By Neil Walmsley
This week representatives of the world’s leading economic, social and political institutions will convene in Bonn to begin their annual attempt to hammer out agreements and action plans that will avert a climate catastrophe. Over the course of two weeks, thousands of ideas, projects, research pieces and proposals will be debated and discussed, ultimately feeding into the creation of a new set of global action plans and initiatives. Billions will be pledged and committed to their delivery by donor governments and philanthropy.
The sheer scale of investment required for projects around the world that will simultaneousy reduce greenhouse gas emissions while protecting against unavoidable climate impacts dwarfs whatever can be pledged at Bonn. Massive financing will be needed from the private sector if even a fraction of the envisaged projects are to be delivered.
The global financial sector and broader private sector is increasingly aligned and committed to delivering this agenda. Many financial institutions have established dedicated funds and programmes for investing in projects that specifically address climate challenges, ranging from smaller venture capital funds that aid entrepreneurs develop new technologies, to much larger low-carbon infrastructure projects such as huge windfarms or electric public transport systems.More traditional (i.e. non-climate specific) funds are using new tools and process to take into account climate considerations when making their investment decisions, ensuring projects are designed to minimise their carbon impact and/or be as resilient to climate change as possible.
Theoretically, there should be more than enough money swilling about in the global financial system to meet global climate ambitions, several times over. Yet we are still seeing only a fraction of what is needed being invested. There is, however, one problem: Good projects. Or more precisely, good projects in the eyes of investors.
Fundamentally the problem is that the vast, vast majority of projects aimed at tackling climate change are not created with the investor in mind. This is not a criticism of the projects themselves, many of which could provide a wide range of benefits and often have quite a strong underlying business. They are usually not, however, prepared in such a way that an investor would consider ‘bankable’.
A ‘bankable’ project is one that meets certain requirements and standards that investors need to see if they are able to put money into it. These requirements and standards vary depending upon the type, size and scale of the project and the individual investor (whether a bank, private equity firm, venture capital fund, etc), but tend to involve detailed analysis of the business model, potential risk and return on investment, legal considerations and agreements, as well as a detailed business plan and financial track record of the organisation setting up the project.
Putting together a proposal that meets these requirements is no easy task, and for larger projects can take months (or even years) to prepare with the involvement of expensive consultants and advisors. The time and cost of this process increases significantly, the earlier in the project preparation life-cycle the project is in. This is well beyond the capacity and resources of many of the organisations developing these projects, such as local governments and NGOs, particularly in developing countries. As a result,many potentially fantastic projects end up being abandoned or sit in limbo indefinitely as they wait for philanthropists and donor agencies to step in and pick them up.
Over the past several years, a number of organisations and programmes have emerged specifically designed to help projects overcome these barriers and secure financing. Project Preparation Facilities (PPFs) provide support to prepare a project for investment, funding the necessary studies and providing consultancy support to create a bankable proposal for investors. The amount of upfront funding and support they put in is often only a tiny fraction of the total project cost (e.g. $250,000 – $1m on a $50m-$500m project), but can help to rapidly accelerate the deployment and financing of these projects.
Many work with specific groups, such as cities (CDIA, C40 Cities Finance Facility, Climate-KIC LoCaL programme), National and Regional Governments (PIDG) or individual organisations (Climate-KIC Demonstrator and Scaler programmes). In Mexico City, the C40 Cities Finance Facility is helping to secure $120m in financing for a fleet of 100 electric buses, helping to decarbonise the public transport sector and provide a financing structure other cities in Mexico can emulate. Climate-KIC provides funding and technical assistance to cities across Europe to help find financing solutions for key projects through their Low Carbon City Finance Lab. On adaptation, EBRD has established several financing facilities focusing on adaptation technology developments in Eastern Europe and countries such as Tajikistan, while EIB’s Natural Capital Finance Facility helps find investment for a range of ecosystem-based adaptation projects across Europe.
Most of these are funded by donors and development banks, though many also fund themselves through adding their fee into the final investment package or taking equity in the project.
As a result of the actions of these programmes, projects are being realised which would never have happened otherwise. Having been involved in creating one facility (the C40 Cities Finance Facility) and supporting the development of another (Climte-KIC LoCaL), I have seen first hand the catalytic impact these programmes have.
If the ambitions of COP23 and the Paris Agreement are to be realised, intermediary organisations are going to need to play a big role in unlocking private sector finance to pay for the necessary projects. I hope these programmes get the recognition and support they deserve, allowing them to continue their important work.
The article was originally published on Resilient Cities Finance and is shared with the author’s permission.