Green Climate Fund + Climate Investment Funds = Global Finance Architecture
In 2008, as the urgency of global support for climate-smart development became increasingly apparent, donor and recipient countries established the Climate Investment Funds (CIF) through the multilateral development banks as a transitory financial mechanism to help provide an interim climate source of funding, pending the effectiveness of a new multilateral climate finance facility developed under the guidance of the United Nations Framework Convention on Climate Change (UNFCCC). This multilateral climate finance facility, now operationalized, is today known as the Green Climate Fund (GCF) and is becoming the central piece in channeling resources to climate change projects and programs across the developing world.
One must praise the commitment from donor countries for agreeing to establish the CIF while UNFCCC worked to design and establish the GCF. The CIF was instrumental in helping establish consensus that moderating and managing climate change is central to every aspect of poverty reduction, economic growth and development. Furthermore, in order to ensure that efforts would not be duplicated once the GCF was operationalized, the CIF creators built a sunset clause into the CIF governance framework.
Despite the GCF being open for operations and already funding climate-related projects around the globe, the CIF sunset clause is still to be enforced. As suggested in the 2014 CIF Independent Review, delays have likely been caused by the fact that CIF donors did not fully define conditions and a strategy to sunset the CIF and hence terminate operations.
Over the last years, new commitments made by donor countries to the CIF dropped significantly. This is not surprising, since key donor countries are the same for both facilities and are understandably concerned about duplication of efforts. This has meant that a number of developing countries have had to wait to either receive potential CIF support or look to begin the application process at the GCF and elsewhere. However, even as donor countries adjusted their flows to focus on the GCF, the GCF itself underwent a slow rise to the level of full funding and operationalization, unable to release approved funds until governance issues were resolved. Unfortunately, these issues have led to a loss in momentum that translates to a slowdown of the global climate finance flows between developed and developing countries. For AfDB, this has also meant a steep decline in climate finance approved operations over the course of 2016. This has a real impact: on people and entire societies that are being increasingly affected by climate change events. Think of Hurricanes Irma and Harvey that affected the lives of millions of people in the Caribbean and elsewhere.
The CIF’s Clean Technology Fund (CTF) provides non-grant resources to middle-income countries that have the potential to avoid significantly large greenhouse gas emissions. One of the characteristics of these non-grant resources is that, over time, these will totally reflow back from the project borrowers to the CIF trustee, meaning that additional resources could be made available to fund new and additional investments in low-carbon technologies. In the context of the CTF, this amount stands at around USD 5.6 billion.
What can be done to ensure that this USD 5.6 billion is used in a smart and timely manner that allows countries to recover and keeps momentum in the fight against climate change?
One alternative could simply be continuing business as usual but the time value of CTF reflows, spread over the next 40 years, means that only residual amounts of funding will be available in the short to medium terms. A “smarter” option would aim at leveraging these reflows with the support of private sector individual and institutional investors. This can be done by establishing a special market-based vehicle capable of independently raising funds through the issuance of green bonds in the capital markets, using the reflows as a mean to secure future bond repayments.
This presents not only a unique opportunity to ensure a highly efficient use of limited public resources through the use of reflows from legacy assets, but also a means by which to finance the next generation of CTF investments quickly, without the need to wait for the legacy reflows to be realized. All of this can be done at no additional cost to donor countries.
For this option to be viable, a thorough assessment of the risk exposure of the current portfolio must be undertaken as leveraged amounts will largely depend on the severity of that exposure. While a market-mechanism will inevitably lead to a loss in concessionality and the vehicle would have to generate sufficient revenue as to not default on bond repayments, the CTF would still remain highly competitive vis-à-vis other sources of funding.
This option is in the best interest of African countries. First and foremost, CIF donor countries must recognize that all medium-term financial resources Africa can muster will still not be sufficient to help the continent sustainably meet its development goals. Second, it is understandable that public sector counterparts in low-income countries may not be adequate to receive loans due to, for example, weak sovereign debt sustainability frameworks that may undermine the long-term financial viability of the issuance vehicle. One can argue that the same does not apply to private sector counterparts willing to accept financial terms more onerous and shorter in duration than those provided to sovereign entities in middle-income countries. Risk would still have to be assessed on a project-by-project basis and a sound security structure built around these projects, so as to protect the overall quality of the portfolio, but in the name of accelerating market transformation in those countries policy makers should not exclude these counterparts.
Everyone in the climate finance development arena understands by now that the current level of commitments made to the GCF are insufficient to cover the global development aid needs in the area of climate change. Because of this and the fact that the real potential to drive long-lasting market transformation lies with the private sector, the CIF is as relevant today as it was at the time of its creation.