INSIDER: Four Ways the Green Climate Fund Can Strengthen Its Next Strategic Plan
Later this week, the Board of the Green Climate Fund will meet in Monrovia, Liberia, to discuss the Fund's Strategic Plan for 2020-2023. This is a moment for the GCF to not only lay out its plan for the future but review and learn from its first four years of operation.
The Strategic Plan communicates the Board's vision for the Fund, sets core operational priorities and outlines how they will be achieved. The plan also signals the GCF's priorities to accredited entities, countries and other stakeholders. It can help stakeholders plan how to engage with the Fund, hopefully improving access to finance and strengthening partnerships with the Fund. The Strategic Plan also plays a role in accountability by allowing Board members and stakeholders to determine whether the GCF has delivered on its objectives.
The draft of the new Strategic Plan has been under development for over a year and currently runs to 22 pages (compared to 9 pages for the initial Strategic Plan). The job of Board members meeting this week will be to identify the Fund's priorities for the next four years and agree on a more focused text, which can then be taken to the formal Board meeting in March for approval.
There are four key question that Board members will need to grapple with:
1. How should the GCF align its ambition with 1.5 degrees?
The Intergovernmental Panel on Climate Change's 2018 special report on 1.5 degrees reinforced the urgency of climate action. The possibility of keeping average warming at only 1.5 degrees 570 Gt in 2018 is shrinking fast and the energy sector alone needs $2.4 trillion in investments per year up to 2030 to undergo the needed transformation.
While the GCF has approved several large-scale mitigation projects in its first five years of operations, there is a need for a renewed focus on highly ambitious projects that can help developing countries align their development trajectories with the emission reduction pathways required for a 1.5 degrees world. The Strategic Plan does not elaborate in detail on how such projects will be incentivized or assessed.
Currently, the only clear reference to fostering greater ambition in the draft Plan is the goal to "Deliver portfolio-level mitigation and adaptation results that exceed average [initial funding period] results." These results metrics are emissions reduced or avoided for each USD USD 1 billion invested in mitigation and the number of people with increased resilience for each USD 1 billion invested in adaptation.
However, while large direct emissions reductions could be part of an ambitious portfolio, the Fund should explore metrics that capture broader transformational potential. Focusing on projected direct emission reductions could discourage project developers from looking for a more system-wide impact.
This requires assessing the potential for emissions reductions to be catalyzed beyond the direct scope of the project itself. It includes looking at the projected impacts of, for example, institutional and regulatory reforms in reshaping entire markets. Board members could think about how to incentivize GCF support for emissions reductions in hard-to-abate sectors where marginal costs are currently high, but where scaling up deployment will be critical for deep decarbonization. References in the draft Plan to working in tricky sectors like energy-efficient ocean-based transport and energy-efficient cooling are a good start in this regard.
One option to drive ambition in future programming might be an "ambition filter" as part of the updated investment criteria and results areas, which would require mitigation projects to aim for a minimum threshold of ambition that goes beyond direct project emission reductions in order to be eligible for funding. Careful thinking would be required to ensure it respects the Governing Instrument's provisions on eligibility and country ownership, but it could be designed to account for different country contexts, for example with metrics scaled according to a country's emissions and capacity.
2. What should the GCF's approach to adaptation and loss & damage be?
UNEP estimates that adaptation finance needs in developing countries could be $180-300 billion a year by 2030. There is clearly a need to make sure that public finance for adaptation is both increased and targeted at the most vulnerable communities. The GCF already has a goal that half of its resources, on a grant equivalent basis, will be allocated to adaptation, and that of this adaptation funding, at least 50% is allocated to particularly vulnerable countries such as Small Island Developing States (SIDS), Least Developed Countries (LDCs) and African States. In its first funding period from 2015-2019, the Fund exceeded these targets with 53% of funding allocated to adaptation and 69% of adaptation funding going to LDCs, SIDS and African countries. The draft Strategic Plan proposes that this higher level be maintained and formalized as the new adaptation allocation goal, which makes sense as a way to ensure GCF adaptation funding gets to countries most vulnerable to climate impacts.
Beyond increasing adaptation targets, the GCF should clarify its approach to approving adaptation funding. In the past, unclear messaging on what the GCF required for adaptation projects approval led, at times, to disagreements among board members and between the Board and the Secretariat over what the GCF should and shouldn't fund. This, in turn, caused confusion among project proponents. A new Strategic Plan could be a good place to more clearly lay the groundwork for that approach. The Plan should move the GCF beyond the false dichotomy between development and adaptation and recognize that adaptation is not a separate action from development. Rather, it is about doing development differently. This requires a stronger emphasis on the causal connections between proposed activities and context-specific climate risks, impacts and vulnerabilities -- and less emphasis on identifying climate actions as separate from development.
