Private Sector Report from GCF B.28: The Good, the Bad and the Ugly

Lifting the title of the 1966 Italian epic spaghetti Western film, here’s a report on the good, the bad, and the ugly at what went down at GCF B.28.

This report was partly sparked by seeing that the U.S. is back in business. With a new ambitious international climate finance plan and updated NDC, President Biden’s Leaders Summit on Climate Change ignited a momentum for countries to ramp up new climate commitments and reinforced the centrality of the 1.5°C limit in the Paris Agreement as a global goal.

U.S climate envoy John Kerry spoke at an event hosted by the Green Climate Fund (GCF) and reported that the U.S. is looking to pledge about $1.2 billion to the fund in the current budget cycle, a welcome change after more than four years of no U.S. contributions to the flagship UN climate fund.

However, I couldn’t help but reflect on what happened at the last GCF Board meeting. It was GCF’s twenty-eighth board meeting (B.28) and held virtually from 16-19 March 2020. I participated as Active Private Sector Observer (APSO), which means that I sit in the board room and provide direct private sector expertise and insight to board decision making. The APSO’s role is to provide a voice for other Private Sector Observers and best practices of the private sector in general.

There’s a mismatch between the vision of the GCF and the operationalisation of the institution for private sector participation.

The Good
The good news is that the board approved all 15 new funding proposals for projects seeking USD 1.2 billion in GCF funding. There was a mix of projects with Asia-Pacific and Africa representing the lion’s share of projects.

One project to note is SAP021 Community-based Landscape Management for Enhanced Climate Resilience and Reduction of Deforestation in Critical Watersheds for $10m by Accredited Entity (AE) JICA (Japan International Cooperation Agency). The project in Timor-Leste, both a Least Developed Country (LDC) and a Small Island Developing State (SIDS), are two priority beneficiary groups of the GCF. Overall, ten of the funding proposals either wholly or partly targeted LDCs, SIDS or African States, totalling USD 651.1 million, and accounting for 54% of the total GCF funding allocated at B.28.

From a market perspective, what is innovative about SAP021 is that the exit strategy includes introducing private investments and incentive mechanisms by enhancing carbon offsetting schemes designed to support farmers in their reforestation activities. In this way, farmers could receive direct incentives for their continuous maintenance and protection of the planted trees and this cross-cutting project provides measures for mitigation and adaptation through alternative livelihood means to improve beneficiaries climate resilience.

From the private sector, the Green Growth Equity Fund (FP164) is a USD 137 million private-sector project presented by FMO, a Dutch development bank structured as a bilateral private-sector international financial institution. The joint UK-India GGEF is a climate fund, managed by EverSource Capital (a joint venture between Everstone Capital and Lightsource BP founded in 2018), focused on mobilising significant volumes of long-term institutional capital (patient capital) into the Indian green growth sector through a distinctive investing strategy of rapidly scalable, green and sustainable businesses.

These projects bring the total number of projects in the GCF portfolio up to 173. GCF committed funding is now at USD 8.4 billion, with a total value (including co-finance from all sources) of the GCF portfolio of USD 30.3 billion of approved projects and programmes.

The Bad

Only one of the 15 funding proposals at B.28 was from the private sector. That’s just 11% and represents an ever reducing share of private sector focused projects and equity, or “skin in the game” of climate finance in developing countries. That, quite frankly, is bad.

One of the GCF’s four priorities, as found in their Updated Strategic Plan, adopted at B.27 in November 2020, is Catalysing private sector finance at scale, recognising the crucial role that private sector mobilisation needs to play in the global shift of financial flows needed to attain the Paris Agreement’s objectives, which the GCF was set up to support. The tokenism to private sector finance, of approving only one private-sector project at B.28, does not set the pace necessary to meet these objectives, nor to support the $100bn climate finance yearly target set by the international community.

The level of private sector finance and inclusion in the GCF portfolio remains low, and the number of projects presented to the board (which happens three times a year) continues to decrease. At the GCF board meeting in February 2019 (B.22), the private sector represented 40% of the GCF portfolio. Six Board meetings later, the private sector now represents only 33% of the total number of projects in the GCF Portfolio. In two short years, private sector participation in the GCF portfolio decreased by 7%, even as the GCF adopted a target to increase private sector projects at B27. The GCF is a growing public sector club.

Also, and somewhat puzzlingly, a new agenda was shared on Day 2. Low and behold, even though it goes against the GCF’s operating procedures, the recruitment for a new Head of the Independent Evaluation Unit (IEU) was on it; this item wasn’t on the original agenda.

