Making the Green Climate Fund “effective” soon - in a lasting way

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By the end of April 2015 only 42 percent of the November conference pledges were paid

The Green Climate Fund, striving to be fully operational by the Paris climate summit in December, missed its "effectiveness date" at the end of April, an important deadline giving the Fund the authority to begin making funding commitments. This analysis provides a status update on what the Fund needs to not only "open for business" soon, but also move lastingly beyond "business as usual."

Just weeks before climate negotiators reconvene in Bonn in June to make progress on a new global climate agreement to take effect in 2020, the Green Climate Fund (GCF), considered to be one of the key multilateral instruments in the new agreement’s tool box to support transformative change in developing countries, missed an important deadline at the end of April.  Following the GCF’s initial resource mobilization efforts last winter, with pledges to be spent during between 2015 and 2018 totaling 10.2 billion US Dollar from 33 countries, including eight developing countries, the end of April was set to be the Fund’s “effectiveness date” – the date the Fund would be ready to make financial commitments. However, this required 50 percent of the 9.35 billion US Dollar in pledges made at the one-day pledging conference in Berlin in November to be fully executed. Yet, by end of April, only 21 countries had signed contribution agreements totaling 4 billion US Dollar, or 42 percent of the November conference pledges. Both the United States and Japan, the highest contributors with combined pledges of 4.5 billion US Dollar, failed to meet the deadline. This prompted calls by the Fund’s Executive Director to the remaining hold-out contributors to “accelerate” the signing of their money over to the Fund – as the failure to do so will quickly send a bad signal to the international climate process during its critical phase.

The GCF Secretariat can unfortunately not count on the United States to speed up its domestic funding approval process to sign the 3 billion US Dollar pledged in November over soon. The Obama administration did not even request any funding for the GCF for the ongoing budget year and has only put in 500 million US Dollar in the President’s budget request for fiscal year 2016 – over which Capitol Hill will be haggling in earnest only later this summer. This will be an uphill struggle in a Republican dominated Congress for which wording like “green”, “climate change” and “funding” – especially for an entity connected to the United Nations – are all already individually red flags, never mind their combined potency. The administration is therefore counting on allies in the faith, businesses and national security communities to help them made their argument on the Hill - with still uncertain success despite months of ongoing behind-the-scenes efforts of many pro-GCF American voices. The missing 500 million US Dollar for GCF effectiveness to be reached quickly will therefore have to come from Japan (which had pledged 1.5 billion US Dollar in Berlin), as several of the other still outstanding contributors like Canada or Australia (with 450 million US Dollar combined) only pledged after Berlin.

Reaching its ability to sign funding agreements with recipient countries soon is key to the GCF strategy to approve the first few projects at its final Board meeting in October of this year, just weeks before parties to the UN climate convention convene in Paris in December to finalize the 2020 agreement. Five years after the GCF was established with the Cancun Agreements at COP 16, it could then prove to the COP 21 that it is fully “open for business.” As an operating entity of the financial mechanism of the UN Framework Convention on Climate Change (UNFCCC) under Article 11, the GCF is “accountable to and function[s] under the guidance of the COP,” just like the Global Environment Facility (GEF), the financial mechanism’s other operating entity. Once all pledges are fully paid, the GCF will be the biggest multilateral climate fund in a still evolving global climate finance architecture.   

The main financial channel for multilateral finance transfers

In the new 2020 climate agreement, the GCF is expected to become the main financial channel for multilateral finance transfers from developed to developing countries, particularly for adaptation flows. While it is unclear if the new agreement will set a time-table for new quantified climate finance goals, the fulfillment of the 2009 Copenhagen pledge of 100 US Dollar billion per year by 2020 is seen as the floor for long-term financing commitments. How much of this money will be channeled via the GCF and how much of it will come in form of public funds is an open question. A regular replenishment process scheduled to start in mid-2017 will then show if developed countries, as the primary contributors to the GCF Trust Fund, share the ambition for the GCF to potentially handle tens of billions of dollars per year.

The 24 member Board of the GCF, composed of an equal number of representatives from developed and developing countries with a special seat each for Least Developed Countries (LDCs) and Small Island Developing States (SIDS), has met nine times since August 2012. Two more Board meetings (in early July and mid-October) are scheduled for 2015, which will have to deal with ambitious agendas under a lot of time-pressure to get the GCF ready for funding action this fall.  This will be the end game for the Board and a test of its willingness to reach compromise, a skill honed via a number of hard fought decisions to fine-tune and clarify the “business model” of the GCF over the past three years, as it still has not agreed on a voting procedure in the absence of consensus. The non-resident GCF Board is supported by the Fund’s Secretariat, based in Songdo in South Korea, which is nearing its full initial personnel strength with close to 50 full-time staff. Several specialized Board committees and advisory panels convening periodically, for example for accreditation or on investment and private sector engagement, have also been established.

