Why the Green Climate Fund Should Give Developing Countries Greater Direct Access to Finance
At its latest board meeting in March 2021, the Green Climate Fund (GCF) approved $1.2 billion in funding for 15 climate change projects in developing countries. However, funding for only two of these projects, or 1.5% of the total amount, went directly to developing country institutions.
The GCF, one of the financial mechanisms the Paris Agreement adopted in 2015, is the world’s single-largest source of public finance dedicated to reducing greenhouse gas emissions and helping countries adapt to climate change. Despite a commitment to enable developing country institutions to access funds without going through an international intermediary, the GCF has struggled to enable “direct access” to take off.
Most of the climate finance provided by the GCF flows through international institutions such as the UN Development Programme (UNDP) or the World Bank. The GCF has accredited 62 developing country institutions as eligible for direct access so far, but 42 of them have yet to receive actual project funding.
Giving more direct access to finance is crucial to putting developing countries in the driver’s seat of their own development. It’s also key to the GCF’s success, as demonstrated by past examples of GCF-supported projects of direct access entities:
1. Direct Access Brings Adaptation Finance to the Local Level
National and subnational institutions are uniquely positioned to channel GCF funding to the local level, where communities can implement solutions that respond to their specific climate vulnerabilities and needs. There is growing recognition internationally that individual households, communities, villages and cities, which are on the frontlines of climate change impacts, need to be supported and empowered to adapt in locally relevant ways.
The Environmental Investment Fund of Namibia is addressing this challenge through its Empower to Adapt project, approved by the GCF in 2016. The project gives small grants and training to rural communities to build climate resilience through improved land and natural resource management. Communities may choose to partner with local NGOs or small businesses on projects that strengthen forest and savanna ecosystems and establish sustainable businesses. Some of the GCF sub-grants awarded to date are being used to improve access to water in drought-prone areas, to strengthen food security by growing more vegetables with less water, and to protect communities’ water sources.
2. Direct Access Is Critical to Aligning Financial Flows with the Paris Agreement
As developing countries aim for low-carbon and climate-resilient growth, their public and private national financial institutions are key players in aligning funding for that growth with the goals of the Paris Agreement.
The Development Bank of Southern Africa (DBSA), a state-owned financial institution, has been an early mover on green finance in South Africa, the continent’s largest greenhouse gas emitter. DBSA’s leadership on climate action placed it at the center of South Africa’s dialogue around transitioning to a low-carbon economy. Between 2018 and 2019, the GCF approved $155.6 million to finance two direct access projects and mobilized an additional $551.9 million in climate finance for those projects from its own funds and other actors. Its GCF projects are funding solar and wind energy development as well as energy and water efficiency, creating local jobs in the process. The DBSA’s Climate Finance Facility project, one of the projects funded by the GCF, is the first fund in Africa that uses a green bank model, bringing in public finance at below-market interest rates and other favorable (or concessional) terms in order to reduce the risk for private investors investing in climate change projects.
Private sector financial institutions in developing countries can play a similar role. XacBank, a commercial bank in Mongolia, blended a $40 million concessional loan from the GCF with its own funding to provide a $60 million loan facility to help micro, small and medium-sized enterprises (MSMEs) make investments in renewable energy and energy efficiency. This facility makes it easier for XacBank to extend credit to MSMEs on more favorable terms. It helps address the barriers of prohibitively high interest rates and short loan time frames that have hindered access to finance by MSMEs, which make up over 90% of businesses in Mongolia. The program also actively targets women-led businesses, which face greater obstacles in accessing finance.
Since its accreditation in 2016, XacBank has mobilized $65 million in grants, loans, and equity from the GCF and another $83.4 million from other funders. The funded projects are shifting the investment landscape in Mongolia towards greener alternatives such as solar energy generation and energy-efficient housing.
Early movers such as DBSA and XacBank can be pivotal in shifting their countries’ financial sectors toward a new and more sustainable way of engaging with the broader economy. When national financial institutions integrate climate change risks and opportunities into their core strategic goals, they can influence the national dialogue and shape overall funding flows in ways that international entities cannot. Demonstrated success with green projects garners these institutions a seat at the table during national policy discussions, helping to usher in climate-compatible public policies.
3. National and Local Institutions Are in it for the Long Run
National and local institutions — called “direct access entities” for the GCF’s purposes — are already established fixtures in their countries and typically committed to supporting sustainable development over the long term. They are familiar with their countries’ needs, challenges and opportunities, and have built mutual trust with stakeholders.
Developing country institutions are often uniquely positioned to advance national climate change priorities in ways that are inclusive, nationally appropriate, and empowering to beneficiaries and other stakeholders. Largely for this reason, country ownership of development finance has long been recognized as critical to its effectiveness.
The GCF’s rigorous process of accreditation requires direct access entities to establish and maintain policies, procedures and systems for impact and accountability that meet internationally recognized standards of best practice. This, in turn, raises the bar for other local institutions that seek international finance, facilitating a virtuous cycle of national leadership and country ownership of climate finance.
For example, the Peruvian fund PROFONANPE’s experience mobilizing GCF funding has elevated it in the Peruvian institutional landscape. Last year, Peru’s government merged the National Environmental Fund into PROFONANPE, making it the only national fund for environmental projects in Peru. The organization is using GCF funding to enhance the resilience of a sensitive wetland ecosystem to droughts, storms and heatwaves. In the process, the project is empowering 120 Indigenous populations dependent on the wetlands to diversify their livelihoods through sustainable businesses.
4. Direct Access Entities Can Be Nimble and Innovative
Direct access entities represent a diverse set of institutions in their scale, organization type and mission. On average, though, they are relatively smaller and have less complex governance and operational structures than international institutions. As a result, they tend to be nimble and innovative in crafting solutions to climate challenges.
For example, the Department of Environment in Antigua and Barbuda’s Ministry of Health and Environment is using GCF funds to build the resilience of not just its own country, but also neighboring Dominica and Granada. All three small island countries have experienced increasingly frequent hurricanes that ravage their infrastructure and economies.
The GCF-funded project, approved just five months after direct access accreditation, is improving public infrastructure such as drainage and irrigation systems, conserving natural ecosystems, and providing small grants to NGOs for storm-proofing community buildings. In addition, it has established an innovative revolving fund to provide affordable loans to private businesses and households to strengthen the resilience of private infrastructure to hurricanes, thereby providing incentives for private investment in adaptation.
Empowering Developing Countries through Direct Access
Giving developing country institutions direct access to GCF funds has enormous potential to promote a paradigm shift toward low-emission and climate-resilient development. The GCF and other providers of climate finance should learn from successes to date and ramp up support for developing country institutions by improving the functioning of the direct access modality. WRI’s recent working paper provides concrete suggestions on how the GCF can do so.
If the GCF is to substantially advance the Paris Agreement goals, it will need to put empowered, capable and accountable national institutions at the core of its strategy.