This is a digest of the ‘real-time’ articles published by shared learning expert Nicola Millson during the CFA.
Day 1 starts immediately below, or click on one of these links to be taken straight to the corresponding day
Thoughts and themes from Day 1 of the Climate Finance Accelerator
On Monday,11th September, above the flickering red and green signs of company stock at the London Stock Exchange, appeared a new symbol: “Climate Finance Accelerator”.
This sign, in this context, is a strong signal of a movement gathering momentum to shift countries and companies towards a low carbon, sustainable economy. It marked the launch of the first Climate Finance Accelerator, a bold initiative bringing together countries and financers to co-develop plans that can help counties transform their economies to mitigate and adapt to climate change.
Country delegations from Nigeria, Mexico, Columbia and Vietnam have been teamed up with London based financial experts and development banks to co-develop detailed investment plans for bankable projects in an intensive 5-day process. The CFA is the brainchild of serial climate change-makers Ian Callaghan and Tessa Tenant and was set-up together with PWC and Riccardo. It provides a structure to help countries attract the finance needed to meet the climate targets they set out in the Paris Agreement.
One can understand why this is attractive to the private sector, once the sheer scale of the finance gap becomes apparent – Sir Roger Gifford, speaking this morning, put the need at $90trillion. Mexico alone is looking for more than $100bn by 2030. Countries have already committed massive budgets and are looking to the sector for smart financing arrangements for further billions.
This mini-blog will follow the teams over the next few days and highlight some of the emerging themes, resources and ideas coming through that may be useful for others working in similar areas.
A few themes that emerged today, including:
The power of multi-stakeholder dialogue
Nanno Kleiterp, development financier, said “it’s all about learning to understand each other’s language”. Hans Verholme, supporting the Nigerian delegation, mentioned “It’s about merging conversations at national and international level”. The Mexico delegation, which had representation from Government, local banks and the guild of taxicabs, noted that by involving diverse stakeholders CFA-inspired conversations had already significantly progressed the agenda.
Want to learn more about what goes on at CFA17? Sign up for our ‘NDC Financing Made Easy‘ webinar, which will expand on the outcomes and teachings.
Similarity in sector focus
Of interest is the similar focus areas across counties; transport (specifically, electrification and shift from private to public modes), energy (implementation of renewable and efficiency measures) and agriculture (including smart agriculture and land-use shifts). This offers opportunities to learn from existing projects and for collaboration, knowledge-sharing and replication.
The management of risk
The CFA initiative removes the information asymmetry that raises the price on projects by making opportunities more transparent to the finance community in a language they understand. It also allows them to weigh up endogenous and exogenous risks and develop blended and specific solutions to address each of these. Ultimately this will (as Michael Lewis from Deutsche Bank pointed out), lead to suites of new products from these institutions. It is also noted that part of the bigger transformational journey will need to include insurance companies. A Government led initiative, like the Green Investment Bank, supports increased market confidence by showing intention, creating focus and offering first capital.
Link to development
As Nigeria said in their opening statement today “Climate and development are inextricably linked”. Climate projects have multiple co-benefits that make them attractive to counties. In the UK 430 000 people are already employed in the green energy sector and it is growing at more than 12% p.a. For Nigeria, the opportunity to create new value chains in agriculture will support food security and lower cost of imported food. All of the counties mentioned the projects discussed as an opportunity to increase access to energy and alleviate poverty.
A wide range of creative finance structures and solutions are already deployed
These are very diverse and include: green bonds, Green Investment Bank (UK), Green Investment Bank (Connecticut), Green Growth Fund, Denmark Climate Fund, charges on electric bills, cap ‘n trade, carbon credit, Climate Investor 1 Fund, and government guarantees. They all offer case studies for countries and finance professionals to learn from.
Finance is not the silver bullet
While this was listed as the most important barrier for countries to move forward with their plans, other factors that need to be addressed include: in country capability development, ensuring strong governance and legal frameworks and community engagement.
A great start! Ed Wells, of HSBC, said today that “the money is there. If we can create the structures, it will flow”. Today (Tuesday) we start in earnest creating those structures, with the country teams working at different banks on an immersive ‘deep dive’ into enabling environments and how to prioritise projects.
Day 2: Developing solutions to contextual challenges
Today country delegates were paired with experts from international banks to discuss the enabling environment within each country involved. This was in order to understand which projects to prioritise and what financing mechanisms would be most appropriate. This technical deep dive session took a sector by sector focus to explore barriers to financial access and potential solutions.