This lean organizational set-up is indicative of the “wholesale” business model in which the GCF will start its funding operations. Rather than implementing directly, for example like the Multilateral Development Banks (MDBs), the GCF will rely on the staff power and detailed procedures of other organizations accredited to the Fund, with the Secretariat only providing due diligence review of funding proposals and implementation reporting. This, however, can only work, if the GCF Secretariat addresses the well documented shortcomings in existing development finance approaches, including the transparency of contracts and sub-contracts, by working in particular with financial intermediaries such as in the World Bank’s private sector arm, the International Finance Corporation (IFC).. The GCF Secretariat must be able to guarantee through its oversight at the Fund level that projects financed and overseen by intermediaries indeed “do no harm” to livelihoods and the environment, nor undermine fundamental human rights in the name of addressing climate change.

The GCF will have a multitude of implementing entities from the public and the private sectors allowing for both international access to developing countries through multilateral organizations, as well as for direct access through national entities. As a matter of fact, no limit has been set by the Board on the number of sub-national, national, regional and international organizations that can seek accreditation to the Fund. This is in contrast to the Adaptation Fund, which allowed for only one national entity per country to be accredited for direct access to its funding. A “fit-for-purpose” GCF accreditation approach gives applicants flexibility to tailor their applications to the size and risk categorization of the projects they hope to implement with GCF funding and the financial instruments the organizations will deploy.  The larger, riskier and more complex (think financial blending, equity investments or risk guarantees) the GCF projects are the applying entity wishes to implement in the future, the more comprehensive are the fiduciary standards and environmental and social safeguards the applicant must have the ability to enforce and comply with. For a three year interim period, the GCF is relying on the performance standards of the World Bank’s private sector arm IFC.  The GCF’s own safeguards are to be determined in a comprehensive and participatory process. However, a monitoring and accountability framework for GCF project implementation still has to be finalized. Likewise, the set of three accountability mechanisms for the Fund, including an independent evaluation office, a fraud unit and an independent redress mechanism to allow for developing countries’ challenges to GCF Board funding decisions and with the authority to receive complaints by affected people related to Fund operations, are not yet fully operational and need further work this year.

Nevertheless, the Board at its last meeting in March already approved the Fund’s first seven implementing entities. This first batch included some national actors like the Senegalese NGO CSE, but also large “usual suspects” multilateral actors like the Asian Development Bank or UNDP. Somewhat controversial, the accreditation of a developed country’s bilateral development bank, the German Kreditanstalt für Wiederaufbau (KfW) under the GCF international access mode opened the door wide for other bilateral development finance institutions (DFIs), including from developing countries, which now gain the ability to implement GCF funding not just domestically but also in other developing countries. More accreditations vetted by a six member expert accreditation panel are to be approved at the July and October GCF Board meetings. As of mid-March, more than 60 national and international entities have already began the process, some under a fast-track approach that takes into account compliance with other fund’s procedures, such as the GEF’s or the Adaptation Fund’s.

Private sector component

Still further progress is needed to fully define the private sector component of the GCF. From the start of the GCF operationalization process, the Fund’s engagement with the private sector and the organizational focus on a Private Sector Facility (PSF) was meant as a distinguishing factor to separate the GCF from other existing climate funds. This PSF approach includes the desire to set the GCF “risk appetite” for engagement with the private sector at a higher level than, for example, is practice at the World Bank’s Climate Investment Funds (CIFs). This is a lesson learned that many Board members felt the GCF needs to apply to be successful in supporting the “paradigm shift toward low-emission and climate-resilient development” that the GCF’s governing instrument defined as the mission statement for the Fund. The GCF is keen to work with private sector entities both as providers of financial inputs to the Fund – a focus is here on institutional and equity investors – as well as project implementers and co-financiers. The look at private investors is meant to bring funding for the GCF “at scale” beyond the largely public grant contributions that make up the initial 10 billion US Dollar in pledged starting capital, especially in future replenishment rounds and given the reality of budgetary constraints in developed countries. As co-financiers and implementers, the GCF courts the private sector for implementation via public private partnerships (PPPs) as a preferred approach – an engagement model with risks that need a principled accountability approach in the GCF. 

A key determinant for whether the GCF will be successful in supporting paradigmatic change in recipient countries through its private sector investing will be the Fund’s prioritization of engaging domestic businesses in developing countriesover transnational and developed country corporations. The GCF needs to set its sight particularly on strengthening the capacity and increasing the access to finance for climate-relevant investments by micro-, small- and medium-sized enterprises (MSMEs), which form the backbone of developing country economies – and will determine their climate-friendly future course. The Board aims to start with an MSME pilot program this year. The first GCF-accredited private sector entity, social investor Acumen Fund, also focuses on engaging with a MSME clientele.

