5 lessons on climate change financing
<p>To invest in climate-related innovations, you'll need a stomach for risk -- and other key takeaways from the Climate Investment Funds meetings.</p>
After returning from a week of meetings of the Climate Investment Funds in Jamaica, we can’t say that we saw much of the beautiful country, but we did get a glimpse of some hot topics in climate change financing.
The CIFs — two multilateral climate finance funds designed to help developing countries pilot low-carbon, climate-resilient development — have been called a “living laboratory” for climate finance. Because they are one of the largest international climate finance funds and have been in operation for six years, other emerging funds can learn from their experiences. In particular, the Green Climate Fund — expected to become the main vehicle for securing and distributing global climate finance — can benefit from the lessons coming out of the CIFs experience.
Here are a few takeaways from last week’s meetings that provide lessons for the GCF:
1. A quick start can help get money to the countries and projects that need it, but the devil is in the details.
As experts noted throughout the meetings last week, the CIFs got off the ground relatively quickly in 2008 by relying on multilateral development banks to work with countries to develop investment plans and channel funding. However, they have had to work out many important details as they’ve gone along, including criteria for what makes a project worthy of CIF funding and guidelines for measuring results. Swift action to get funds flowing where urgently needed must go hand in hand with systems that allow for details to be fine-tuned as time goes by. These details are critical for ensuring that money is used effectively.
2. Learning is valuable, but the costs of learning can be a deterrent.
Recently, the CIFs Trust Fund Committee considered using a range of evaluative tools (such as impact evaluations) to find out what’s working and what’s not. The hope was that these tools would help the CIFs generate better outcomes by spreading knowledge and learning, and replicate and scale good practices. Indeed, WRI research on the World Bank also suggests that taking an evidence-based approach can help ensure meaningful results. However, the Trust Fund Committee made a judgment that the costs associated with such learning processes were too high.
3. Whether you call it “transformation” or “paradigm shift,” have a clear theory of change.
The recently completed evaluation (PDF) of the CIFs, overseen by an Evaluation Oversight Committee made up of the five Independent Evaluation Departments of the MDBs, provides much food for thought on the CIFs experiment. Sometimes CIF projects have an obvious transformational goal — for instance, several investments in concentrated solar power, including a $750 million CSP investment plan for the Middle East and North Africa, are expected in aggregate to result in cheaper CSP technology globally.
However, CIF projects do not always present clear logic about how they will address barriers to impact and replication. There is also a question as to whether each individual project seeking funding should be transformational on its own, or whether building a portfolio of complementary projects will drive broader transformation. What the evaluation pointed to was the need for clear theories of change during the investment planning phase.
4. Consider your risk appetite early on.
Investing in innovative activities to address climate change entails taking a certain level of risk — in testing new approaches, there is a potential for failure as well as high rewards. However, due to its funding structure, the CIFs have been limited in using the full range of tools at their disposal due to the varied risk appetite of different contributors. Because of this arrangement, the CIFs have tended to shy away from risky private sector projects and riskier instruments such as equity investments. The CIFs have spent a lot of time considering this issue, and they are just now making progress to overcome this limitation through their new Enterprise Risk Management Framework. Much of the time spent fixing this problem could have been avoided with sufficient consideration to this issue early on.
5. Results can’t be achieved without strong partnerships.
Climate change affects businesses, communities, government and more, so it cannot be addressed without a range of actors stepping up. The CIFs have engaged global stakeholders since the outset, including civil society groups, indigenous peoples and private sector actors. This collaborative approach was evident during the CIF’s Partnership Forum, which took place alongside decision-making committee meetings last week. As countries and MDBs work together to roll out projects on the ground, its emphasis will shift to engagement with national stakeholders. Together, these stakeholders can help strengthen the design and implementation of investment plans and help build broad-based support.
As an experiment in climate finance, the CIFs will continue to generate valuable lessons. It’s important to learn from this “living laboratory” in order to secure and deliver finance to help communities fight and overcome the challenges posed by a changing climate.
Learn more about distributed energy systems at VERGE SF 2014, Oct. 27-30. This article originally appeared at World Resources Institute and is reprinted with permission. Top image of Tanzanian farmer in field affected by drought by CIMMYT via Compfight.