This blog is Part 1 of a three part series. See here for Part 2: Use of Financial Instruments and Part 3: Accreditation
The Green Climate Fund (GCF) Strategic Plan for 2020-2023 is up for consideration by the Board at its upcoming meeting in Geneva, Switzerland. Why are we paying attention? The Strategic Plan sets the vision, goals, and framework that will guide the programming of the Fund’s first replenishment for the next four years. The priorities outlined in the Plan send important signals to developing countries represented by National Designated Authorities (NDAs) as beneficiaries of the Fund, to GCF fiduciaries (accredited entities), and to stakeholders overall. The Board will consider the draft document and decide on its approval (or not) next week during its twenty-fifth meeting.
We have analyzed the document and chose to highlight three key elements that are essential in the GCF agenda-setting process. This post focuses on how the Fund expects to engage with the private sector. The aim is to assess what the Plan is prioritizing, and also (deliberately or inadvertently) failing to clarify about GCF priorities for the next four years.
Private Sector Engagement
What is the key issue? Mobilizing private finance is essential to achieve the Paris Agreement’s long-term goals and effect the paradigm shift that is at the core of the GCF mandate and vision. As one of its strategic priorities for the replenishment period, the GCF is stressing the importance of “catalyzing private sector finance at scale”, an approach that also drove the work of the Fund during its Initial Resource Mobilization (IRM) period, including through a specific request for proposals (RFP) to “mobilize funds at scale”.
What is the angle in the 2020-2023 Strategic Plan? The Fund is sending some positive signals in noting that it aims to support climate-oriented local financial systems, green banks, markets and institutions. The Plan’s focus on de-risking and addressing barriers, including currency fluctuation, is also welcome and necessary. Further, the Strategic Plan emphasizes the key role of the private sector in adaptation, by supporting enabling environments and blended finance deployment to test innovative business solutions. Also, the Plan prioritizes attracting large institutional sources of capital through aggregation and securitization.
The Plan has also left some issues open. It notes that a GCF private sector strategy “will be developed”, and that a “successful execution of the strategy will require a staged development of modalities, starting with an accreditation strategy and readiness for private sector engagement”.
What is the subtext? In mid-2019, the Board considered a strategy for the Private Sector Facility (PSF); however, it failed to approve it based on a number of concerns. Among the options proposed for the PSF was the possibility to finance projects directly (as allowed by the Governing Instrument)–as opposed to via accredited entities– by making some changes to the Fund’s business model and potentially ring-fencing an amount for the PSF to pilot direct investment. Some Board members and stakeholders were wary about the capacity of the PSF to invest directly in projects, what it would mean in terms of staff needs and budget implications, and how to ensure high fiduciary, environmental and social standards.
Research shows that there are high-risk, innovative ideas that accredited entities are not putting forward/developing through their own pipelines. The Forward-Looking Review of the Fund conducted by the Independent Evaluation Unit found that, with respect to the private sector pipeline and portfolio, “projects brought to the GCF by accredited entities are to a large extent similar in sector prioritization (i.e. mitigation focused) and financial instruments (i.e. hard currency, focus on loans) to those financed through other sources in the GCF”.
As CCAP noted in its input to the Strategic Plan, this could indicate that GCF concessional financing is not necessarily used to finance the most innovative, riskier projects that need risk mitigation or subsidy the most. Indeed, our research suggests the Fund’s portfolio is mostly supply driven. Accredited entities are incentivized to prioritize projects within their own pipelines over those from external sources. Consequently, highly innovative ideas that could benefit from the Fund’s concessional finance may be turned away by accredited entities if they are not aligned with their own sector priorities and risk inclination.
As currently expressed in the Strategic Plan, key actions around bolstering the role of the private sector are fairly open ended and more on the conservative side. There are only a few concrete provisions that encourage a bolder role for the PSF. As the Board considers a “staged development of PSF modalities”, it should consider why current approaches have thus far not yielded effective results, and allow for more proactive action such as direct investment or syndication roles with institutional investors. The Plan is not explicitly encouraging these proactive investment approaches, however, we expect to see them in the upcoming private sector strategy.