There is also a need for the Strategic Plan to set out the Fund's approach to loss and damage. It is currently not mentioned, but the invitation by COP25 to the GCF Board to "continue providing financial resources for activities relevant to averting, minimizing and addressing loss and damage" makes it clear that this is something the Fund needs to address.
3. How can the GCF ensure quality in programming and practice?
The GCF is under great pressure to program a large volume of funding in a short amount of time, and to mobilize significant sums of finance from the private sector. The draft Strategic Plan focuses particularly on these areas, with ambitious goals for programming and private finance mobilization. However, in doing so, there is a need to continue to manage the risks that an emphasis on scale and speed can bring. The GCF should of course be aiming higher, bigger and faster, but the Board needs to manage possible tradeoffs with the quality of the portfolio. The Fund may have ambitious goals, but if the programming is not high quality, it will be hard to reach them. Ambition and quality therefore must go hand in hand to ensure the Fund has impact commensurate with the scale of the climate challenge.
Some of the proposed goals risk creating perverse incentives. For example, the draft plan suggests an indicative target of $7 private finance leveraged for every $1 the Fund provides. In its first five years of operation, the GCF achieved a private leverage ratio of $3 of private finance for every $1 the Fund provided, so this would be more than doubling the rate. While mobilizing private investment is important, this metric should be used with caution, since it measures an input (investment) not the output (emissions reductions and enhanced resilience). It risks incentivizing investments in less risky and/or low marginal cost activities where it is relatively easy to attract private co-financing. This would be a waste of the GCF's concessional resources and high appetite for risk; other actors, including MDBs and the private sector, ought to be able to finance low-risk approaches without GCF participation.
The draft Strategic Plan also suggests that the GCF explore additional financing modalities beyond grants, loans, equity and guarantees that it current provides. Options identified include supporting venture-style incubators and underwriting securities. If the Fund goes down this path, it would need to significantly upgrade its capacity to measure and manage complex financial risk, including more staff and specific expertise, including in particular sectors. While the draft plan proposes some staffing growth, careful consideration is required to ensure that, if the Fund expands into more technically complex sectors and/or financing approaches, there is a willingness on the part of the Board to provide commensurate resourcing so that Secretariat capacities can grow accordingly.
4. How can the GCF empower developing country institutions?
Part of what makes the GCF such a popular fund is its emphasis on developing country ownership, including through its use of direct access which allows institutions in developing countries to access funding without having to go through international intermediaries. The draft Strategic Plan rightly states that Direct Access Entities (DAEs) provide an opportunity to help countries build the institutional capacity necessary to bring about climate transformation. The goal of direct access should be to help institutions access the human, technical and financial resources required to effectively implement the country's climate goals. There are several ways the Strategic Plan can guide improvements in the GCF's approach to direct access.
For many direct access entities, obtaining project approval has proven difficult. As of the last board meeting, 56 DAEs have been accredited, but only 18 of these have had projects approved by the Board. Readiness and Project Preparation Facility funding are some of the GCF's most important tools for helping countries develop sound proposals. However, even this preparatory funding can be cumbersome for entities to unlock. For example, an independent evaluation report found that applicants had to wait on average 3-4 months to receive just $50,000 to enhance capacity on environmental and social safeguards and gender.
In its Strategic Plan, the Board should explore ways to make readiness and project preparation funding easier to access. This could include reducing the amount of information required to obtain such funding, which would have the added benefit of reducing the amount of paperwork the secretariat must review, thus freeing up GCF staff time. Lag times in proposal development may also be reduced if recipients of readiness or project preparation funding could use these resources to support salaries of staff members at the accredited entity itself, not just external consultants.
Another way that the GCF helps developing countries is by providing capacity and expertise to help them develop national climate commitments (including Long-term Strategies and National Adaptation Plans) and translate these into investment plans in the form of GCF country programs. The draft Strategic Plan states that the GCF will continue to do this. This emphasis on high-level planning is valuable but fails to account for the finding by the Fund's independent evaluation unit that country programs have "not delivered on their aims yet." Part of the problem with country programs is the lack of guidance as to what they should cover. Many country programs are too broad and high-level to provide meaningful guidance to national authorities and project developers. The GCF could benefit from instead helping countries assess the viability of different project options so that they can move forward with viable project proposals that fit well with the GCF's mandate.
A Strategic Plan to deliver the ambition of Paris
Last year, the GCF received $9.7 billion in new pledges for the next four years. The new Strategic Plan can be a vital tool to enable the Fund to program its new resources to have the maximum impact. To do so, the Board needs to ensure the Plan focuses on how the Fund can help countries achieve the ambitions of the Paris Agreement in terms of emissions reductions and increased resilience while increasing the quality of programming and the capacities of developing country institutions.