Image Credit: Anoop Kumar

What’s Out There for Paris finance in 2018?

03/02/2018

With the world back at its collective desk and another year underway, we sampled a cross-section of the “NDC community” for thoughts on ambitions for 2018, key milestones for the year, and the barriers they hope to see whittled away at.  While there’s a great variety in the responses, reflecting geography and professional contexts, there are also some recognisable themes, which we’ll try to pick out in this two-part blog. 

This week, we look at Milestones, Climate and Development Finance and Disclosure.  Next week it will be Institutional Investors, Green Banks, Business and Cities.  Our thanks to those who contributed, and apologies in advance for the drastic edits in most cases!   


Milestones

Let’s start with the formalities.  2018 sees the third UNFCCC “Biennial Assessment”   – the stocktake on climate finance flows that the FCCC (sorry, “UN Climate Change” as we must now learn to love to call it) carries out every other year. The review is important, says ODI’s Leo Roberts, because it “provides an opportunity to track progress through the Talanoa dialogue, and in particular to put greater focus on article 2.1.c [of the Paris agreement][1] … though this is not easy, with ongoing disagreements around additionality and ‘what counts’ likely to resurface.”

Climate Action Network (CAN), the grouping of civil society organisations that is a key advocate for global South interests, makes a similar point about the connection between the Assessment and wider negotiations, saying that “Climate Finance accounting methodology negotiations in UNFCCC need to arrive at a robust methodology to address the gaps that developing countries have highlighted in CF reporting.”  CPI told us that it is hoping to close some of those gaps.  As well as contributing to the UNFCCC study, “CPI will for the first time embark on a multi-year climate finance tracking programme. This will help us to both enhance our coverage of climate finance across multiple dimensions (sectors, actors, instruments, end uses) and to develop improved methodologies, for example, to assess progress against global goals and to estimate mobilized finance.”  The latter ambition if achieved would be a major step forward. CPI is also working to produce during the year “a tool for developing countries to carry out their own baseline assessment of domestic and international, public and private climate finance flows.”

Next as to our contributors’ expectations on the “official” agenda is COP 24, which couldn’t be more poignantly situated for our times – in Katowice, in the heart of the Polish coalfield. (Following his recent Davos triumph, even President Trump may be tempted to attend.) The context is not lost on ODI, with “the location of the COP presenting an excellent opportunity for the climate community to engage properly with the economic implications of the ‘just transition’ to a low carbon world – for example, the balance of support provided through fossil fuel subsidies as between companies vs. workers and communities.” Several people note the need for the COP to come up with a finalised “Paris rulebook” and clear ambition on both enhanced NDCs and finance from industrialised and middle-income countries.

Nigel Topping, We Mean Business

Nigel Topping of We Mean Business puts it succinctly: “We want to see enhanced policy ambition in several major economies, as the evidence of the 2020 ratchet getting underway – whether that’s enhanced NDCs, enhanced policies not yet included in NDCs or enhanced real-world progress.”  CAN’s agenda in this regard includes “a ratchet up on the commitments to phase out fossil fuels by 2020, through concrete measures such as enhancing RE share in the mix, technical assistance to borrowing nations and project developers, more de-risking finance and increases in internal carbon prices”.

Another major milestone for many respondents is the 2018 Global Climate Action Summit, to take place in San Francisco from the 12-14 of September. “This is the place for non-State actors to demonstrate their ambition and commitments to make the Paris Agreement a reality,” in the words of Andrea Fernandez of C40 Cities, while one of Mission 2020’s key goals for the year is to “inspire the financial community to accelerate ahead of 2020, bringing concrete new deliverables on clean finance in time for the California Summit”. Alexa Kleysteuber of the organising team in the California State government told us that “the Summit will bring together leaders from state and local governments, business, and citizens from around the world [to] mobilise bold new commitments by non-state actors that will contribute to meeting the Paris Agreement. It will also demonstrate to national governments in the run-up to COP24 that stronger commitments are necessary, desirable and achievable. Summit participants are expected to make substantial climate commitments to support climate action in five key areas: healthy communities, inclusive economic growth, sustainable communities, land stewardship, and transformative climate investments.”

By “transformative climate investments”, the California team envisions investments “on the scale needed to achieve the Paris Agreement [but that will also] spur innovation and ensure inclusive economic growth.”

Climate and Development Finance

Many barriers to such investment in developing countries remain, as CPI points out, including lack of liquidity, small scale of investments, volatile currencies and lack of credit-worthy off-takers. “This means that risk mitigation instruments such as guarantees, hedging, and insurance are more important today, as are initiatives that absorb early stage risks and those that focus on aggregating and securitizing investments.” CPIs own Climate Finance Lab has mobilised close to $1 billion in investment for renewable energy, energy efficiency, and land use solutions in emerging markets.

Preety Bhandari – Director of the Climate Change and Disaster Risk Management Division, Asian Development Bank

Key to scaling up the availability of risk mitigation instruments will, of course, be the multilateral banks, and Preety Bhandari of the Asian Development Bank noted the joint statement of the MDBs and the IDFC (the DFI “club”) at the One Planet Summit in December 2017,  committing to increasing climate finance, mobilising external investments for climate actions and increasing transparency in climate finance reporting, as well as supporting the implementation of the NDCs.

As to ADB itself, Bhandari said that the focus will be on the implementation of the first phase of its new Climate Change Operational Framework 2017-2030 (CCOF2030). “This will support an acceleration in climate investments and serve as a learning opportunity as ADB scales up climate finance to meet its $6 billion target by 2020.” The framework also commits the Bank to measuring and reducing its portfolio-level greenhouse gas emissions in line with efforts to limit global warming to 2°C. Support to NDCs, specifically, will emphasise investments in resilience, with a spotlight on cities and urban development. Bhandari notes the upward trajectory of ADB’s climate-related spend towards its goal of $6 billion by 2030, from $2.6 billion in 2015 to $4.5 billion in 2017. Adaptation financing is still some way off the 2:1 target vs mitigation spend, but has risen from $0.3 billion to close to $1 billion during the same time period.  A new climate financing data portal launched in 2017 will be updated annually. 2018 will also see first risk management products out of the German government-supported Asia Pacific Climate Finance Fund (ACliFF).

