items on accreditation strategy and guidance for project developers, and – most fundamentally – no decision on the 9 financial institutions applying this time to work as partners with the GCF and no discussion of the 11 funding proposals up for approval by the board. This leaves pending nearly US$1 billion of project funding targeting 17 countries, creating delay and uncertainty, and even potentially jeopardising the implementation of some programmes on the ground.

GCF needs the private sector

Unlike many of the other public climate finance institutions, the GCF has a direct mandate to encourage and facilitate private investment in climate related activities. Its dedicated Private Sector Facility was set up to “fund and mobilise institutional investors and leverage GCF’s funds to encourage corporates to coinvest with us”.

The only possible way that funding at scale will be made available to support investment in low carbon infrastructure and business at the level necessary to meet the Paris Agreement’s 2 degree (or 1.5 degree) target is if the private sector plays the major role.

So the GCF has to get this right.

Significant private sector players are already showing interest in the potential of partnering with the GCF and, indeed, are already working with the GCF. Eight of the institutions which have been approved to receive funding directly from the GCF (which they will onlend or invest in other institutions or projects) are commercial entities, including global banks HSBC, Credit Agricole and Deutsche Bank. And out of around US$3.7 billion in GCF funding approved to date, approximately 40% will go to projects classified as private sector.

But if it hopes to continue this promising beginning, the GCF cannot continue to operate in its UN bubble and expect the private sector to adjust its behaviour to fit the fund’s norms. It has to be the other way around.

Private sector needs certainty

In the real world of global capital markets, uncertainty kills transactions. This is as true for a multinational giant as for a small local commercial bank. Lack of transparency about whether or when funding for a project will be available often makes it impossible for a developer or financial advisor to allocate resources to continue working on that project. Private sector opportunities sometimes arise quickly, but may also rapidly disappear if the turnaround time is too slow. Protracted approval processes (decisions being delayed from meeting to meeting) increase transaction costs and heighten the likelihood of the project being abandoned.

In addition to concerns about the GCF’s ability to make timely decisions, potential partners often struggle with the onerous procedure of submitting funding proposals, and have been consistently calling for clearer guidelines and benchmarks to facilitate the project development process. Unfortunately, approval of a series of key principles underlying project design (including concessionality, incremental cost and cofinancing) has also been postponed due to the breakdown of board discussions this week.

Building on business norms

In order to move forward and, in particular, to regain the confidence of the private sector in the near term, the GCF needs to demonstrate that it can function according to norms of behaviour that are understandable to the business community. At the very least, this calls for a serious rethink of its governance and decision making procedures.

The GCF is an operating entity of the financial mechanism under the UNFCCC. It does have an essential political aspect to it and it can’t operate exactly like a private sector entity. Within this construct, however, there may be scope to introduce some practices from the business world.

First, an effort to depoliticise some of the preparations for and operations of board meetings would be extremely positive. Corporate boards tend to work according to an agenda produced by management not negotiated by board members. More progress on devolving decision making away from the board and to the GCF Secretariat would also be very welcome. A corporate board usually delegates operational decisions, such as staffing arrangements, to management.

Second, a focus on allocating decisions to those experts most capable to make them would greatly aid the efficiency of both the GCF Secretariat and the board. A typical financial institution establishes a credit or investment committee, which scrutinises and approves funding proposals. The board of the institution has final oversight of the project portfolio and the funding pipeline, but does not usually take part in discussions of individual proposals.

Third, while all boards will strive to reach a consensus on key issues, sometimes unanimity of opinion is not achievable. In the business context, rules of procedure which allow one board member to block a decision against the wishes of the overwhelming majority would be viewed as unfeasible. To avoid the current situation where board deliberations end up going nowhere, the GCF must make progress on introducing alternative methods for decision making.

Urgent need for change

All participants and observers to the twentieth board meeting of the GCF acknowledge the need for some degree of change. Lennart Båge, developed country co chairman (who had the unenviable task of attempting to keep the agenda moving this time), announced that: “.. the Cochairs will reflect on this meeting, with the aspiration to ensure that our next meeting is more productive ..”

The next meeting is only three months away. A wide spectrum of private sector actors want to work with the fund and share their commercial and management expertise with the GCF. But they do need to see material progress towards greater efficiency, transparency and timeliness of decision making. Businesses take their opportunities where they can and they can’t wait for ever.

Written by: Alexandra Tracy, CMIA’s Active Private Sector Observer to the Green Climate Fund

Published in Environmental Finance 11 July 2018 http://bit.ly/EnviroFin_Jul2018