All change happens in context and today’s process enabled finance participants to better understand the specific market conditions in each country, discussing policy and regulation, financial and economic, technical and market, social and cultural factors in detail. One delegate said that her views of emerging market opportunity had shifted because she’d realised that for the country she was involved with climate change was a very live issue and finding a solution is viewed as a necessity. This meant that engagement with both government officials dealing with extreme weather conditions and communities’ dealing with livelihood loss was easier and faster, than in other, more developed and resilient countries.
The afternoon plenary was opened by Dr Daniel Klier from HSBC, who heads up both strategy and climate finance for the bank. His compelling presentation outlined the gap the Accelerator is here to fill – pointing out that, based on HSBC research: 97% of investors want to increase their climate related investments, yet the market was viewed as ‘shallow and illiquid’, with a lack of clear definition on climate investment or transparency of opportunities. He stressed that the finance community has a role to play in creating liquid markets through standardisation, working closely with transition clients to reduce risk and in improving transparency through better data and disclosure.
A few cross-cutting themes included:
Developing a strong, diverse narrative
Part of the discussion across the groups centered on how to create a narrative to maximise the benefits and impact of investments and create access to more sources of finance. An example was how to finance fresh food value chains in Nigeria – to focus on strengthening local value chains for better production to create jobs, resilience, and shift from import dependency. The tomato crop alone has a deficit of 1.2m tonnes that is created by under-production, spoilage and lack of adequate distribution. This is an opportunity for the economy that could support climate-smart agriculture and local livelihoods.
Finding solutions outside current definitions of bankable climate projects
All the teams noted that it was harder to work on agriculture than on transport and energy – yet this sector was vital for the transformation of these economies both because of the high climate impact and because of the co-benefits in livelihood and community development. Agriculture initiatives engage rural populations and support political stability. It was noted that taking a regional, portfolio approach might allow for insurance which would lower risk and make projects more attractive to finance.
A similar question arose on how to best package and then measure smaller energy efficiency projects – vital for the transformation – for financing.
Learning from each other
While there are nuances at sector level in each country, the similarities of the challenges faced allows for cross-pollination of ideas and sharing of precedent and practice. A call was made for an ongoing platform to be created to support countries in sharing experience.
Nigeria was paired with Deutschebank. The team developed a set of criteria to evaluate projects based on a detailed discussion of enabling environment. These included: having generation and distribution embedded in the community, developing clusters below 1MW to side-step time consuming regulation, ensuring developers and project leads have strong track records and focussing on smart models to collect money. A delegate from the country said a key insight for him was to how to approach and set up investments to better protect investor money. Nigeria is focussing on 3 mini-grid projects which will engage multiple communities.
Mexico worked with a team from HSBC. Looking at the transport sector, they expressed the need for supportive policy at all levels of government. They used precedents internally and from other countries, particularly Bogota in Columbia, to learn how to transform transport. Insights included exploring the opportunity for electro-mobility working firstly with taxis and distributing subsidies for a shift to electro-mobility directly to the end-user. However, there are still many questions on how to incentivise the shift, access best practice and technical assistance, invest into technology – particularly software required, develop T’s and C’s for fleet renewal and leverage international pressure to support the transformation.
A similar dialogue in the Mexico team on the energy sector raised questions on how to fill capability gaps, create working renewable systems and overcome “oil inertia” in culture and values. A delegate noted that a recurrent problem of land rights could be overcome through focussing on cash flow guarantees.
The Columbia team, working with BNP Paribus took a systems approach to the projects they set-out. This meant looking to expand large, bankable projects to incorporate other, smaller projects that were less easily financed but vital to the transformation of sectors. They looked, for example, at how to incorporate the development of bike lanes (which are hard to finance) with the larger metro development project to enable a complete transport system. A question they worked with was how to access funding not only for the project but to address the enabling conditions to better make the project work.
The day closed at the Crystal Exhibition on Sustainable Cities with inspiring talks from Pete Daw of Siemans and Matthew Scott from the Bank of England with insights on crowding in private finance and creating orderly transitions.
Day 3 is about priorities and we will dive deeper into the opportunities.
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Days 3 and 4: Navigating the obstacles
Days 3 and 4 of the innovative Climate Finance Accelerator, brought countries and financiers together to co-create solutions to meet climate commitments. This is the third in this series, following the process and highlighting insights from the day.
