Signal effect for global climate finance

At the climate summit in Bonn in November (COP 23), Fiji will be the presiding country. It is striving for an agreement to spend more money on adaptation to climate change in the countries at greatest risk. In this context, the GCF has a key role to play. Many developing countries that need financial support to implement their nationally determined contributions (NDCs) to climate action are pinning their hopes on it.

The GCF is accountable to the COP and operates under its guidance. It is currently the largest multilateral climate fund, with financial pledges totaling US $10.3 billion. It can and must deliver major stimuli for global climate finance. Its leading role is not primarily due to its financial clout – which is comparatively modest compared with the trillions of public and private investments that are needed keep global warming below two degrees Celsius. The GCF’s great relevance mainly rests on its guidelines that demand the maximisation of private-sector involvement; bold approaches to innovative financial instruments; the strengthening of country ownership; and the establishment of climate-finance institutions and procedures in recipient countries. Last but not least, the GCF has sent out an important signal by committing to sustainable development and gender equality in all its transactions.

The GCF was established in 2010 at COP16 in Cancun. It is based on the pledge made by the industrial nations to provide developing countries with climate finance worth an annual US $100 billion by 2020, relying on public as well as private money. According to a clause of the Paris Agreement, more money must be raised after 2025.  

A few weeks before the COP in Paris, the GCF's governing Board approved the first draft of project proposals. The Fund thus became fully operational in October 2015. Its Board has an equal number of members from developing and developed countries.

The founding document remained vague on how much of the promised US $100 billion a year would flow through the GCF, but it did state categorically that "a significant share of the new multilateral adaptation funding" must be channeled through the GCF. According to GCF disbursement rules, 50% of the money must be used for emissions reduction and 50% for adaptation. Moreover, half of all adaptation funding is reserved for small island developing states (SIDS), African countries and least developed countries (LDCs).

Private sector favored

Vigilance and assertive management are needed to ensure compliance with these commitments. After five rounds of funding commitments for 43 projects since October 2015, the GCF project portfolio showed a clear imbalance towards emissions reductions in July this year. Mitigation projects accounted for around 66% of all funding pledged. Around a third of all approved funding was earmarked for dual-purpose projects, in which, as experience tells us, the emissions-reduction aspect clearly predominates. The GCF Board approved a further 11 projects worth US $392 million in GCF funding in early October, changing the aforementioned distribution ratios likely slightly.

So far, with now a total of 54 projects worth US $2.6 billion in GCF support, around 50% of approved funding has been committed to projects and programmes that benefit the private sector, including three projects worth US $139 million in GCF support in the latest batch. This focus is deliberate. The GCF believes that private-sector involvement will guarantee long-term support from developed countries. These countries hope that GCF co-financing deals will leverage private-sector investments and thus secure a growing volume of private funding to fulfill the climate-finance obligations by 2020.

In July, two GCF pilot programmes for the private sector were at the tendering stage, with a combined worth of US $700 million. Moreover, some private-sector get funding directly from the GCF. Of 59 implementation partners, the GCF had accredited by October 2017, eight were private enterprises, including a number of major multinational banks. According to a clause in the GCF Monitoring and Accountability Framework, partners’ renewed accreditation after five years depends on their phasing out their involvement in fossil-fuel businesses. This measure is meant to drive the decarbonization of partners’ investment portfolios.  The clause must be enforced fast because it is crucial for the GCF mechanism making the Paris Agreement succeed.

The GCF gives those developing countries that are worst affected by global warming important new access to international climate finance – in spite of, and in some cases even because of, its private-sector focus.  The Board, which includes one member from an SIDS and one from an LDC, has already made significant sums available for LDCs, SIDS and Africa: 84% of the US $2.2 billion of GCF funding approved by July 2017 supported projects and programmes in the respective categories of countries,  and 77% of adaptation funding was committed to them as well. More than half of all funding applications for next year, moreover, concern measures in SIDS, LDCs and African recipient countries.

A GCF core principle is country ownership. This principle means that recipient countries must be in charge of and held accountable for policymaking as well as the implementation of measures. In regard to accreditation and project proposals, the Board has therefore committed to prioritizing national and regional implementation partners which have direct access to the fund. This means that they need not submit proposals through one of 22 accredited international organizations, including multilateral development banks or UN agencies or 5 international commercial banks. As of July, 27 of the then 54 partners had direct access, including three private sector direct access entities. Another five public direct access entities were accredited at the GCF’s last Board meeting in early October, bringing the group of GCF accredited entities now to 59.

The GCF is also experimenting with what it calls “enhanced direct access”. In a pilot programme, funding decisions worth US $200 million will be made at the nation-state level. A pilot project is currently being implemented in Namibia.

Moreover, the GCF has launched a readiness and preparedness programme, to which it had committed US $34 million by July 2017. Some 165 projects in 105 developing countries are set to benefit. At its meeting in early October, the Board committed a further US $50 million to support national adaptation planning processes specifically. The programme is designed to strengthen national designated authorities (NDAs) and focal points, which act as links between recipient countries and the GCF. These agencies should become crucially involved in the drafting GCF country-support programmes and projects. They must ensure that all stakeholders in a country are represented and allowed to participate in the process.

This summer, the Board endorsed a reform of the project-approval process which will similarly boost country ownership. NDAs and national focal points must approve each project for implementation in their country before the Board can accept a proposal. In many countries, however, NDAs and focal points are inadequately equipped for their tasks so far. Success will thus depend on continuous support and technical assistance from an expanding GCF secretariat.  

Though the GCF is an important institution for ensuring the implementation of the Paris Agreement, its future financial viability is by no means guaranteed. The USA had pledged US $3 billion, of which US $2 billion are outstanding. Since US President Donald Trump has announced his nation’s withdrawal from the Paris Agreement in June, this money is unlikely to flow in the next few years. Some observers worry that other major donor countries – including Japan, Britain and Germany – will not make up for the shortfall.

This is one of the reasons why the GCF is considering possible roles for philanthropic donors from the private-sector. It is essential, nonetheless, that the industrialized nations soon renew their pledge to support the GCF with large long-term contributions. COP 23 would be the perfect occasion for doing so. Without such a pledge, the outlook will be bleak for the GCF replenishment process which is scheduled for 2018. Lack of funding would ensure a sad reckoning at a time when national emission reduction pledges must be scaled up to make the Paris Agreement succeed.