2016 is a hot year for climate finance. Following the Paris Agreement in December and its ambitious pledges on clean energy and low-carbon investments, it is time for action and implementation.
The developed countries have committed to mobilizing $100 billion USD a year by 2025. Keeping this pledge to the developing world requires dedicated work steering both public and private resources.
Global Innovation Lab for Climate Finance is seeking to speed up innovation to solve these worldwide challenges. It is engineering new solutions and supporting the development of new finance instruments that unlock private investment for climate-resilient and low-carbon growth in developing countries.
Some ideas have already made it through the crucible of the lab’s highly selective project cycle.
Energy efficiency is one area with significant impact leverage. Two financial vehicles for mitigation have gained the support of the lab.
Energy Savings Insurance seeks to mainstream investments in efficiency by limiting investors’ risk in the case of underperformance.
Energy Efficiency Enabling Initiative is a newly-endorsed project idea that would operate as a private equity fund, aiming to scale the market in the developing world. According to the Secretariat’s analysis, a $100 million USD fund could generate up to 225 GWh of annual savings. This corresponds to 100 KT of CO2 emissions.
Water, agriculture, energy and infrastructure ideas are also in the works. The Water Financing Facility concept aspires to mobilize institutional capital for resilient water infrastructure. An Agricultural Supply Chain Adaptation Facility would channel private funds for agricultural supply chain resilience. Climate Investor One would employ an innovative approach to infrastructure development. This would accelerate the deployment of renewable energy in Africa, Asia and Latin America.
“There is no fixed number of projects in either the mitigation or the adaptation space, although we are trying to strike a balance between the two. Ultimately, it comes down to the views and expertise of the lab members, who know where the barriers to green investment lie,” said Barbara Buchner, executive director of the Climate Finance program at Climate Policy Initiative.
The lab crowdsources ideas on innovative solutions and provides extensive analytical support to those that pass the highly selective criteria.
"There are four criteria that we ensure all projects meet,” Buchner said. She described them as follows.
- Actionable: projects can be implemented in a few years
- Innovative: new or enhanced financial tools must be practical and applicable
- Catalytic: projects should mobilize private investment
- Transformative: the idea needs to have a significant impact and be easily replicable
The challenge to scale funding opportunities for climate solutions can only be met by collaborative efforts.
“The lab aspires to reach a broad diversity of stakeholders. Thus, the application is open to everyone: research organizations, academic institutions, financial intermediaries, and private companies,” Buchner said.
The lab cycle lasts for approximately 12 months. It begins with an open call for ideas. In the first year, more than 90 applications were submitted.
Phase 1 of the selection process requires screening of the ideas that meet a minimum set of binary criteria for completeness of their applications.
The Secretariat then puts together a list of the proposed ideas to move forward. The principals vote on them.
Phase 2 consists of instrument design. Promising ideas, regardless of their concept development stages, receive feedback. They benefit from rigorous brainstorming among collaborative working groups.
Phase 3 carries forward the endorsed projects and entails full support for the ideas’ pilot development. The lab facilitates the process of finalizing concepts, raising funding from public and private sources, and scaling the financial instruments to ensure they can deliver on commitments.
This intensive stage involves focusing on defining target markets, recruiting human resources, and establishing governance structures.
At the end of the phase, each pilot is expected to have made significant progress in reaching milestones. These include signed agreements to provide strategic support, clear goals, target markets, and active fundraising.
The lab envisions keeping close ties with all projects that have received its support. Beyond the pilot launches, the lab plans to continue publicizing reports of future achievements of these projects.
Phase 2 of the Second Lab Cycle concluded at the end of June, when the principals endorsed another four project ideas that are moving forward.
“The endorsed projects do not receive a monetary prize, but instead [get a] valuable six months of analytical support. They get connected with a network of influential funders affiliated with the lab and are introduced to the right entities that can facilitate their fundraising. We have already raised $500 million [USD] for the first four pilots,” Buchner said.
“The creation of the lab was [based on] a combination of factors,” Buchner said. These were outlined at the Climate Finance Ministerial in April 2013 and described in the chair’s summary published by the United States Department of State.
“Spurred by the United States during the [ministerial], there was consensus around the need to better coordinate climate finance, especially in the developing world,” the summary said.
“The concept was based on a public–private initiative that was embraced by the United Kingdom, the United States, and Germany,” the summary said. “The founding visionaries of the lab sought to address the lack of innovative instruments and attract more private capital. The result was the lab, which launched in September 2014.”
The lab was developed in partnership with several other major climate-finance donor countries – Denmark, France, Japan, the Netherlands, and Norway. Some of these nations helped to fund the lab. The Rockefeller Foundation and Bloomberg Philanthropies also provided support.
In 2015, the G7 countries endorsed the lab.
Climate Policy Initiative, a leading think tank on the issues of climate finance, acts as the secretariat of the lab, administrating the application process, reporting and governance structure.
The decision-making body consists of principals and advisors. The principals are a coalition of global representatives of governments, institutional investors, project developers, and multilateral banks. Each principal has an advisor who contributes institutional expertise on the proposed ideas.
Hurdles that new investment vehicles need to overcome may be significant, operating in underdeveloped markets. Raising and deploying capital also take time – often well beyond the six months of the lab incubation.
“The lab is committed to supporting its grantees beyond the six months and ensuring they continue working on their projects,” Buchner said.
“[The lab] seeks to continually innovate and improve its approach as it is a very educational process for ourselves, as well,” Buchner said. “We want to make sure we are getting the right ideas. Thus, we solicit feedback from investors and other stakeholders.”
It is too early to assess the impact of the endorsed projects and map the transformational footprint these innovative financial products have on gearing us towards a low-carbon economy.
The lab’s Secretariat is committed to continuously update and develop its impact measurement tools to build a robust and transparent reporting scheme.
It is an uphill battle to build climate finance, as Michael Bloomberg said at this year’s Clean Energy Ministerial.
A record $391 billion USD was invested in climate-resilient growth in 2014, according to the Climate Policy Initiative data.
The 2015 United Nations report “Trends in Private Sector Climate Finance” highlights points of convergence. These include growing investor concern around carbon-intensive assets and the awareness of the insurance sector.
But, in order to keep up with the Nationally Determined Contributions (NDCs), $13.5 trillion USD need to be mobilized.
“The keys to success in scaling climate finance instruments are raising awareness, forging partnerships between stakeholders, and soliciting support from implementing organizations,” Buchner said. “To bring in external capital, it is crucial to ensure that the risks and the rewards are appealing to the private sector.”
Other labs and projects are also underway to catalyze these markets.
India Innovation Lab for Green Finance replicates the model of incubating fresh ideas. It has been operating since November 2015.
Another aligned initiative is the platform Finance for Resilience, pioneered by Bloomberg New Energy Finance and seeking to address the gap in clean energy investments.
It is encouraging to see how the urgency of climate action spurs innovation and inspires the design of new financial tools. Hopefully, collective human ingenuity will be the key to solving the problems that arose from individual carelessness.