From Talking the Talk to Walking the Walk on Climate Finance
After Paris – The need to move from talk to action
The Paris Agreement reached by 194 countries at the COP21 Climate Summit in December 2015 marks a historic turning point in a 20-year conversation about how to tackle climate change. Up to this point, there have been examples of incremental progress, though the overarching policy ambition necessary to curb climate change have been slow to come. The need to act is urgent in order to keep global temperature rise to ‘well below 2 degrees C,’ the stated goal of the Paris Agreement.
How to finance the transition to a low-carbon and climate-resilient world is a challenging question, especially for developing countries, which often lack the policy and financial capacity needed to spur the necessary investment.
Since 2009, developed countries have been working to scale up climate finance for developing nations, with a goal to mobilize USD 100 billion per year from multiple sources. The good news is that investment is growing – especially in key emerging economies such as China. According to the Global Landscape of Climate Finance, 2015 saw the largest amount of climate-related investment to date, with USD 391 billion of finance flowing to mitigation and adaption globally. In the lead up to Paris, the OECD, in collaboration with CPI found that countries are well on their way to achieving this goal, with an average of USD 57 billion of mobilized climate finance flowing from developed to developing countries in 2013-14.
While progress is certainly being made, the IEA estimates that approximately USD 16.5 trillion will be required from 2015-2030 to re-orient global systems to a scenario consistent with a sub 2-degree future. The need to pick up the pace and move from talk to the most concrete of actions is what defines the post-Paris world. The challenge of bridging this gap is profound, and will require concerted efforts from private and public actors, households around the world, and civil society. It will require an understanding of the actual barriers faced by all types and classes of investors, and the use of public policies and finance to minimize these. This in turn necessitates political will, robust technical analysis, and above all, innovation.
Crowdsourcing Innovation for Climate Finance
The Global Innovation Lab for Climate Finance (The Lab) supports efforts to leverage investment flows to the developing world to speed up the transition to a low-carbon future by identifying, developing and piloting new financial instruments and public-private partnerships designed to overcome barriers, maximize impact, and attract private sector capital. The Lab crowd-sources ideas from the global climate finance community, including private and public investors, financial institutions, technical experts, and policy makers. Then, incorporating the guidance of a diverse set of advisors and external experts, the Lab develops, stress-tests, and refines the best of these ideas into innovative, instruments with financial backing for concrete pilots on the ground.
The approach is simple – solving the climate finance challenge, and addressing climate change on a broader level, will require bold collaboration and innovation that spans actors and sectors. Successful pilots can be scaled to incorporate larger investments, new investors, other sectors and geographies.
Instruments from the First Lab ‘Cycle’ which lasted one year, and concluded in mid-2015, have already generated over USD 500 million in initial funding for pilots. These instruments address a diverse set of financing challenges, including (1) making renewable energy projects in developing countries more viable by increasing access to development, construction finance, and refinancing facilities; (2) addressing currency exchange risk endemic to low-carbon infrastructure projects in developing countries; (3) insuring against underperformance risk for energy efficiency investments; and (4) partnering with agribusinesses to incentivize and support climate-resilience for farmers in their supply chains. In less than a year, several of these pilots have ‘broken ground’ and are already unlocking finance and action in key sectors.
The Lab’s Second Cycle
In January 2016, The Lab selected five new ideas, including three focused on adaptation and resilience, from out of nearly 100 concepts submitted. These ideas are currently undergoing development as Second Cycle instruments. Building off the success of the First Lab Cycle, the current set of instruments also span a wide range of systemic financing challenges related to building a low-carbon, climate-resilient economy in the developing world.
Climate-smart Financing for Smallholder Farmers is an innovative approach to bringing financial products to smallholders and building incentives to scale up climate-smart agriculture.
The Oasis Platform aims to increase the penetration of insurance coverage and improve risk management in regions most vulnerable to climate change-related catastrophes by providing a standardized, open access platform with data and modeling on risk and loss assessment.
The Water Financing Facility seeks to enable developing countries to prepare for climate-related stress on water systems by helping utilities create bankable, climate-resilient water projects that attract domestic private investors.
While small-scale renewables play an important role in the developing world, financing options for smaller projects are not well-suited to sector needs. To address this, the Small-scale Renewables Financing Facility aims to pilot two
financial products that systemically improve financing conditions for small-scale renewable energy projects.
Finally, Mobilizing Equity to Drive Energy Efficiency Investments aims to mobilize private capital at scale for energy efficiency financing in emerging economies via a tiered equity fund and a parallel equity guarantee facility; the instrument targets small and medium enterprises, which often lack the capital to invest in energy efficiency.
The current analytic phase is set to conclude in early May 2016 when Lab Advisors will meet to endorse the final instrument designs. Subsequently, The Lab will support the pilot implementation process for each instrument, moving from concepts, to action on the ground.
In addition, the success of the Global Lab has helped to build the foundation for the first regional Lab – the India Innovation Lab for Green Finance – which builds on the Global Lab model but addresses India’s unique challenges and opportunities.
Financing a low-carbon, climate-resilient world while simultaneously supporting sustainable global development is the ‘Post-Paris’ challenge. Answering this call means that key influencers and decision makers must redouble their efforts in both the private and public sectors, drawing out innovations that utilize existing capital flows supported by well-designed policy instruments, while re-imagining what is possible and bankable. The Global Innovation Lab for Climate Finance is just one part of this movement, but we hope you follow our progress as we work to finance a sustainable future.