Innovating in climate finance

14/04/2017

Resource: Global Innovation Lab for Climate Finance

Type:  Annual cycle of calls for ideas


Note:  Technical terms are marked with a * and explained briefly in the Glossary.


As we have reported recently, the market for green bonds has been expanding rapidly over the past few years, with some $93 billion estimated to have been issued in 2016 and the $100 billion milestone expected to be passed in 2017.

These bonds, however, are in most instances financing the “low hanging fruit” of climate finance – energy efficiency programmes and relatively tried and tested technologies such as solar and wind renewables in reasonably large and well-developed economies.

However, implementing the NDCs will require finance that reaches “higher hanging” fruit as well, not least finance for adaptation actions which may have little or no commercial potential.

How then, will it be possible to scale such finance to the hundreds of billions of dollars required?

One response has been the Global Innovation Lab for Climate Finance or ‘The Lab’, a public-private partnership established with funding from the UK, German, Dutch and US governments and two major US philanthropic foundations, Bloomberg Philanthropies and Rockefeller Foundation.

In the two years it has been fully operational, the Lab has identified, developed, and supported climate finance instruments that have raised nearly USD 600 million for renewable energy, energy efficiency, and land use projects in developing countries. The Lab specifically helps launch instruments that are transformative because they address activities such as adaptation and other sectors that typically have difficulty otherwise in achieving commercial success.

This is about crowding-in and acceleration

Barbara Buchner, Executive Director, CPI Climate Finance

The Lab is managed by Climate Policy Initiative, which also serves as the analytical provider.  Executive Director of CPI Climate Finance and Head of the Lab Secretariat, Dr. Barbara Buchner says: “This is about crowding in private sector finance through well-designed financial instruments that layer in public support so as to reduce risks and improve financial returns to levels where they become acceptable for mainstream finance.  It’s also about acceleration.  We are looking to move quickly from talk to action by creating instruments that provide concrete solutions to financing challenges faced in real projects in developing countries.  These must also be replicable, so they can help establish new markets and attract new investors and build to the billions that are needed.”

The Lab has been excellent in crowd-sourcing innovative new ideas for instruments with potential for scaling up climate finance.  Among several areas of value is  hearing feedback from private sector participants about what works and what doesn’t in terms of trying to attract private investment. The role that the Secretariat plays in helping to refine the ideas, mentoring the project proponents etc is also important  – Abyd Karmali, Managing Director, Climate Finance, Bank of America Merrill Lynch and Lab Adviser

The Lab runs on an annual cycle, which begins with a joint, international ‘Call for Ideas’ covering its four programs: The Global Lab, two regional Labs – the India Innovation Lab for Green Finance and the Brasil Lab – and the Fire Awards. The deadline for submissions to the current cycle closed in December 2016, attracting a record number of over 200 submissions across all four programs.

Submissions to the Global Lab are reviewed by a group of senior experts (the “Lab Members”) drawn from development finance institutions, banks and institutional investors, project developers and governments,  in both developed and developing countries.  (Among Lab Members who have featured on NDCi.global to date are Andrew PiddenAmal Lee Amin, and Abyd Karmali.)

Ideas submitted through the Call for Ideas are assessed against the Lab criteria by the Secretariat and Lab Members and shortlisted for further development. The first stage of this further development consists of instrument design, followed by a pilot preparation phase where full financial and impact modelling is carried out along the profiling of target investor groups.  At the end of this process, the ideas are reviewed a final time by Lab Members for endorsement and to garner institutional support for funding and implementation.

Following endorsement, instruments receive support to get pilots off the ground, moving from talk to action Such support includes design fine-tuning, working with proponents and implementation partners to support the mobilisation of finance through governments, development banks, or other institutional investors, as well as securing partnerships.

Eight ideas have been endorsed so far via the Lab process, four focussed on adaptation and the rest on mitigation.  Adaptation instruments include a Water Finance Facility that will issue bonds designed to attract institutional investors such as pension funds and insurance companies in domestic markets.  The first pilot is progressing in Kenya and the first bond is expected to be issued in spring 2017.

An example of a mitigation facility endorsed by the Lab and in course of implementation is the renewable energy facility Climate Investor One, covered by NDCi.global in December 2016, a hybrid concessionary*/commercial platform that provides finance for both project preparation and development. The Facility has catalysed large-scale solar and hydro projects in the Rwanda, Zambia, and the Philippines.

Four key criteria for ideas: Innovative, Actionable, Replicable, Sustainable

 

Julia Ellis, Senior Associate at CPI

Julia Ellis from CPI,  former policy advisor at UK BEIS, and a founding member of the  Lab Steering Group, says that ideas are welcome from any source, provided that they meet the Lab criteria. “Essentially, ideas must be innovative, actionable by a market player of some kind and have catalytic potential – i.e. they can be replicated to contribute to the scaling of finance. Finally they must be financially sustainable, but that doesn’t mean public or concessional funds can’t be included at the outset – in fact in most instances it probably will be.”

For more information on the Lab, visit www.ClimateFinanceLab.org.

To contact the Lab, write to lab@cpiclimatefinance.org.

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3 thoughts on “Innovating in climate finance

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