Co-Chair Lennart Båge presents challenges and opportunities
In 2016, developed countries committed to deliver at least $100 billion per year in climate finance for developing countries by 2020. But even this $100 billion is just a small fraction of what is needed to shift the world’s economy on a low-carbon pathway and limit the temperature increase.
Long-term risk in climate finance
According to the latest IPCC report, the 1.5 degrees pathways are projected to involve annual investment in the energy system of an average of $2.4 trillion or about 2.5% of the world’s GDP, between 2016 and 2035. Governments cannot bear this cost alone and most of it will have to come from the private sector. It is all about investment decisions and long-term risk. The private sector manages more than $210 trillion, but currently only 5% is being invested to climate finance.
Key role for the Green Climate Fund
The Green Climate Fund (GCF) has a key role for developing countries as the world’s largest dedicated climate fund and has so far received nearly $8 billion in contributions. That does not seem much compared to the huge needs for global climate finance, but GCF is channeling funds where there are few/no alternatives, and is using its resources to leverage and catalyse investment from others. Over the last few years GCF has been actively engaging with private investors working in different ways to scale up private sector investment flows for low carbon and climate resilient development. Given that more than 70% of the global GDP is generated by the private sector and that many of the jobs in developing countries are created by local sector small and medium size enterprises, it is imperative to unlock the private sector investments to tackle the climate change threats and support the local economy.
Challenges for the private sector
Even though the potential of private sector investments is immense, most of the investors face a number of similar challenges:
- The risk-return profile of climate finance projects is unclear, particularly in the case of climate adaptation. Political and regulatory uncertainty in developing countries is also an issue.
- Lack of anchor investors who could send the positive signals to the market.
- Insufficient information and awareness about climate finance projects and how to access global climate finance in developing countries.
Role of the public sector
Public sector and organizations like the Green Climate Fund have a crucial role to play helping private investors overcome these challenges. For instance:
- Bundling small scale projects into large investment vehicles helps reduce financial risks and hedge political uncertainties.
- The public sector can act as a first anchor for investment and provide a base capital, which increases certainty for private investors and boosts their confidence in the financial outlook of projects.
- The public sector can help develop financial products which reduces the risk of developing country projects investments, e.g. through concessional and long-tenor loans as well as first loss guarantees attracting long-term institutional capitals from e.g. Pension funds and Insurance companies.
- GCF can provide readiness funding to mitigate political and regulatory uncertainties.
Based on the Green Climate Fund’s experience working with the private sector, it is clear that climate change is not so much a matter of compliance for business anymore, as an area of untapped profit potential. Some of the first GCF projects involving private sector demonstrate significant potentials of the way forward for private investments in climate action.
Intervention to drive down bid prices
The Green Climate Fund is supporting a project with the European Bank for Reconstruction and Development (EBRD) in Egypt aimed at creating a new renewable energy financing framework by scaling up private sector investment into solar power. Financing of USD 154 million from GCF is unlocking private investment, and Egypt is already moving from the first phase – fixed price feed-in tariffs – to the second phase of competitive bidding through tenders. The private sector has showed a huge interest in the new investment opportunity with GCF’s intervention driving down bid prices to supply more renewable energy at lower cost.
Innovative payment solutions
In Sub-Saharan Africa, Acumen Fund and GCF have created the KawiSafi investment fund to provide equity and debt capital to local private sector companies offering low carbon energy solutions. GCF’s anchor investment in KawiSafi of USD 20 million in investment capital will help bottom of the pyramid customers access clean energy through solar lanterns, solar mini-grids and solar home systems. Traditional investors are wary of the risks, but KawiSafi is tapping innovative payment solutions like mobile pay-as-you-go that can deliver returns on investment by creating new markets for clean energy in rural, hard to reach areas. GCF’s ability to engage the local private sector is supporting them to drive the transition.
The Green Climate Fund board has just approved a funding proposal by the Agence Française de Développement (AFD) (French Development Agency) worth over $270 million which will be implemented in a number of Sub-Saharan countries including the Least Developed Countries (LDCs) and Small Island Developing States (SIDS). The project called Transforming Financial Systems for Climate will focus on on-lending to local financial institutions with concessional loans which aim to “crowd-in” a significant amount of private sector investments and also provide grants for capacity building of the local financial institutions as well as final beneficiaries.
Paris Peace Forum
This material with challenges and opportunities for the Green Climate Fund was presented on 13th November 2018 by Co-Chair Lennart Båge at the Paris Peace Forum. Editor for this article was Dr. Fredrik Ingemarson, SIFI. Co-Chair Lennart Båge is also a member of the SIFI advisory board.