“I’m learning to be flexible”, said a senior country delegate today, “to get on board and not give up – to jump, to hide, to move around obstacles – make it happen, and keep going until it’s done”.
All participants are showing entrepreneurial grit and determination as they begin to align agendas, reframe projects as bankable solutions and develop workarounds to challenging contexts.
Wednesday’s plenary discussion focussed on four issues:
Aligning interests, priorities, and ways of working
Policy-makers and financiers have different mandates, related accountabilities and ways of operating. As one person pointed out “it’s like getting people speaking only Spanish to understand those speaking only Chinese”.
This is further complicated by the fact that within government institutions and across different parts of the finance community objectives differ and ‘green’ and ‘climate’ are understood differently.
A delegate from the public sector spoke of this insight: behind every question asked by the finance expert was a set of measures and the answer given is rated objectively in terms of commercial return. Once this was understood and the questions and underpinning framework made clear, the projects could be better framed against these terms.
A discussion on linking hard currency to local cash flow helped another group realise the value of local banks to fund local solutions. This group pointed out that even if there is good dialogue, it’s important not to lose focus on the end goals, the results needed to get to the best solution for end-beneficiaries, and not be subverted to a particular party’s agenda.
A bemused banker spoke of trying to get a delegation to vote on prioritising projects – only to realise that they operate on consensus. Not only are people ‘speaking different languages’, often they don’t realise different cultures exist. However, it was acknowledged that “No single person or entity has all the knowledge needed to complete a deal. Everyone should recognise the value of pooling knowledge”.
Scoping the opportunity
The discussion within the groups looked at how to understand the opportunity beyond financing a single project to: extend impact (e.g. by taking a regional view), leverage grant funding (by taking a longer term view of finance needs) and find finance for joined up solutions that address the problem in its entirety.
For some of the policy-makers, it was important to stretch projects to meet the scale of their ambition to maximise impact on NDC’s, and then work out how to finance this project. This meant understanding other sources of capital beyond project finance e.g. local funding, guarantees, etc.
A frustration was “how green is green enough?” In many cases funding is needed for both the transition (e.g. LPG) not just destination (e.g. renewable) in order to shift systems and this was not always aligned to funding mandates from DFIs.
Most funders are focussed on commercial returns from specific projects. Sometimes it was important to understand the value chain and the context for a particular project.. often this understanding enhances outcomes and returns in unexpected ways. All this costs money and investment of time and resource and the need for capacity-building. A significant amount of work is required in order to find the data required to get funding. Time is also required to engage all stakeholders – no matter how brilliant the projects. Where policy changes are required, work must be done to get support for opportunities through multiple government departments, especially where no single policy champion exists. There is a potential role for Development Banks and Foundations to fill these technical assistance gaps.
“Oiling the wheels”
Doing a deal is easier where clear policy signals exist that welcome the private sector and any investment made is respected and protected.
Further, it is easier to move projects forward where early success stories or precedents from other places can be shared to create an evidence base against relevant metrics (e.g. number of jobs) for the change.
And finally, there is a major need for specialist financial intermediation – people who have the structuring skills and investor networks to help project sponsors meet the needs and objectives of investors and get the deals done. In many markets this is not available except for very large projects and at high cost. “Lower end” intermediaries need to be developed both in number and capacity, and this will probably require concessional funding.
Day 5: Financing the Future
On Friday, Government delegations from Nigeria, Colombia, and Mexico presented their climate finance propositions to a diverse group of investors, at the close of the week-long Climate Finance Accelerator.
These engaging read-outs of their learnings marked the culmination of 5 intense days where country delegations worked alongside the finance community to test and develop climate finance plans. The delegations were praised by Aziz Mekouar, from the Moroccan COP Presidency, for “showcasing leadership and forward thinking”, by taking part in this first Accelerator. The delegates themselves showed remarkable progress and cohesion – remarking on how impressed they were with the commitment of the financiers to supporting them in developing bankable pipeline.
The climate imperative for all stakeholders
Private sector, Governments and NGO’s reiterated that there is no alternative to action on climate change. Steve Waygood, our host from Aviva, spoke of climate change as a business imperative with Aviva committing to invest £500m annually in low-carbon infrastructure projects and actively diversifying out companies that are not responding to the climate agenda. Mr. Mekouar set the bar high “We shouldn’t speak of climate finance”, he said “all finance needs have a component of climate.”
