By Vandana Gombar, BloombergNEF editor. This article first appeared on the Bloomberg Terminal.
The Seoul-headquartered Green Climate Fund has approved $5 billion for about 100 green projects in developing countries over the last four years, in the form of debt, equity, grants or guarantees. As project approvals have picked up pace, however, funding available for allocation is close to being exhausted.
One of the first tasks for its newly appointed executive director, Yannick Glemarec, is to replenish the fund, so that it can play a larger role in global climate finance: “Our board has the capacity to approve between $2.5 billion and $5 billion [of funding] a year,” Glemarec said in an interview.
The decision to set up the GCF was taken in 2010. Five years later, it was given the task to channel a part of the promised $100 billion flow of climate finance from developed economies to developing countries annually. Many countries committed money to GCF, taking the total pledges to over $10 billion. The largest contribution announced was from the U.S., at $3 billion, of which only $1 billion has been paid in.
In this latest round of pledging, two countries have “announced that they would double their contribution to the GCF”: Germany, which pledged $1 billion initially, and Norway, which pledged $271 million in the first round.
Glemarec declined to speak about the target for funds mobilization, but agreed on the need to stretch each GCF dollar further, “to move trillions [of dollars] with billions” for high-impact projects. The fund has a risk appetite: it can invest in pre-commercial projects or “take a first-loss position to give a fighting chance to an equity fund investing in adaptation projects,” for instance.
It is supporting half a dozen bond issues in the pipeline – green and blue bonds [for marine and ocean based projects] – by providing credit enhancements, and also working with FMO [Dutch Development Bank] to raise over $800 million from pension funds and other investors to support pioneering renewable energy projects in Africa, Latin America and Asia via the Climate Investor One project development and investment fund.
Critics of the fund say that it has delivered less-than-expected, and lacks agility – a 24-member board, split half and half between developed and developing countries, can only move so fast. “For the very first time, we are trying a totally different governance system based on parity between the global sovereigns of the world. There are bound to be some growing pains,” Glemarec said, adding that he did not think 24-member board was too large.
It has backed a group of solar projects in the Benban Solar Park in Egypt, approved concessional loans for the first set of utility scale projects planned in Nigeria, and supported projects in Bahrain, Kyrgyzstan, Indonesia, and many other countries. GCF can get involved at the strategy stage, the policy stage, at the proof-of-concept stage, or at the scaling-up stage.
Q: You joined last month amid a flurry of activity at the Green Climate Fund. What are the near-term priorities for you and GCF?
A: I have two main priorities for 2019: to contribute to a successful and ambitious replenishment of the fund because a fund which is not capitalized is not of interest to anybody, and to build on the work of my predecessors. During its first five years, the GCF put in place the foundational policies, recruited the staff and focused on the origination of projects. Now almost 100% of our resources [$7 billion] are allocated.
Q: Are there a lot of countries willing and able to fund GCF further?
A: I think there is a strong consensus that GCF is a unique and critical instrument to raise the ambitions of all countries to accelerate climate action. The GCF has a key role given in the Paris Agreement. We started our replenishment at the end of 2018, with an extraordinary gift from the governments of Norway [$271 million pledged initially] and Germany [$1 billion pledged initially]: they announced that they would double their contribution to the GCF. It has obliged other financial contributors to see whether or not they are to match this announcement.
Q: What is the targeted mobilization for this round?
A: I cannot share a number yet, because we are following a replenishment process where the idea is to first agree on what the key results areas should be. This is to be captured in what we call a strategic programing document that will be finalized in July. Once there is a consensus on result areas, and on new policies, for example, on use of a new type of non-grant instruments, the next step is to prepare the replenishment document that will consider different scenarios. We hope to have some preliminary pledges during the Climate Summit in September. The Pledging Conference is in October 2019.
Q: Is the U.S. completely out of the picture? They had committed $3 billion. What has come in so far?
A: The U.S. has provided $1 billion, and remains a member of GCF. Each nation is free to decide on its allocations. The operational process is that we do not yet have any cut-off dates, so if some countries, after a while, decide to re-engage, that is still possible.
Q: The purpose of the GCF was basically to help finance green projects in developing countries. Do you think there is a case for reviewing the countries which fall under the “developing” category? Should countries like India and China be receiving money from GCF or should the fund focus on the least developed countries?
A: All developing countries (non-Annex-1 countries) that are members of the UNFCCC and party to the Paris agreement are eligible for GCF funds.
The mission of GCF is to support transformative initiatives to scale up climate action, in line with the Paris agreement, which requires that every single effort possible should be made to try to avoid crossing the 1.5 degrees global warming threshold, and in all cases to not cross the 2 degrees threshold. Transformative might mean different things in different contexts. In a sector where nobody has ever worked, or where there has been limited investment, such as, for example, health and climate change, one project can be immensely transformative. Where things are much more established, for example, in the renewable energy sector in a country that has access to the capital market, the definition of transformative will become the leveraging ratio: with one dollar of public money, how much money can you leverage?
So, the notion of transformative will depend on the sector, on the country, on the beneficiaries and on the technologies.
Q: How do you stretch each GCF dollar further?
