December 9 – Money talks at the climate talks

As the Ministerial Dialogue on Climate Finance gets under way today, the GCF reached its $10bn target following a €50m pledge from Belgium. Climate finance is always a critical and contentious topic at a climate summit. Of course, at this stage pretty much every topic is ‘critical’ and contentious for someone. Countries won’t freely give away their negotiating chips in Lima. I had thought that the reasonably successful first round of fund-raising by the Green Climate Fund might have lowered the tension in the negotiations, but this wasn’t to be. China and Brazil stated flatly that $10bn is not enough. Some of the least developed countries greeted the pledges with cynicism – “where did that ‘fast-start’ climate finance go after Copenhagen?” they ask.

The US has responded that the money pledged to the GCF is only a fraction of the total public climate finance. And that the public finance is only a fraction of the total public and private climate finance flowing to developing countries. Although the talk inside the negotiating hall mainly focused on the amount, in side events there was more discussion of how the GCF will work in practice and, importantly, how it will engage the private sector.

Most appreciate that public finance will not be enough, and that much more could be achieved if it levers private finance. At two IETA side events over the weekend, the GCF Secretariat said that they are now “open for business” and are keen to engage the private sector. The process for accrediting public and private entities to disburse or invest the capital has started. And the GCF hopes to have evaluated and selected projects for funding by the time we get to Paris next year.

The questions from the private sector were: how do they get involved, what types of project might the GCF support, will it be in the form of grants, concessional finance, mezzanine debt, or equity? Although it is early days, it is encouraging that the GCF Secretariat is taking a pragmatic approach. At the moment, there are no fixed amounts set aside for the private sector or earmarked for funding adaptation vs mitigation projects. The Private Sector Facility is simply the channel to engage on private sector projects.

It was also encouraging that the GCF suggested that it wouldn’t only finance triple A-rated projects, but that it might take on more risk. Many made the point that the GCF could help manage the layers of risk that private banks are not good at managing, such as policy and sovereign risks. When it comes to infrastructure investment, it is good to be boring. Institutional investors are looking for long term, stable returns. In the UK, utilities (water and electricity transmission) and rail companies are highly regulated and generally give investors a steady return. As a result, they are able to issue corporate bonds to fund their capital investment programmes rather than more expensive project finance from banks.

It’s likely that the GCF will work with developing country governments build capacity to help projects become more investable. It may help governments implement programmes such as renewables feed-in tariffs and even provide payment guarantees that can attract private sector investment. If the GCF is able to take on some of the risk of these projects, it could ‘crowd in’ the private sector, and the private sector should accept a lower return for these lower risk projects. If low-carbon investment in developing and emerging markets could be boring, it would really start to attract private capital.

Jonathan Grant, PwC

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