Uncertain Future of the Climate Investment Funds Makes Achieving Climate Finance Goals Tougher

and , June 2016

 

On June 15th and 16th members of the Joint Trust Fund Committee of the Climate Investment Funds (CIF) meet in Oaxaca, Mexico, to discuss, among other issues, the strategic direction of the fund. One topic to be discussed is the CIF’s “sunset” clause, which was conceived at the fund’s establishment and requires it to conclude its operations once a new financial architecture – now embodied by the Green Climate Fund (GCF) – is effective.

Now that the GCF is operational, some feel that the “sunset” clause should be activated. In any case, the CIF does not currently have sufficient resources to finance the projects in its pipeline or those of new pilot countries.

Contributing governments are certainly in a tough position. They are faced with the question of whether or not to re-up their financial commitment to the CIF, but have recently pledged significant resources to the GCF – over $10 billion in total – and their budgets for climate aid are under pressure as resources are diverted to address other immediate needs such as the European migration crisis.

The lack of clarity regarding the future of the CIF is having a real impact. The dearth of financial resources for the CIF and uncertainty regarding whether new resources will be made available is disrupting recipient countries’ project pipelines and delaying the development of investment plans for new CIF pilot countries. This is also creating doubt within the multilateral development banks (MDBs) regarding how much and what type of concessional finance they will have access to. This is important because of the role concessional finance plays in overcoming investment barriers and helping MDBs to mobilize internal resources to meet their climate finance commitments.

As the CIF Joint Trust Fund Committee meets this week and makes major decisions on the fund’s future direction, it is worth reflecting on what role the CIF has played within the global climate finance architecture and what unique elements it has brought to the table. A study recently published by CPI – The Role of the Climate Investment Funds in Meeting Investment Needs – can help inform this reflection. The report highlights climate-relevant investment needs and assesses the CIF’s distinctive role in bridging investment gaps compared to other multilateral climate funds.

It concludes that the CIF should be kept in operation to maintain progress towards meeting international climate finance targets, particularly while the GCF gets up to speed and in light of key temporal and structural differences that exist between the two funds. The CIF has played a particularly important role in financing climate action because of a few distinctive features. These include:

  • The CIF’s programmatic approach. In partnership with the MDBs – the CIF’s implementing entities – the fund involves recipient countries’ private and public stakeholders in the development and implementation of policy reforms and investments aligned with countries’ climate strategies. It starts with countries being informed of the indicative amount of resources they are eligible for, followed by the development and endorsement of the investment plans and finally approval of projects. This approach, which has provided a certain level of predictability to both the recipients and implementing partners, represents a role model for the development and implementation of countries’ Intended National Determined Contributions (INDCs). Translating INDCs into concrete investments will similarly require the mobilization of multiple stakeholders under coherent strategic investment plans and the development of supportive policy and governance frameworks.
  • The range of financial instruments available through the CIF and the fund’s risk appetite. Although some have yet to be fully utilized, the range of financial instruments offered by the CIF has proven to be particularly well-suited to foster the piloting of first-of-a-kind approaches and business models, and to take on market risks that others are not willing to take. A survey of developing countries and their climate finance priorities indicates that flexibility in financing terms and types of financial instruments provided is of “critical” importance to advance climate objectives.
  • The CIF’s focus on private sector engagement in mitigation, forestry and adaptation. The CIF has allocated more finance to drive private sector investment in these sectors than any other multilateral climate fund. It has also been the first to develop dedicated approaches to achieve this end, such as the private sector set-asides for forestry and adaptation, and is one of the only multilateral climate funds that offer concessional loans for these activities, as opposed to just grants. Building on this experience, the CIF holds the potential to further enhance private sector engagement in these areas going forward.

The CIF has experience and a functional structure in place, which can help to maintain momentum and bridge major climate investment gaps. Other climate funds have notable strengths, but do not necessarily offer the same capabilities as the CIF.

While the establishment of the GCF is intended to fill investment gaps, questions remain regarding the extent to which the fund will be able to deliver the scale and type of support recipient countries need in the short to medium-term as it gets up to speed.

As decision makers shape the international climate finance architecture and make choices about which funds and approaches they choose to support, they should consider the unique and positive features of existing funding mechanisms and how these features can help effectively address countries’ current and future investment needs.

Given the real scarcity of resources available, there is no easy answer. If they decide to keep the CIF alive, it may be worth exploring and taking decisions on alternative funding modalities to maintain at least certain elements of the CIF operational and mitigate a potential loss in the momentum it has created.

 

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