A: Often, people are more familiar with the technical leveraging ratio, but a policy change can have an unbelievable leveraging ratio. The policy with the highest ever leveraging ratio in the world in renewable energy was the feed-in tariff in Germany in 1990, that created an industry worth hundreds of billions of dollars. We are for transformative change, and that involves achieving a huge leveraging ratio to move trillions with billions.
I would say at least half of our portfolio has an extremely high leveraging ratio. For example, we have been involved with the establishment of the largest solar park in Egypt [Benban] with the European Bank for Reconstruction and Development. We provided a grant for policy support to help the government of Egypt to develop the power purchase agreement. Without the guarantee of the PPA [power purchase agreement], no commercial investors would have come. We also provided concessional finance to close the deal.
In a case under consideration, we are taking a first-loss position on a $60 million equity investment in a $1.1 billion project. This would enable other equity investors to come in.
We are now seeing projects which are increasingly leveraged, and increasingly transformative.
Q: Critics say that GCF has not achieved as much as it could have. Do you agree? Do you have a plan to move to a higher scale of operations and impact?
A: The GCF has been designed to provide double dividend: it provides extremely sophisticated financial instruments to assist transformative change, and also generates political goodwill and confidence to convince countries to raise the ambitions of the nationally determined contributions. With double dividends, the governance is bound to be much more complex than that of a traditional financial institution. It is fair to say that the GCF is still a work-in-progress. But look at the achievements over the last five years: resource mobilization of $10.3 billion, creation of an institution from scratch – putting in place all commercial policies, recruiting staff, originating an innovative portfolio – and allocation of 100% of the resources by the end of this year.
Q: So you don’t think anything needs to change at GCF, or any restructuring is called for? There are those who think that a 24-member board is a bit unwieldy perhaps?
A: The fact that the GCF has 12 developing countries, and 12 developed countries represented on the board was a major breakthrough. For the very first time, we are trying a totally different governance system based on parity between the global sovereigns of the world. There are bound to be some growing pains. I don’t think a board of 24 is too large.
Q: In four years of operations, about $5 billion has been committed, so that is a little over $1 billion per year. Are you planning to scale that up?
A: I would definitely not be pleased with $1 billion per year. We are currently approving about $1.5 billion per year. In one of our most recent board meetings, we have been able to allocate $1.5 billion at one go to quality projects. Our board has the capacity to approve between $2.5 billion and $5 billion a year.
Q: Do you have a targeted return on investment?
A: In our case, we give out grants, or highly concessional long-tenor loans: 40 years at 0.1% interest. The return is measured in the kind of impact the project has. To be able to influence large financial flows, we must ultimately support commercially viable projects. One of the studies we intend to undertake is the average rate of return of our commercial partners.
There are some funding models we might test in the future, as we mature. There are some challenging renewable energy projects – with complex financing structures – but they become plain vanilla renewable projects once commissioned. If we engage as a first-loss equity provider in such projects, it is possible that after 2-3 years, we will sell our share to institutional investors, and have a reflow that we can immediately reinvest.
Q: First-loss equity provider seems like an interesting idea. Can you provide more details about your plan here, and possible projects where you could take that position?
A: For the private sector we provide equity, concessional loans and guarantees including on a first loss basis to mobilize private and institutional investors. An example is the Climate Investor One project development and investment fund where we are working with FMO [Dutch Development Bank] to raise over $800 million from pension funds and other investors to support pioneering renewable energy projects in Africa, Latin America and Asia. Other examples include working with the Development Bank of Southern Africa to mobilize funding for non-sovereign backed energy projects in South Africa and providing long-term funding for grid-connected solar projects in Nigeria.
Q: GCF provides mostly grants and loans, and some equity capital and guarantees. Does the mix need to change?
A: We are capital-agnostic. We can invest 100% in grants, or 100% in loans or in equity capital or in guarantees. The instrument we use depends on the [market] needs, and right now, for most of the deals we have been involved with, grants have been extremely important for policy support because we are often in a pre-commercial situation. Grants and concessional finance is important for establishing proof-of-concept.
We are quite engaged in equity capital too, which accounts for 9% of our investments. We have established one of the first equity funds for small and medium enterprises for adaptation in sub-Saharan Africa and one thing is clear: we can multiply by 10 our contribution and we would still not have exhausted the demand.
Q: What are some of the interesting projects in the pipeline?
A: We are working on five to six bond issues: green bonds and blue bonds. We provide credit enhancements to ensure that the bonds have ratings that make them acceptable to institutional investors.
Q: GCF was one of the channels that was to be used for the $100 billion annual financing flow from developed to developing countries by 2020. Do you think that $100 billion target will be met?
A: I think everybody is fully aware of the importance of meeting that target. If you look at the nationally determined contributions of countries, 50-60% of them refer to the importance of climate finance. If we want to meet the ambition of the Paris agreement, it is important that we meet the $100 billion target, and that has to be put in context with the $5 trillion necessary for achieving the 2030 agenda and the $1 trillion needed for sustainable energy access.
- GCF set up: 2010
- First funding approved: 2015
- Total funds pledged: $10.3 billion
- Total funds available for allocation: $7 billion
- Total funds committed: $5 billion