The countries presented exciting opportunities but showed that there is no ‘cookie-cutter’ approach to financing, even across the same sectors, as each country’s context differed.
Miguel Angel Gomez from the Columbia delegation had three key messages for his audience: Columbia has ambitious goals, the institutions necessary to deliver these goals are in place and there are bankable projects underpinning them. He presented a sustainable mobility plan for Bogota that, using the proposed Metro as the core, creates an extended proposition to increase climate impact by integrating with other modes of transport such as cycling. The $4bn capex required is proposed to be funded by a mix of trade finance and green bonds. Columbia overcame the issue of fragmented finance requirements in both energy efficiency and agriculture by proposing an ESCO structure and Climate Smart Ag fund, respectively, that would each aggregate smaller projects into more attractive / “mainstream” investments size-wise. The ag fund was worked out during the course of the CFA as the country delegation and financiers from BNP Paribas and Enclude looked for ways to move away from small, single, idiosyncratic projects likely to be dependent on grants, to more commercially sustainable structures. Colombia also identified $ several billion of further NDC related projects requiring finance, in just the transport, energy and agriculture sectors.
Giesela Meindez and Daniel Chacon-Airaya presented on behalf of the Mexico delegation. They focussed on energy and transport, which together make up 50% of Mexico’s carbon emissions. An e-taxi pilot project to convert 2700 taxis in Mexico City (2% of fleet) and Colima (40% of fleet) was proposed. In addition, through clever structure to reallocate existing subsidies, devised during the CFA as a result of the team’s work with HSBC, a further project to provide solar for 25 million households and 4 million SMEs was put forward.
Olukayode Ashuolu from Nigeria’s central-bank sponsored agriculture guarantor NIRSAL, presented an electrifying speech on behalf of the Nigerian delegation. He spoke of his governments’ strong commitment to NDC-related projects, as they are vital for climate compatible development, diversification of the economy and economic and social inclusion. Nigeria’s initial NDC plan has outlined more than $142bn of investment. Working wth Deutsche Bank during the CFA, they had identified 8 projects for immediate focus in the agriculture and energy sectors.
A statement by Ha Han Nguyen from the Vietnam delegation, who observed the weeks proceedings, confirmed her country’s eagerness for further future engagement in the CFA process, for which a funding package is now being sought.
All speakers remarked on the value of the Accelerator and the pre-London processes run in-country to bring together people who needed to be at the same table. In a panel, country representatives discussed their thoughts from the week’s proceedings. Some of these were:
- “We [governments and financiers] speak different languages, but we can learn to understand each other”
- “We need to enhance dialogue between the private and public sector at international, but also local levels, to know what is already happening inside the country [finance-wise] and to leverage that”
“There is a huge amount of focused work required to move from plan to projects to desired outcomes and results”
- “Climate finance is still finance, and needs to manage risk and be linked to returns”
- “We need access to international funding to enable us to pursue larger projects outside boundaries of local finance and to access other networks and knowhow”
The rigour and attention to detail of investment bankers is vital to successful climate projects
In a panel with the investment banks which had worked with the country teams, Tessa Tennant praised the bankers for their commitment to the process – even earning the kudos from one country delegation of “these bankers, they’re actually quite nice”! She spoke of the importance of having term sheets to act as ‘dictionaries’ between financiers and policymakers, to ensure everybody understands and can act on the spectrum of issues that need to be addressed to get projects over the transaction line.
Graham Smith from HSBC spoke of three considerations to access finance: ensure the rule of law is in place (i.e. contracts enforceable and protected), know your customer (clarify if the mandate allows for customer type and country risk, and ensure the right people are on board); and lastly, check that the project is ‘bullet-proof’ (i.e. practically workable in context).
Bankers spoke of their delight to discover that dialogue was constructive and friendly and were impressed by the interest of the delegations in unpicking what risk really meant. They were pleasantly surprised that their colleagues from other parts of their institutions were also interested in the opportunities and ready to get involved. They saw the CFA as a ‘deal-flow network’ and all were keen to stay involved with this and future processes.
“Further, faster, together…”
Nick Nuttal from UN Climate Change summed up the main objective of the 5-day process: “The Paris agreement was like a shiny new concept car – looks incredible, but there’s as yet no engine under the bonnet. The CFA is helping to create that engine, and move the car from concept to the road”. His final words rang true for the audience: “This”, he said “is where the future is…”