Green Climate Fund: a message to the Board. Unlocking private sector finance: Can the GCF rise to the challenge?

Green Climate Fund: a message to the Board. Unlocking private sector finance: Can the GCF rise to the challenge?

By Virginie Fayolle & Caroline Fouvet

The Green Climate Fund (GCF), the world’s largest dedicated climate fund endowed with US$10 billion, is mandated to catalyse a “paradigm shift” in the global response to climate change. It aims to pave the way for a climate resilient and low-carbon, global economy. Delivering a paradigm shift at scale cannot be delivered without bringing on board the private sector, in particular the local actors. However, its portfolio is currently dominated by conventional projects funded by multilateral agencies, with an overwhelming majority from the United Nations Development Programme (UNDP). Little progress has been made in engaging the private sector on adaptation. Its private sector focused portfolio is mostly composed of mitigation projects. Excessive red tape, understaffed teams and confusing application guidelines are also acting as barriers to effective private sector engagement. The challenge of mobilising climate finance at scale requires that the GCF reinvents itself. Under a new leadership, will 2017 be the year that the GCF rises to the challenge?

Climate change needs cannot be met with public finance alone, the cost of mitigating and adapting to climate change is simply too high

A recent project in Bangladesh funded by the Climate and Development Knowledge Network(CDKN), and delivered by a team made up of Acclimatise, the International Institute for Environment and Development (IIED) and the International Centre for Climate Change and Development (ICCCAD), identified the opportunities to engage the Bangladeshi private sector to access the GCF.

The Bangladesh Intended Nationally Determined Contributions (INDC) indicate that the national climate finance needs are approximately $69bn between 2015 and 2030, including $42bn for adaptation and $27bn for mitigation.[i] Given the public budgetary constraints and the high costs, mobilising the private sector is essential to scale up existing investments in climate change development initiatives to meet the INDC targets. The private sector in Bangladesh provides most of the capital investment. In 2010, it accounted for 93% of Gross Domestic Product (GDP), 81% of total investment, 94% of consumption expenditure, and 80% of domestic credit.[ii] We can see similar situations in most countries. It is the private sector that meets most of the needs and services required by a country’s citizens.

The GCF has a clear mandate to engage with private sector

The Private Sector Facility (PSF), the private-sector arm of the GCF, was set up to maximise private sector engagement to provide transformational solutions and catalyse private finance, through two alternative mechanisms. The first is aimed at institutional investing, while the second focusses on micro, small and medium-sized enterprises (MSMEs). The former aims to mobilise funds at scale from institutional investors such as commercial banks, investment funds, insurance companies, pension funds and sovereign wealth funds. The latter uses public finance to work with local MSMEs – to unlock innovative solutions for tackling climate change, particularly on adaptation.

Limited demand for private sector engagement

Approval by a country’s National Designated Authority (NDA) or Focal Point (FP) is required to undertake the accreditation process, as well as to submit a proposal to the GCF Board. The project undertaken by the Acclimatise-IIED-ICCCAD team in Bangladesh has shown that much awareness-raising is needed to address the tensions between climate and commercial objectives. This is often linked to limited capacities and awareness amongst NDAs and FPs, which are often the only ‘salesmen’ of the GCF in country. The PSF should invest more time and effort in sensitising NDAs and FPs on the role of the domestic private sector, including local financial intermediaries, in contributing to the transformative change required to tackle climate change.

In addition, although direct access to funding from domestic private sector is a top priority for the GCF, reality does not reflect the ambition

Becoming accredited for direct access is a long and difficult process, taking nine months on average, while in many cases it takes longer, depending on the size, scope and level of risk. This highly complex and time consuming accreditation process is alien to the business models in operation in many countries. Businesses are put off by transaction costs which are difficult to justify when set against the likelihood of securing funding from the GCF. It comes as little surprise that the GCF has seen limited interest from domestic private companies.

 

The GCF needs to start speaking the language of the private sector:

Last, but not least, it is now obvious that the cumbersome GCF project procedures and requirements must be simplified and adapted to be less time and resource consuming. Private sector companies find themselves faced with complex jargon which they do not use or understand. The processes are discouraging, expensive and inappropriate to meet the needs of the private sector. A streamlined application process for micro-scale projects (less than USD 10 million) with less onerous due diligence is required, especially because it is often the project size direct access entities are accredited for (including private ones).

If the GCF is genuine in its desire to work with the private sector, then it must develop a ‘fit for purpose’ accreditation and project approval process specifically designed for business. We need more than a ‘Band-Aid approach’, something more radical is required. Only by drawing on its experience to date, and rethinking its approach to accreditation, project approval and engagement with NDAs and FPs, can the GCF hope to mobilise the domestic private sector and unlock home-grown private finance. As the 16th GCF Board meeting will be commencing on Tuesday 4th April, it is time for lessons to be learned and action to be taken.

_______________________________________

Authors:

The blog is written by Virginie Fayolle, a Senior Consultant who leads climate finance activities at Acclimatise and Caroline Fouvet, a Researcher at Acclimatise.


[i] World Bank (2011). The Cost of Adapting to Extreme Weather Events in a Changing Climate. Washington: World Bank.

[ii] Asian Development Bank (ADB) (2010). Bangladesh Private Sector Assessment. Dhaka: Asian Development Bank Publishing.


Cover photo by Robert Montalvo (CC by 2.0).

About the Author

Leave a Reply