Governance is an issue that has handicapped the GCF in past years, and seldom as blatantly as it was at B28: a matter as simple as the meeting’s agenda was subject to 3 different iterations before the meeting even opened, and the Board spent its precious time – an entire day of meeting out of the four scheduled – deciding on a final version. A similar issue had occurred in 2018, where B20 saw little more than funding approved as the Board spent its entire meeting arguing over the agenda instead of discussing policies needed to maximise the GCF’s impact and encourage partnerships, including with the private sector.

At B28, the final agenda removed a number of long-awaited policy items, such as the Update of the Simplified Approval Process, meant to facilitate access to finance for small or low-risk projects, or the Updated Accreditation Framework which includes a much awaited Project-Specific Accreditation Approach, helping prospective GCF partners bid for funding for a specific project without the long accreditation delays, and included a discussion on the selection process for the head of the Independent Evaluation Unit (a position vacant for over 6 months).

Recruitment at the GCF has been another long-standing issue, which directly affects Private Sector engagement: we are still awaiting a new Director of the Private Sector Facility (PSF) as the previous one left over a year ago, in January 2020.  Despite efforts to recruit, the vacancy remains, and Tony Clamp continues to serve as interim Director of the PSF. Sixteen months without an appointed new director, and over six months without a new head of its IEU, concerns private sector developments at the GCF. With no new PSF Director, a string of recent departures from the PSF and wider governance issues as demonstrated at B28, we are concerned that the GCF telling us that the private sector is a priority for them is frankly just lip service. From conversations with numerous private sector players, the feeling is that the GCF Secretariat is also held back by increasingly ugly politics within the GCF Board.

That’s bad because the private sector has got the expertise, willingness, and cash to invest, but we can’t if we don’t have access and remain marginalised. Governments don’t have enough money to finance the climate transition alone. Crowding in private sector capital is critical to meet the objectives of the Paris Agreement. The GCF is a financial mechanism of the COP. Yet, the private sector is floundering at this iconic institution and at the most critical time in history to engage and leverage private capital to address the climate crisis we face.

The Ugly

At the Climate Markets & Investment Association, we’ve followed and participated in GCF activities since the fund’s inception. The governance of the fund, or rather continued lack of efficient governance, is of grave concern for effective risk management, for the private sector and donors alike.

The GCF is the world’s largest climate fund, the centrepiece for a commitment to mobilise USD 100 billion a year in climate finance, and is consistently experiencing strategic political blocking of the approval of GCF policy documents from a small group of developing country board members (consistently the same culprits).

In the first fifteen months of the GCF’s four year replenishment, we have seen only four policies approved, there are 46 outstanding, a large number of which are critical to set out the Fund’s ambition, processes, and partnership criteria for public and private partners. The policies and procedures to be agreed at B.28 were primarily designed to increase the Secretariat’s efficiency and effectiveness and increase the approval of funding proposals on a rolling basis, and included items that have been discussed at lengths for years now – begging the question as to why they have not been adopted to date.

One such policy, critical for private sector participation and co-financing of GCF activities, is the drafted new ‘Integrated Results Management Framework’ (IRMF). The fund has matured, and it is the board’s fiduciary duty to update the way the GCF measures performance and manages results. The IRMF, meant to underpin the Fund’s Updated Strategic Plan for its replenishment, is intended to supersede the original Results Management Framework (RMF) decided at B.07 and the Performance Measurement Framework (PMF) at B.08; both decisions occurred in 2014. That’s seven years ago when the fund was getting started. In fact, before the GCF had actually ever agreed to fund any proposals. The first projects were approved at B.11 in November 2015. You see where I’m going with this, right?

The RMF and PMF were cobbled together before the GCF actually got projects off the ground and is no longer fit for purpose. Any private sector fund manager would have been promptly sacked for refusing to update critical internal systems for seven years. Yet, the board negligently, again, refused at B.28 to approve a new Integrated Results Management Framework (IRMF), blocked by some developing country board members saying, “this IRMF is really complex”. Yes, indeed. Creating an integrated results management framework for a fund with now 173 projects being operationalised across 117 different countries, some in highly vulnerable states and others in political hotspots, is complex.  Risk management, measuring performance and managing the results of an $8.4 billion fund like the GCF is diverse but not impossible. And while it may be easier for large, private entities to understand the IRMF, support was proposed for smaller actors such as direct access entities, with the Secretariat meant to provide time and resources (over $12m) to help with its implementation, alongside thorough guidance documentation to be prepared.