The realization of the Fund’s transformative potential has been aided by a number of key Board decisions over the past year. One significant core provision is the mandate to work toward allocating half of GCF resources toward adaptation focused on building the resilience of people and ecosystems in recipient countries. Half of the GCF’s adaptation funding will then be ring-fenced for SIDS, LDCs and African states, all countries already severely affected by climate change, which aggravates existing poverty and social exclusion of the most marginalized population groups such as women and indigenous communities. Those countries have so far not profited enough from current climate finance flows, which prioritize emissions reductions in large emerging economies. This makes the GCF allocating approach even more important as an international corrective, particularly if it paves the way for enshrining this balanced allocation principle in a new Paris climate agreement.

Investment framework

While some further refinement work is still necessary, the GCF Board also agreed already on the key provisions of an investment framework to help guide its decision-making process on funding proposals that take multiple criteria into account, including the sustainable development framing of proposals, the needs of recipient countries and most affected population groups and whether investments are one-off activities or contribute to a lasting change, including through changes in policies or regulatory systems. These are meant to complement the focus on the climate ambition of the Fund’s financing commitment. Over the next few months, the GCF Board and Secretariat will have to do further work to ensure that it measures its results and performance focused on such multiple benefits not just at the level of individual projects and programs, but also by looking at aggregate outcomes and impacts on the Fund-portfolio level.

Still missing from both the GCF performance measurement and investment frameworks, however, is a clear statement by the Fund that its goal to promote a paradigm shift is incompatible with support for “business-as-usual” technologies and approaches, including fossil fuel projects, large hydro dams, plantation-style reforestation or biofuel monoculture or nuclear technology. An explicit “exclusion list” of such technologies and approaches in the GCF has yet to be adopted and is facing opposition in the Board, among others from Japan and China.

Country-ownership is anchored in the GCF governing instrument, its “constitution,” as a guiding governance principle for the Fund and was confirmed by several decisions over the last few Board meetings. National designated authorities (NDAs), as the main liaison of a developing country with the Fund, are expected to play a key role in developing and proposing country programs for GCF investment and in coordinating country priorities, including through domestic participatory multi-stakeholder engagement. To increase their capacity is one of the priorities of a readiness and preparatory support program worth millions of dollars that the Board has already approved. The right of the NDA to confirm via an active endorsement letter that project proposals are in line with national funding priorities is an expression of that principle. Developing countries’ rejection of a decision-making procedure for the GCF Board in the absence of consensus that would assign voting shares according to contributions (as in the Bretton Woods organizations) is another. There was also no consensus in the Board for a stipulation in the GCF contribution policies that would have given developed country contributors the right to earmark funds. 

Gender policy

As the first multilateral climate fund, the GCF will start out with a gender policy and a gender action plan in place even before the first project is approved. This commitment to apply a gender-sensitive approach to its financing, which is enshrined as a guiding principle in the GCF governing instrument, is part of the paradigm shift that the Fund seeks to support. The GCF has also already integrated gender considerations to varying degrees into its accreditation, investment and results management frameworks. The ability to implement the Fund’s gender policy for example is one of the accreditation stipulations for implementers of GCF funding, applicable equally for mitigation and adaptation and for public and private sector approaches. More work needs to be done, especially to ensure that both the GCF Board and Secretariat are not only gender-balanced (as the GCF Governing Instrument calls for – a demand the current GCF Board falls woefully short of), but also gender-competent. Gender-responsiveness has to be integrated throughout the GCF project cycle, from project proposal development to implementation and by securing and learning from results of monitoring and evaluation at the portfolio level.

Given the high stakes for a new climate agreement at COP 21 and the key importance an operational GCF has for a positive outcome in Paris, the GCF Board and Secretariat in their work this year will undoubtedly prioritize those policies and decisions that allow the Board to consider and approve the first GCF projects by October. This is understandable, but also potentially dangerous for the GCF’s reputation as well as its smooth functioning long-term. Despite the political pressure, the Board and the Secretariat cannot forget some other key policies and procedures yet to be fully determined. These include GCF information disclosure and communication policies that emulate existing best practices at other funds, for example by allowing for the live webcasting of Board meetings, as well as comprehensive and meaningful stakeholder engagement and consultation processes and fully developed conflict of interest ethical guidelines for the GCF Board and the Secretariat staff. The latter is also relevant for accredited observer organizations to the Fund ready to cross the line from policy observation and advocacy to GCF funding implementation. Those policies, often not considered essential under time-pressure, are nevertheless core requirements to ensure that the Fund will not only be “open for business” on time for the Paris COP 21, but also really moves its funding approaches lastingly beyond “business-as-usual”.