With the upcoming COP 23 in Bonn marking the passage of another year since the Paris Agreement was signed, we thought it would be useful to take the pulse of NDCi.global’s readership via a survey on Paris Agreement finance. Given the survey wasn’t a 3-minute job to complete, having a number of open questions where we invited comment, we had a great response, with 22 professionals from banks, think tanks, governments and consultancies giving us their views. Countries ranged across developing and SIDS to developed, and there were responses from every region except LAC. So we are happy that the report below represents the views of a reasonable cross-section of engaged opinion on the topics we covered.
In this two-part piece, we look first, this week, at definitions of climate and green finance, the pace we’re going at, the preparedness of governments and the private sector, whether we need a “finance director” to co-ordinate these aspects of the Paris Agreement, and the performance of the DFIs.
In the beginning were the words …
There is an ongoing problem with definitions, so we started the survey by providing a suggestion on distinctions between various types of “climate” and / or “green” finance, as follows.
- “Official climate finance”: Purely public sources of development finance such as the GCF and other multi/bilateral climate funds
- “Climate finance”: Finance for climate-related projects that have a linkage to an NDC or other national low-carbon development strategy, but may come from any source including concessional and commercial
- “Green finance”: Finance undertaken by companies or project developers in line with their own carbon- or pollution-reduction strategies or product development programmes, principally privately financed and having no concrete link to national strategies
We asked respondents if they found these distinctions useful. Two-thirds said they did, but there were a number of issues raised by the other third. These included where the Copenhagen “$100 billion” would be counted, and the value of a distinction based on linkage to the NDCs or other national climate strategies.
The answer to the first question, of course, depends on how the commitment is formally defined, but a working assumption might be that it would include all “official climate finance” and that part of “climate finance” that is provided from concessional sources such as DFIs. On the second question, since the NDCs currently only achieve 2.7°C and have a significant element that is conditional on countries receiving external financial assistance – something that is frequently forgotten – it does seem important to be able to track flows that have linkages to national plans. Equally, there will be a huge amount of “green” innovation that is not expressly linked to Paris and will happen anyway, because companies, in particular, find it cuts their costs and/or makes their products more desirable to consumers, so this might be a useful definition for “green finance”.
We invite your thoughts on how to streamline these definitions further. Following a suggestion in the survey, we are already adding a specific reference to adaptation finance in the definition of climate finance.
Are we picking up pace?
We asked: “Do you think finance related to the Paris Agreement is picking up pace?”
Only 27% said yes, with 36% each saying no or maybe – close to ¾ in all, which is not a ringing endorsement of progress to date. Among the most prominent barriers were seen to be:
- Lack of understanding of finance among policy-makers
- Vice versa, lack of understanding among financiers (for example of emerging market risk)
- Lack of bankable/investable pipeline for investors, and
- Complexity in the official climate finance application processes.
Other barriers / suggestions for improvement included:
- Development banks should have common risk mitigation instruments with common application procedures
- Dearth of sustained interfacing between key players
- Lack of in-country capacity
- Continued financing by MDB’s of fossil fuel-related projects, unwillingness to shift rapidly and completely to funding renewable energies and energy efficiency
- Hurdles for small businesses
- Too much focus on planning and huge investments, vs mechanisms that support distributed actors delivering at scale e.g. local govts and municipalities; and
Are you ready?
We asked about preparedness of government, the private finance sector and private companies in the respondent’s country. It was perhaps not surprising that in developing countries this was felt to be generally medium to low across these sectors. This finding reinforces the need for development financiers and philanthropy to pay attention to the resulting capacity building needs. More unexpected was the level to which developed country respondents felt that preparedness was at best ‘medium’, especially at the government level, indicating that there are capacity issues here as well.
Someone in charge?
We asked: “Does there need to be some kind of co-ordinating body for climate finance? At its simplest, for example, so that climate finance flows can be monitored?”. Nearly four fifths of respondents said yes, with just 9% saying no and 14% undecided. As to who should play this role, UNFCCC was mentioned several times but with significant qualifications: “Too cumbersome”; “Maybe UNFCCC, but some serious leadership and direction is needed”; “UNFCCC perhaps the right organisation to monitor flows, if that is all that is being asked for.”
Alternatives to UNFCCC included the NDC Partnership, the OECD, the IMF and ODI.
A remark fairly typical of the response on the issue of tracking climate finance flows might be: “The main thing is that the data is robust and trusted, and publicly available.”
In light of this, we interpret these responses as being a pretty clear consensus that there does need to be some co-ordination, and that this needs to be far more pro-active than it has been to date.
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Are the DFIs up to scratch?
We asked: “Are development finance institutions playing their role properly?” Only a quarter (27%) said yes, with 36% each of respondents saying no or only maybe. It’s probably just a coincidence that these proportions were exactly the same as for the overall question about finance for Paris picking up pace, but an intriguing one, given the critical importance of the DFIs in this process, as the chief source of de-risking for private finance.
Responses from those saying no or maybe fall into three basic categories: risk, incentivisation, complexity and outreach.
On risk, sample comments included: “They are limited in the amount of risk they can take”; “They are by definition risk-averse”; “Still chasing easier deals”; “Need to commit de-risking finance to specific NDC-related initiatives”; “Too focused on big renewable infra deals and loans. They need to finance innovation in distributed generation and new energy structures”
On incentivisation: “[Easier to] measure their progress (at organisation level and at loan officer level) if they had a KPI of ‘leveraged private finance’”; “DFI’s and their personnel are not incentivised correctly to implement the results required”; “Too focused on big renewable infra deals and loans. They need to finance innovation in distributed generation and new energy structures”.
On complexity: “Their instruments and processes are slow and focus again largely on larger investments with longer lead times. Limited TA reduces capacity to innovate or respond to changing contexts”; “They should be much clearer about what they will and will not fund”; “International [consulting] companies are engaged to develop scope /pre-qualifications and these do not match the realities on the ground … A local solution is required”.
On outreach: “They need to integrate climate into their development policy lending and country partnership work”; “They should reach out more to sensitise and aggregate stakeholders, with a view towards enhancing ownership across the board”; “They need to develop a multi-stakeholder approach in terms of financing, so that there is a cross-sectoral approach at country level to NDC finance, i.e. multilateral+bilateral+ international private finance (pension funds etc)+ leading philanthropies+local capital markets”.
We have to wonder where the shareholders of the multilateral institutions, in particular, are in all this. Most of them are developed country civil servants; perhaps there is a link here between the finding of only ‘medium’ preparedness in developed country governments, and a lack of awareness in these circles of the importance of their roles in the governance of these vital actors.
Next week we look at our respondents’ thoughts on issues such as the climate funds, the role of philanthropy, the efficacy of technical assistance, where they source their information on Paris finance, and their more general thoughts on where we stand in the process