CFAS Summary: This report looks at how Bilateral Finance Institutions (BFIs) can respond to the challenge of climate finance, through innovating funding mechanisms. The report reflects on the role that BFIs could play – through grants, concessional loans, equity and debt finance and innovating instruments – to unlock the essential conundrum for achieving the needed ‘trillions of dollars’ scale of climate investment in the coming decade, in particular in zero and low carbon infrastructure. The paper therefore strives for presenting different examples of such innovative funding such as:

• Blending facilities, which aims at inter alia (i) financing projects that would otherwise not be financed through the pooling of resources and the complementary use of grants and loans, and (ii) ensuring a high leverage effect on limited grants resources.
• Support for policy development to reduce policy risk. Support comes in the form of grants that aim at supporting readiness activities or at enabling the right environment to attract large-scale funds.
• Green Credit Lines provide appropriate funding and dedicated technical support to local development or commercial banks in Developing Countries, to overcome financial and technical barriers to scaled-up investment. In doing so they also enable recipient bank to develop their own strategy and mitigate risk critical to promote the financing of green investment by the private sectors.
• Risk sharing instruments mutualise resources and risks for an investment, that would otherwise hamper the projects and programs to be ‘bankable. The financial actors sharing those risks could be public bilateral or multilateral institutions, private institutions or other types of financial actors.

The paper also looks at a range of options for the Green Climate Fund: on how to make best use of and leverage the existing capacities of a wide range of national and international development finance institutions (DFIs). In doing so, it suggests that the GCF should act as a fund providing complementary resources to those of existing financial actors, using blending mechanisms. According to the report, this makes sense because BFIs are most connected to countries institutions and strategies.

Main author: Murray Ward

Date: 2011

Found: http://www.unep.org/pdf/UNEP_Innovative_climate_finance_final.pdf

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