New instruments chosen for climate finance pilot

28th January 2016 Kirsty Tuxford

Five new instruments to drive investment in developing countries have been chosen for development by the Global Innovation Lab for Climate Finance. Three ideas are based on enhancing climate resilience and two are mitigation-focused. The Lab selected the proposals in January, following a scoping process which tested the viability of each idea.

The Global Innovation Lab for Climate Finance is a public-private initiative made up of high-level experts in climate finance drawn from among others, the World Bank, the African Development Bank, the Inter-American Development Bank, Blackrock, Allianz and the Japan International Cooperation Agency. The Lab is designed to bring cutting-edge climate finance instruments to fruition and to drive private investment into climate change mitigation and adaptation in developing countries. Since its 2014 launch, it has helped attract more than US$500 million to fund pilot projects.

“In the Lab’s first cycle, four successful ideas were endorsed by the G7,” said Dr Barbara Buchner, Senior Director of the Climate Policy Initiative, at the Lab’s Secretariat in Venice. “For example, Climate Investor One raised its required initial funding and is now a concrete investment opportunity that can drive up to US$2 billion in private investment in renewable energy through to 2020. Energy Savings Insurance is in the process of expanding its Mexican pilot to a Latin American Facility that will guarantee energy savings throughout the region, unlocking significant investment in this area. We hope to see similar successes with the second cycle instruments as they progress in their development and eventually implementation.”

Each Lab cycle commences with an international call for ideas, to crowdsource innovative climate finance solutions from a broad scope of actors including academia, the private sector, development banks, and civil society organisations.

There are key criteria for anyone wanting to submit a project for consideration. “Lab Members assess and select ideas based on a set of overarching criteria: Is the idea innovative, including what barriers to private climate finance does the idea overcome? Is the idea actionable–does it include concrete milestones to implementation, and what implementation risks exist?” added Dr Buchner. “And finally, is the idea transformative and catalytic–what is the potential of the idea to catalyse or engage private climate finance at scale, and to be replicated across the world?”

The five chosen ideas

Imperial College, University of London and Oasis LMF (Loss Modelling Framework) have developed the Oasis Platform for Catastrophe and Climate Change Risk Assessment and Adaptation. It’s a proposal that works as an open access system that can plug-and-play data to create risk and loss information for the investment and insurance sector to increase households’ insurance coverage in Asia. The aim is to receive private finance from insurance and reinsurance companies, banks and institutional investors. “We believe our initiative has the capacity to bring confidence to invest in insurance and adaptation solutions in Asia, creating climate resilient societies,” said Tracy Irvine, Environmental Science Innovation and Communication Specialist, Imperial College.

The second idea is Climate-Smart Finance for Smallholder Farmers, which is proposed by F3 Life, which addresses the problem that smallholder farmers in Africa lack access to capital to enable them to adopt climate-smart technology and practices. The instability of the agriculture industry, due to the impact of climate change, means that financial institutions are hesitant to extend credit to these farmers due to their lack of collateral and their perceived default risk. F3 Life’s software monitors farmers’ agricultural practices and use of climate-smart technologies and gives them a credit score, which helps overcome restrictions on accessing capital.

F3 are funding their initiative through crowdfunding, NGOs and retail investors. “We see participation in the Lab as an opportunity to raise the profile of the F3 Life climate-smart credit system globally as well as further develop our system through exposure to the Lab’s network,” said CEO Mark Ellis-Jones.

Climate change is placing increased stress on water systems, and there is a catch-22 situation in that there are insufficient water projects to attract private investors, which results in difficulty for developers who wish to put bankable water projects together. The Dutch Ministry of Foreign Affairs has proposed a Water Financing Facility where water bonds would be issued and technical assistance would be offered to raise funds for investments in, and the set-up of, bankable water projects. There would be a fixed return on the bonds for private investors, and they would be available through a pooled fund, which would spread the risk. Private finance will hopefully come from venture capital, private equity, banks and institutional investors.

“By submitting this idea [to the Lab] we want to create a common understanding and awareness amongst local and international stakeholders regarding fundamental changes in national water sector financing and the establishment of bankable sector investment programs,” said Hugo de Rijke of the Dutch Ministry of Foreign Affairs.

Two proposals deal with mitigation. The first is from the Inter-American Development Bank (IDB), and their idea is to mobilise equity to drive energy efficiency investments. The bank proposed a way to overcome barriers to energy efficiency investments–a tiered equity fund that mobilises investments into small and medium enterprises and real estate, with a parallel equity guarantee facility that mobilises investments at the asset level. The hope is that the result will be the availability of private capital at scale for financing energy efficiency in emerging economies.

The International Finance Corporation (IFC) has proposed a mezzanine/discounting facility to finance renewable energy on a small scale. Typically, the problem today is that banks are resistant to offer loans for small-scale hydro and renewable energy projects due to lending margins and transaction costs. The first product IFC wants to develop is mezzanine finance for the construction phase of small renewables projects, and for more established projects, the IFC will offer a discounting facility to enable refinancing, which uses cash flows as collateral. The result should be a boost for small-scale renewable energy projects, which will act as a catalyst for local industry growth. “An endorsement of the concept by the Lab would go a long way towards eventually implementing such facilities on a larger scale,” said Reinhard Reichel, Senior Investment Officer, Renewable Energy Finance, IFC.

Working groups are now being established for each instrument, in order to lead the Instrument Development phase, due to conclude in April. The Lab Advisors will attend the Climate Action 2016 Conference on 4 May in Washington DC, to provide feedback on progress on behalf of the groups. Following this, there will be a Pilot Support phase and a final meeting in July between Lab Principals and Advisors, where endorsements for instruments will be decided upon.


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