Furthering International Climate Finance: Finalizing Some Key Threshold Issues for the Green Climate Fund

Countries will meet next week to take further steps to advance key threshold issues for the Green Climate Fund. The Fund was a key component of the agreements reached in Copenhagen in 2009 as it could help mobilize significant resources to assist developing countries in reducing emissions and adapting to the impacts of climate change. Fully launching the Fund is an important step in advance of the Paris 2015 international climate agreement. This meeting of the Fund is scheduled to finalize some of the key threshold issues in order to have the Fund ready for large scale resource mobilization. The Board must rise to the challenge by finalizing key threshold issues.

In September 2013, countries agreed that they needed to finalize eight key issues – called the “Essential Eight” (page 60) – in order for countries to have confidence to begin to mobilize significant resources through the Fund. At the same time, these eight issues were considered critical basic conditions to set the Fund on a path to effectively and efficiently help deploy the kind of transformational action necessary to address climate change. Next week countries will be seeking to agree to the outstanding areas necessary to finalize the essential eight issues:

1. Safeguard system and rules, administrative rules, and overall fund structure. The Fund must have a strong set of rules, oversight, and penalties to ensure that projects don’t harm people or the planet. The Fund must also ensure that it is spending money with a strong set of fiduciary rules. The Fund should also be structured to ensure independent recommendations from the Secretariat staff and an independent evaluation team (e.g., a sort of inspector general unit).

2. Structure for taking risks on new ways to address climate change within agreed limits and the framework for making investments. The Found should ensure that its investments are transformational and not merely one-off projects that don’t lead to sweeping changes across a country or sector. For example, if it only invests in a single wind turbine, but the overall government policy isn’t transformed and the market doesn’t shift then the Fund isn’t succeeding. This may mean investing in projects that don’t have a guaranteed 100% success rate since projects like that are already happening and therefore note in need of assistance. But a balance must be found.

3. Ways to ensure that the Fund invests in results and how to track those results over time. The Fund shouldn’t simply pay for a country/project to assess a problem. Instead the country/project should deliver tangible emissions reductions, reduced forest loss, and less people vulnerable to the impacts of climate change. Obviously not all benefits are easily measured so the Fund must recognize this challenge and not rely too heavily on indicators. At the same time it shouldn’t invest in projects that aren’t likely to make a big dent in the problem.

4. Rules to decide which entities are approved to receive funding to oversee a project. For example there will be an accreditation process for deciding which national, regional, and international entities have in place all the necessary safeguards and have the capability of effectively overseeing the necessary transformation on-the-ground. Institutions with a failed track record on environmental or social performance should be excluded from the outset. And entities that implement projects which fail to deliver agreed safeguards or oversight should be subject to automatic recourse.

5. Process to approve projects, including the criteria to make decisions on which projects are funding. Will the Fund make decisions on projects on a first-come-first-served basis or will the fund create a different dynamic to ensure that only the best projects proceed? The Board is envisioning having both calls for proposals (e.g., give us your best renewable energy deployment effort) and unsolicited proposals (i.e., to ensure that good projects aren’t excluded because they don’t fit into a call for proposals). In addition, the Fund wants to ensure that a project has gone through a strong set of steps before it is even presented for approval to the Board.

6. Initial rules for operating the different funding “window” (i.e., mitigation and adaptation) and the private sector facility. The Fund will make separate investments to reduce emissions and help countries adapt to climate change. The Board will have to make decisions to ensure that there is a good mix of project types (e.g., not all deforestation reduction and not all clean energy deployment).

7. Independent Evaluation Unit and the Integrity Unit’s terms of reference so that they can provide strong independent oversight to the Fund and the implementation of projects on-the-ground. The Fund will need to put in place a system to ensure that bad projects don’t occur. Unfortunately past entities like the World Bank or International Finance Corporation have often ignored clear documented violations of their rules. It will be important that this Fund operates much, much better.

8. Policies and procedures for the initial mobilization of resources. The Fund is seeking to put in place a process to kick-start the mobilization of resources. The proposed draft envisions that before the end of June 2014 countries could hold the first meeting to start the initial mobilization of resources – assuming these final elements are agreed. 

The Board is attempting to finalize these threshold issues next week in a manner that creates the overall “Business Model” for the Green Climate Fund. Think of this as the overall structure of a new company you are about to launch. Before you go to investors you must figure out your company’s core DNA (i.e., who you are and what you won’t become), your overall plan, and how you are going to be effectively and efficiently structured. The specifics underneath that business model (e.g, your exact products) are important and will likely evolve over time, but without a strong overall model in place you wouldn’t be able to convince an investor that you are worthy of their resources. This is the stage that the Green Climate Fund is at – trying to get the business model in place so that countries will start to put resources into the Fund.

Much more detailed work will have to come in the following months and years, but if the Board can agree to these minimum threshold issues then countries can start to invest resources in the Fund. It has great promise to play a critical role in helping address climate change. Let’s hope that Board members rise to the challenge.