FEATURE: Lessons on blending finance for climate projects – Experience from the IFC and GCF
This is the second part of a two-part blog on blended finance and climate development projects by Virginie Fayolle and Serena Odianose of Acclimatise. Read part one here.
Lessons from the International Finance Corporation (IFC)
The IFC has been pioneering blended climate finance. Most IFC investments have been made on a commercial basis; however, the Global Environmental Facility (GEF), the Climate Investment Fund (CIF), and bilateral donor funds have been a major source of concessional financing for IFC projects. The outside funds are often matched by IFC resources and can be deployed as concessional loans, guarantees, equity, and grants for private sector projects that would generally not have proceeded due to market barriers.
In a recent study, the IFC reported that between 2006 and 2013, it had committed 39 investment transactions using blended finance: 15 of these transactions using guarantee instruments, 23 using debt products, and one project using equity. Nearly three quarters of these projects are investments made through local financial intermediaries, where every dollar of concessional finance to financial intermediaries has leveraged more than US$ 13.8 of investment on the ground, including US$ 9 of IFC investment that would not have occurred without such risk mitigation support.
However, it should be recognised that despite the successes of IFC’s blended finance models, there are challenges in reaching Least Developed Countries (LDCs) and Small Island Developing States (SIDs), due to a lack of sophisticated capital markets and the IFC’s mandate to respond to private sector demand with its general cap on providing more than 25 per cent of the total financing requirement. As a result of this and higher levels of private sector activity in relatively developed markets, projects tend to be located in middle-income countries.
Progress by the Green Climate Fund (GCF)
The GCF is the designated governing instrument created by the United Nations Convention on Climate Change (UNFCCC) and was established by 194 countries during the international climate change negotiations (COP 17) in Durban, South Africa. The GCF is designed to act as the operating entity of the Convention’s financial mechanism and aims to support a paradigm shift in the global response to climate change by allocating financial resources to low-emission and climate-resilient projects in developing countries. One of the key design elements of the GCF is its ambition to achieve a 50:50 allocation between adaptation and mitigation (at least 50% for adaptation for SIDS, LDCs and Africa) and ensure geographical balance and equitable distribution among countries.
The GCF has promoted blended funding through the use of four financial instruments: concessional loans, equity, grants, and guarantees that can be used through different modalities and at various stages of the financing cycle (see Table 1 below). Debt and equity instruments can help close a specific financing gap for specific projects and programmes, thus bringing more projects and programmes to fruition, while guarantees can crowd in new private sector financing from multilateral development banks, national development banks, and others.
Table 1: GCF Financial instruments
Looking at the projects and programmes approved so far by the GCF (as of October 2016), while it has achieved a balanced geographical and thematic distribution (as shown in Figures 2, 3 and 4), most of the GCF funding requested has been grant financing (%).
In addition to the major climate funds, new platforms are emerging that develop and implement innovative financing mechanisms that can help to meet the unique challenges of financing climate compatible development projects in developing countries. The Global Innovation Lab for Climate Finance (“The Global Lab”) is a platform that identifies, develops, and pilots transformative climate finance instruments. Lab instruments help to leverage public or blended finance that can drive large-scale private sector investments in mitigation and adaptation solutions in developing countries.
Looking ahead – Learning from the Global Innovation Lab for Climate Finance
Examples of these instruments that are currently being piloted include:
- Climate Investor One, which facilitates early-stage development, construction financing, and refinancing to fast-track renewable energy projects using a blend of private and public finance, and is currently being piloted in Africa and Latin America.
- Agriculture Supply Chain Adaptation Facility, which addresses small to medium-sized farmers’ lack of access to medium- to long-term finance and capacity for investments in climate resilience, through concessional loans and grant funding from donors to fund the credit enhancement and technical assistance components of the facility, and is currently being piloted in the Caribbean and Latin America.
As the success of the Lab continues to grow, new opportunities emerge to advance innovative climate finance solutions for the developing world. The Lab is currently seeking ideas for new instruments that can scale up green finance in India and Brazil.
The is the second part of a two-part blog written by Virginie Fayolle, a Senior Economist who leads climate finance activities at Acclimatise and Serena Odianose, Policy researcher at Acclimatise. Read part one here.
Photo: Dana Smillie / World Bank via Flickr