The board has a duty of care to provide the Secretariat with the necessary tools required, yet they failed miserably by not agreeing to a new framework, even as the GCF-1 replenishment is well underway. A small group of developing country board members insisted on knowing exactly what the accompanied Handbook, designed for Accredited Entities (AEs) to use to report on their project activities, would have in it. Alternate Board member Wael Aboul-Magd from the Ministry of Foreign Affairs Egypt even went so far as to insist on reading and approving the Handbook before agreeing to the new IRMF. The Handbook isn’t written, obviously – why write a handbook if you don’t have board approval to start on a new framework? And once it is written – if the Board isn’t able to agree an agenda for its meetings, should it really spend its precious time discussing the intricacies of explanatory documents prepared by a Secretariat that is set up, staffed and paid to do just this? Furthermore, nefarious arguments of ‘it’s complex’ so we can’t decide to actually advance the functioning of the GCF stand up like straw men when put next to all the efforts that the Secretariat has put into consulting with the GCF’s Board and partners, and the proposed implementation support.

Norwegian board member Hans-Olav Ibrekk insisted on finding compromise stating, “we have a duty to deliver” on policies to increase the efficiency and effectiveness of the GCF.

Yet it soon became apparent that what some developing board members want is just to approve projects while kicking policy to the side, as evidenced when Alternate Board Member Ali Gholampour from Iran pushed back on this duty and stated that “the most important items (on the agenda) are the funding proposals and accreditation proposals.”

Swedish Board member Lars Roth’s rebuttal to this hollow argument pointed out that the IRMF was submitted to the board since B.19 (February 2018), that there are 50+ policy and procedural documents that have been waiting for decisions for years and that they would “probably be mouldy by now if they were cheese!”.

Developing countries should consider taking a closer look at their board members serving at the GCF. How can they continue to justify refusing to make policy decisions that would speed up and increase funding to projects and/ or programmes in their respective countries? As Lars Roth from Sweden interjected, “policies are not flashy toys to please the developed countries.”

The Board seemed to be going in the right direction at B.24, when it approved a streamlined, 4-year workplan designed to implement an efficient policy cycle based on learning, evaluation and improved policies, which would allow the GCF to speed up access and delivery by clarifying to its partners how it is set up. Far from taking away from funding decisions, closing the policy gaps highlighted in the workplan would help increase the impact and efficiency of funding for developing countries, including by attracting more private sector engagement locally.

Furthermore, having indicators that are not fit-for-purpose and missing metrics to measure GCF results risks compromising future donor funds as well as wider scale mobilisation of funding, especially private sector. We will struggle to make a case for engagement with the GCF if there are no tangible results to identify. What got the GCF to this point, and vague targets to “significantly increase mobilized private sector finance”, without concrete policy updates just isn’t good enough for GCF-1.  This divisive situation risks compromising funding in the underfunded challenging categories where donor funding could make an impact. It’s a blind spot that some developing country board members haven’t quite thought through.

Board members have a duty and responsibility as directors at the GCF to act in the fund’s best interest. At the same time, they also have a duty to the countries and communities they serve. Blocking policies that increase the fund’s transparency and efficiency, such as the IRMF, the updated accreditation framework or the simplified approval process, is negligent as it continues to leave the GCF’s burgeoning portfolio exposed to compounded risks that aren’t measured, managed, or tracked at the portfolio level appropriately, prevents the GCF from further developing its partnership network, and delays the implementation of impactful programmes on the ground. This is of particular concern given the vulnerable countries of operation of the fund.

Furthermore, the continued lack of policy decisions at each subsequent board meeting adds up and is gravely impacting operational progress and the Secretariat’s ability to do its job well, and attract much needed investment from public and private sources to maximise its impact in developing countries.

The world is watching, and the private sector is ready to walk out

The world, and particularly the private sector, is watching the GCF. Good governance is of critical importance to the private sector. Issues such as these policy fights, or postponing the accreditation of a major Japanese bank ready to commit to ambitious portfolio targets in line with the Paris Agreement, have a detrimental impact on the Fund’s credibility. The governance demonstrated by the board is dismal. Many policy items (accreditation, evaluation, concessionality, incremental cost, programmatic approaches), are stuck in an endless limbo of consultations that never go anywhere, filibustering and obstructionist tactics are consistently employed by a small group of developing countries to the detriment of all. Such policies are critical for private sector buy-in, would streamline the fund’s work, create greater efficiency, and attract private sector interest at scale.

Businesses care about ESG (Environmental, Social, and Governance) indicators. The G is essential. The lack of focus on getting governance right in the GCF board makes it difficult to make the private sector’s case: that the GCF is worthy of their time, attention, and money. These lack of policy decisions are clear indicators of a dysfunctional institution and may spell the beginning of the end of meaningful private sector engagement with the Green Climate Fund.

Written by: Margaret-Ann Splawn, Active Private Sector Observer at the Green Climate Fund and Executive Director of the Climate Markets & Investment Association