Resource: Results-Based Climate Finance in Practice
Type: Free download
Published by: World Bank and the Frankfurt School / UNEP
This report looks at the performance of the climate-related version of a type of financing that has gained increasing attention over the past decade, namely “results-based finance” or “RBF”. As the name on the tin suggests, this financing structure pays out once agreed results or outputs have been achieved. In other sectors it has manifested itself in instruments like “social impact bonds” or “development impact bonds”.
Results-Based Climate Finance (RBCF) kicked into gear following the Cancun COP in 2010, when countries agreed to develop structures to scale up REDD+ finance by 2013. This new report from the World Bank and Frankfurt School studies 74 projects that are currently open, with the 12 largest reaching their peak capitalisation in 2015 at $2.6 billion. This amount will soon rapidly decline, however, unless new funds are committed. Payouts under the programmes, will however carry on rising until 2018.
Projects are fairly evenly spread across the SSA, Latin America and Caribbean and East Asia / Pacific regions. Three quarters of projects are in the energy, forestry and land use sectors, though in terms of $$ some 90% is in the latter two sectors. Almost all projects relate to climate change mitigation rather than adaptation, though many of the mitigation projects have development objectives as well. This is not surprising, given that mitigation offers fairly straightforward measurement options, such as tonnes of CO2 avoided or hectares of forest protected. It’s a disappointment, however, for anyone hoping this might be a way of making adaptation projects more attractive to the private sector (by adding some potential financial upside to successful completion of projects), and it may be the case that not enough lateral thinking is going into the kind of impact measures that could be used.
The report itself points out that the $2.6 billion of climate finance via these ‘payments by results’ structures is small compared to the $40 billion or so of public climate finance in the year studied (2014/15, according to OECD figures). Green bonds, meantime, may top $120 billion this year. Private sector involvement, at just $0.3 billion, appears to have been low.
The report doesn’t say this in terms, but the relatively small amount of issuance is likely to be in part because these structures are often complex and quite ‘individualistic’ in their terms, that is, tied to or resulting from the particularities of the project, country or policy framework involved. If this source of climate finance is to be scaled, it will require significant effort and flexibility to standardise terms and conditions, which in turn may require some trade-offs in the agendas of those funding these instruments. What’s needed is to create the kind of commonly agreed documentation that allowed, say, the international bond market to scale dramatically in the 1980s and is now fuelling the green bond market. Private carbon markets such as California’s are already achieving such standardisation of offset “products”.
Another result of complexity is transaction costs. There is no mention of these in the report, but judging by other public funding, the set-up costs of financings could be in the region of 10%, more than three times what would be acceptable for most developing market transactions of a reasonable size in the private sector. (RBCF is not alone in these difficulties: social impact bonds have also struggled to scale, and have high transaction costs, because of the complexity of structures and the number of parties often involved, each with administrative and advisory costs attached.)
The report finds that RBCF does appear to be having effects both in terms of delivering results in the short term and affecting behaviour (e.g. on policy development) in the longer term. It should also be said that the main purpose of pilot phases (which is where RBCF is currently positioned) is to discover the problems that need to be addressed to encourage scale. That the report doesn’t really make any recommendations as to fixes for the next phase of development is a shame. These would have been timely, especially as the GCF is set to embark on results-based finance under a new ‘window’ expected to open shortly.