Typical of the kind of client the DFIs badly need to reach and support is Nigeria’s innovative $500 million NIRSAL initiative, established by the Central Bank, which directs “climate smart” risk sharing products such as guarantees and insurance, backed by technical assistance, to elements of the agriculture value chain that have difficulty accessing finance. These include technologies and activities such as irrigation, primary aggregation, cold chain logistics, and off-grid energy provision for cluster agro-processing zones.  “Our aim,” says NIRSAL MD Mr Abdulhameed Aliyu “is to pull in global climate finance sources alongside local commercial finance, to drive climate compatible developments that will fix broken value chains.  By doing this we increase economic and social inclusion, especially for vulnerable groups in our society such as women and youth, as well as contributing to the economic development of the nation in terms of GDP.” Local bank finance is currently meeting only 5% of needs, “so we need to create an attitudinal paradigm shift”, Mr Aliyu said. NIRSAL, which attended the 2017 Climate Finance Accelerator programme in London, has provided best-practice training for over 187,000 farmers across Nigeria and deployed $320 million in credit risk guarantees to over 600 projects.

CPI, ODI and the ADB were among those mentioning that they have active work programmes ongoing with developing countries to assist them in developing NDC-related investment plans.

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A number of contributors called for better harmonisation between climate finance providers, or, as Jeremy Burke, formerly of the UK Green Investment Bank put it, “greater co-ordination between organisations with climate funding to deliver faster.”  (Amen to that, and it’s a stated 2018 target of the GCF to achieve what it calls greater “coherence” between its processes and those of other climate funds.) Burke also believes that “we need to challenge the case for grant funding when investment capital can be deployed and re-used once repaid (particularly in renewables and energy efficiency).

Andrew Higham, Mission 2020

For Andrew Higham of Mission 2020, the priority is to “close the gap between project development and available capital. We need more and better intermediaries, as well as more easily accessible finance for early stage project development – that’s urgent.”  CAN is also calling for “a serious ratchet up from DFIs in finance for sustainable energy access, which is languishing at 1-5% of their energy budget. ODI believes that this is “a preoccupation” of DFIs, but that “policy and planning priorities of national governments are an obstacle in many developing countries.” There should be improved transparency on th issue during the year, however, with “the upcoming review of progress towards SDG 7 likely to highlight the extent to which public finance is supporting transitions to renewables and access to modern energy services for the poorest.”

There was surprisingly little mention of the GCF (which could indicate either lack of concern or lack of great expectations over developments there) but there was concern over the future of a “legacy” climate finance source, the Climate Investment Funds administered by the World Bank and expected to “sunset” with the arrival of the GCF. We would continue to advocate that decisions of this kind are taken not in isolation but as part of a wider review of the roles and functions of the climate funds as a whole.

Finally on the topic of “official” climate finance, ODI “would love to see 2018 as the year in which major donors ‘practice what they preach’ when it comes to financing the energy transition, by halting the funding of high carbon industry through Overseas Development Aid programs. ODI is continuing its analysis of ODA support for energy in developing countries, to support advocacy by civil society on aid budget priorities.

Disclosure

On a similar theme, but related to the private sector and financial institutions, many actors are focussed on greater transparency both over what people are supporting with their investment dollars, but also the climate-related risks they run by continuing to make these investments.

CAN, for example, is looking for financial institutions to come up with “a robust methodology for disclosure and transparency on their portfolio emissions, and the climate risk to their own business and those of their stakeholders.”  For too long, CAN says, lack of clear information sharing by FIs has allowed them to continue with ‘business as usual’ on fossil finance.  Instead, wants to see FIs proactively create roadmaps to 1.5ºC to guide their policies and investments, and green finance metrics strengthened to ensure that “brown is not tagged as green, as civil society has noticed in the past.” To that end, it sees “engagement with senior management and board members” and promoting more interaction between southern CSOs and FIs at all levels, including inviting FIs to campaigning activities.

And what about NDCi.global?

NDCi.global was established to help connect the global community that will get the Paris Agreement financed and implemented over the next 15-20 years. We believe this community is probably some 20-30,000 strong around the world. Its members are to be found in government ministries and city halls, local and international capital markets and the professions that service them, development finance institutions and aid agencies, supranational organisations and NGOs, companies, think tanks and academia.

Since we started with our blogs, links and social media presence just over a year ago, we think we’ve reached about one-third of the “NDC community” one way or another, with what we hope are informative and even provocative updates on all things related to finance for Paris. This year, we hope to start developing new ways of engaging and building the NDC community, which we hope to announce soon.

We will need additional funding to do that, so if you/your institution thinks that an independent voice and a community/capacity building capability in climate finance are things that would be valuable to continue and advance, do let us know!

Next week:  Institutional Investors, Green Banks, Business and Cities.


[1] Decoding this a bit for non-experts, the ‘Talanoa dialogue’ is the Fijian Presidency’s rebranding of the discussion on what can be implemented by 2020, and progress towards the $100 billion of financial support (annually) promised by the developed world by then. Article 2.1.c is the one that commits the world to “making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development” (my italics)”.  As such, it is perhaps the single most important clause in the treaty, defining Paris as not just about a transition to cleaner technologies but as a commitment to climate adaptation and development as well – a distinguishing feature that is all too easily forgotten.

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