Creative Collisions Expand the Universe of Climate Finance


You can read the background to the Climate Finance Accelerator here and a digest of the ‘real-time updates during the week here

In closing the inaugural Climate Finance Accelerator (CFA) in London on September 15, with his trademark mix of humour and thoughtfulness, UNFCCC’s Nick Nuttall compared the Paris Agreement to a concept car seen at a motor show.  “It’s breathtaking to look at,” he told the 150-strong audience of investors, bankers and country delegations, “but when you lift the bonnet, there’s no engine underneath it.”

His reference was to the need for the Paris ‘rule book’ that will be the focus of negotiations at COP 23 and make Paris run as an agreement.  But if the rule-book is the car’s engine, without a power source the engine itself can’t run.  And the power source for Paris is the money to implement the country commitments:  without this money, Paris will remain gleaming but stuck on that motor-show stand.

Nuttall was speaking to a room fairly buzzing with energy – energy that resulted, I believe, from a realisation that over the course of an intensive week, the Climate Finance Accelerator concept had, as hoped, offered a glimpse of how to bridge the biggest barrier to the financial power source for Paris:  the gulf between governments and private finance.

As one of its originators, my first descriptor for the climate finance ‘accelerator’ was a climate finance ‘collider’, as in Large Hadron Collider.  This was outvoted in branding discussions as being too ‘in your face’, but I think the notion still holds good:  that if particles that generally don’t meet are pushed together, new things will be learned (and even new particles forged).  The idea of locking people in a room for three days until they come up with some solutions to specific problems that you pose them is hardly sophisticated psychology, but in the case of theClimate Finance Accelerator, it seems to have worked.

So what new was learned and created?

(Body) Language
The Colombia team at work with BNP Paribas, Enclude and PwC

The first and simple learning point is that this is about people.  On both sides of the gulf there are people; and what’s more people of goodwill who want to move things forward.  “These bankers are actually quite nice,” one country delegate was heard to remark.

And it turns out these people can, in fact, communicate with each other after all.  “We speak different languages, that’s true, but there are dictionaries out there, and there are translators.”

Not just plain vanilla

A second key learning for many country delegations, I believe, was the realisation that “climate finance” is not just grant finance from donors.  It turns out that there are in fact many different flavours available, though some of them require a fair few ingredients and a bit of skill in the mixing.  No ice-cream parlour sells only vanilla:  when you increase the range on offer, you tend to attract many more customers … and so it goes with finance. As HSBC’s Ed Wells remarked at the beginning of the week, “The money is there, it just needs to right structures to start flowing.”  What’s more, if you get the funding model right, governments themselves can turn a (re-investable) profit.  Every public / private peso that can be arranged is a purely public peso less to find in government budgets.

Equally, for the financiers I believe there was a realisation that there is far more deal ‘pipeline’ out there than they imagined, and that this pipeline may be a bit buried but is by no means untraceable.

Anything can be fixed…

… if you have the right people working on it.  The most intriguing stories from the Climate Finance Accelerator were the instances where real-time collaboration ‘in the room’ had fixed problems that would probably have been intractable otherwise.  A complex Mexican proposal for promoting rooftop solar was re-engineered into a far more elegant (and bankable) structure.  The knowledge of a microfinance expert as to who could lead an ambitious rural microfinance push allowed the Colombian delegation to think about a multi-region commercially-oriented initiative not just stand-alone grant-based schemes.  And so on.  These problems were fixable because the right set of people to fix them had been assembled in one place.

Keep it practical

Because the Climate Finance Accelerator centred around actual transactions, not theoretical policy discussions, country delegates were able to see and hear first-hand  – especially in the project prioritisation sessions – the practical barriers that the financiers saw to making the proposals on the table fly. Conversely, financiers found a great willingness among the country teams to try to understand and fix these practical barriers, which now had a much more immediate and physical reality.  It has always been the case that an instruction manual that seems an impenetrable read in isolation quickly becomes obvious when the tool or gadget in question is in front of you.

Perseverance, meet Adaptability

I’m pretty sure there must have been a character called Perseverance in John Bunyan’s Pilgrim’s Progress.  I don’t think there was one called Adaptability.  But both characteristics need to meet if difficult projects are to succeed, as I believe the teams mutually discovered.  Deals are done through vision, tenacity and attention to detail, but they also need a virtually limitless ability to re-work and re-design to get around the (often scores) of obstacles, large and small, that lie in their way.

We need skilled mechanics under the bonnet

The aim of the Climate Finance Accelerator was to introduce a different dynamic into the interactions between governments and financiers  – at the working level where deals will actually be progressed.  We believe this objective was fulfilled, but we are also aware that what we have provided are only models and illustrations of approaches.  Although the banks are further developing some of the projects brought to London, there is still – from long experience of this kind of finance – a missing link, and that’s the skilled intermediation that will be needed – locally, on the ground – to lift the likelihood of the other transactions getting done.

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Transaction intermediation is the skilled business of taking an investment-ready project through the actual process of securing this investment, including providing it with access to the required network of appropriate investors. This kind of intermediation requires not just the technical skillsets to create financing structures and agreements.  It also involves the knowledge of who then to approach that would be most likely to invest, the network access to such investors, and finally the trust of those investors in the quality of the projects that the intermediary brings forward.  If any one of these elements is missing, the transaction will likely fail.

Every functioning market in the world needs intermediaries. In the developed world, such intermediation is practically invisible most of the time: if you buy your car insurance online, you won’t be aware of the chain of deals that have been intermediated stretching right back to the reinsurance of the risk.  Yet funders of project development have an absolute blind spot on this topic.  They will happily pay for any amount of technical assistance – like market studies or design work – but they will not pay for professional intermediation. As a result, I suspect, a large amount of their project development spend goes to waste, simply because projects, in the end, fail to find their investors because they are not professionally intermediated.

For all the utility the Climate Finance Accelerator may have provided, in the end, civil servants are there to run countries, not transactions.  It’s useful that they understand what it takes to do a deal, but they can never be expected to acquire the full technical skills, let alone the networks, of professional intermediaries.  For that, specialists are needed, and if Nick Nuttall’s Paris engine is to be built and maintained, then skilled financial mechanics need to be found and nurtured, globally and fast.

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