How to Expand International Climate Finance Investments
A country’s success in attracting international climate finance depends on the enabling environment in place to facilitate projects.
Rightly or wrongly, developing countries may see themselves in competition for financing from the $10 billion Green Climate Fund (GCF)—the flagship fund for adaptation and mitigation investment under the UN Framework Convention on Climate Change.
Some countries have been particularly successful in tapping GCF funds; for instance, small island states in the Caribbean and Asia-Pacific have to date received roughly $380 million in GCF approvals, equivalent to around $130 per capita.
For other countries, it has been more challenging. To meet the GCF Board’s increasingly stringent eye, projects must demonstrate a robust climate rationale, including establishing the climate investment need and justifying the proposed activities. Business-as-usual projects are being increasingly rejected in favor of paradigm-shifting investments that offer sustained benefits.
A country’s success in attracting international climate finance will likely depend on the enabling environment it has in place to facilitate climate projects. Effective enabling environments feature a well-functioning project cycle, in which investment concepts are prioritized, designed and implemented, and subsequently evaluated.
At the prioritization stage, high-level strategic climate change planning will develop longer-term principles and objectives for action. This could include investment themes, timelines, and estimated investment needs. Examples can be found in countries’ self-declared Nationally Determined Contributions to the 2015 Paris Agreement and National Adaptation Plans of Action.
At this stage, the project concepts or ideas that will eventually seek GCF funding are first created, and their climate rationale first established. Climate projects should ideally arise from an assessment of climate risks and vulnerabilities, rather than reworking development projects.
For some countries, however, investment prioritization processes may be less effective on climate issues. Country climate finance focal points (for GCF finance, they are called National Designated Authorities) may not have sufficient seniority and have limited access to central government planning units such as the Ministry of Finance. There may be insufficient awareness or incentives for national entities (including private sector) to develop GCF projects.
Design and implementation
Climate change projects feature many of the same inputs as development projects, including engineering design, safeguards, and stakeholder engagement. Adaptation projects additionally will be underpinned by detailed assessment and management of climate risks. Mitigation projects will need to demonstrate emissions reductions against future baseline emissions levels.
However, in some countries climate-related data—as well as data on energy and emissions—may be sparse, unavailable, or unreliable, making detailed project-specific climate assessments difficult.
Monitoring and evaluation
Monitoring and evaluation (M&E) establishes a transparent track record of project progress and impact for management and planning. M&E reports will typically track project milestones through to higher-level policy objectives.
If a country can demonstrate good results from their climate investments, they are more likely to receive additional funding in future.
Evaluation is an often under-appreciated element of the project cycle. However, it is likely to become increasingly important as donors seek more visible and widespread use of advanced M&E approaches, such as randomized control trials.
The challenge in many countries is that local capacity for M&E can be limited or diffuse, and incentives to undertake M&E are perceived to be low. Reporting is often done on a discrete project basis and there is little long-term tracking of benefits.
Enhancing climate investments
There is no silver bullet to improve the enabling environment for international climate investments. However, some lessons emerge from country experiences to date.
1. Take a programmatic rather than project-by-project approach. National climate investment programs, such as those under the Pilot Program for Climate Resilience (PPCR), seek to strengthen the project cycle by applying expertise and resources to project prioritization through to M&E. This enhances investment coordination and institutional memory, which may increase the likelihood of future investment. Tajikistan, for example, has leveraged its experience with PPCR investments and received GCF approval for three more climate projects, with two more in the pipeline.
2. Build on existing national institutions and systems. There is a tendency among donors and governments to establish new processes and institutions for climate change-related activities, including for coordination, review, and planning.
Such systems often lack sufficient resources or authority and fail to gain long-term traction with key decision makers. They may also duplicate well-established functions in place for development finance. As such, enhancing the climate relevance of established development functions may be more effective, efficient, and sustainable.
3. Strengthen and empower climate finance focal points. To enhance the effectiveness of the project cycle, the core role of the National Designated Authority—to review prospective projects—could be expanded to enhance project cycle functions including strategic planning and prioritization, technical advice, and evaluation. Kyrgyz Republic, for example, has recently established a Climate Finance Center directly within the Government to improve climate investment coordination within its central planning functions.
4. Invest in more accessible and higher-quality climate services. Poor quality hydro-meteorological data and forecasting hinders climate resilience. Investments in improved monitoring, data collection, and forecasting, as well as institutional strengthening of hydro-meteorological services are likely to have significant benefits, including for identifying and designing prospective climate projects.
By all accounts, we should be entering a ‘golden era’ of international climate finance. Driven by recent momentum on global climate action, the most in need have the potential to receive unprecedented quantities of investments. Those with the most effective enabling environment, however, will be best suited to attract and manage those investments to the greatest benefit.