19 March 2019
Institutional Finance Update: Steering Capital Towards Global Investments in Climate-aligned Assets
UN Photo/Gill Fickling
story highlights

IFC started applying Green Loan Principles to spur growth of USD 33 billion green loan market.

EIB approved EUR 4.8 billion of transport, business, urban and energy financing in Europe.

EU announced funding of low-carbon infrastructure and environment projects, expected to unlock EUR 3.2 billion.

In 2018, NDF approved nine projects totaling EUR 47 million, including EUR 10 million to projects under the Climate Resilience and Adaptation Finance and Technology Transfer Facility.

4 March 2019: Building climate-resilient and low-carbon infrastructure, particularly in developing countries, requires support, which includes mobilization of finance and investment at different stages of the technology cycle, provision of technical support and facilitation of access to financing for innovation such as through implementing the results of technology needs assessments (TNAs). This institutional update describes last month’s developments in green financing instruments, guidance on TNAs and climate finance readiness, as well as activities of international banks, funds and other green funding activities.

Faced with significant finance and technology needs for climate action to help solve the global environmental crisis, the international community is faced with the challenge of finding ways to lower per capita environmental footprint while at the same time increasing per capita benefits of sustainable development.

EIB Reports Record Investment Support in Africa, Approves EUR 4.8 Billion of Financing in Europe, Africa and Asia

In February, the European Investment Bank (EIB) reported a record EUR 3.3 billion in 2018 in financing for private sector and infrastructure investment in 20 African countries. There, EIB provided more than EUR 1.14 billion for private sector investment, including financing for female entrepreneurs. The Bank also backed lending for climate-related investments, such as in clean energy, as well as sustainable development in priority sectors, such as enhancing water supply and management, addressing land degradation, supporting forest conservation and improving sustainable fishing.

The EIB also approved EUR 4.8 billion of new financing for private sector, transport, energy, housing and water investment. This includes: EUR 864 million support for investment outside Europe; EUR 2.3 billion of new financing for business investment across Europe and Africa; EUR 1 billion for electric vehicles, upgrading international rail links and urban transport; and other investment projects. [EIB Press Release on 2018 Investments in Africa] [EIB Press Release on EUR 4.8 Billion in Financing for Transport, Business, Urban Transport and Energy]

EU Funds Low-carbon Infrastructure, Environment Projects to Unlock an Estimated EUR 3.2 Billion

The European Commission announced funding of EUR 116 million under the LIFE programme, the EU’s funding instrument for environment and climate action, with the expectation to unlock more than EUR 3.2 billion of additional support to 12 large-scale projects in ten EU member States to support the EU’s transition to a low-carbon, circular economy. The funding will support environmental projects in Austria, Bulgaria, the Czech Republic, Estonia, Finland, Greece, Hungary, Italy, Portugal and Slovenia.

In addition to water, air quality and nature conservation projects, four projects focus on climate mitigation and adaptation actions, including: capacity building; infrastructure; technological solutions in the areas of energy efficiency, heating and cooling; zero emission transportation; as well as coastal and flood risk management and forest fire protection. The four climate action projects have a combined budget of EUR 75.9 million, including EUR 32.4 million from the LIFE programme, and intend to make use of a further EUR 778.3 million in complementary funding from the EU and national and private sector funds. [EU Press Release] [Project Descriptions]

IFC Applies Green Loan Principles to Spur Growth of Green Loan Market

The International Finance Corporation (IFC) began offering its investment clients the option of structuring loans in accordance with the Green Loan Principles. Green loans, a source of bank funding made available exclusively to finance or re-finance, in whole or in part, new and/or existing eligible green projects, are governed by the set of principles modeled after the Green Bond Principles.

Developed by the Loan Market Association (LMA), the Asia Pacific Loan Market Association (APLMA) and the Loan Syndications and Trading Association (LSTA), these voluntary guidelines specify how loan proceeds should be used and how projects should be selected to qualify for the green loan status. Core components of the Green Loan Principles include:

  • the use of loan proceeds for green projects that address issues such as climate change, natural resources depletion, loss of biodiversity, and air, water and soil pollution;
  • a process for project evaluation and selection by which the borrower communicates environmental sustainability objectives as well as eligibility criteria;
  • transparent management of proceeds and tracking of the allocation of funds; and
  • reporting of up-to-date information on the use of proceeds by which the borrower uses qualitative performance indicators and, where feasible, quantitative performance measures and impact reporting.

As with green bonds, assurance of environmental integrity and positive environmental impacts of investments through these green financial instruments are crucial to preclude perceptions of “greenwashing.” IFC will support its clients’ efforts to meet the requirements spelled out in the Green Loan Principles, which also recommend, where appropriate, external review, including verification by a third party. In some cases, the Principles allow for self-certification by the borrower.

Green loans are governed by the set of principles modeled after the Green Bond Principles.

IFC notes that developing countries currently account for just USD 1.6 billion of the estimated USD 33 billion in outstanding green loans. The market is expected to grow rapidly, outpacing the growth of the green bond market in the near term. [IFC Press Release]

UNEP-DTU Provides Guidance for Technology Needs Assessments

The Paris Agreement on climate change established the Technology Framework to guide the Technology Mechanism of the UNFCCC. In December 2018, Parties agreed on a list of implementation activities, including to review guidelines for TNAs and implementation of TNA outcomes aligned with the transformational changes envisioned in the Paris Agreement. TNAs and key TNA outputs – Technology Action Plans (TAPs) – identify technology needs and measures to overcome existing barriers, such as lack of support for testing climate technology and formulating investment-ready projects with national or international funding.

In February, the UNEP Partnership with the Technical University of Denmark (UNEP-DTU Partnership) published a guidebook titled, ‘TNA Step by Step: A Guidebook for Countries Conducting a Technology Needs Assessment and Action Plan.’ The document provides examples and information on: setting up and preparing for the TNA process, including required organizational structure and stakeholder engagement; identifying and prioritizing climate technologies, including reporting, and support and guidance to technology prioritization; and conducting a barrier analysis and identifying measures for an enabling framework. The authors outline steps to be taken to establish a TAP and linkages to relevant UNFCCC processes for adaptation and mitigation actions. [UNEP-DTU Press Release]

NDF Supports Coastal Resilience, Testing of Climate Technologies

The Nordic Development Fund (NDF), in its summary report of the results of NDF-backed projects completed in 2018, highlights the Fund’s shift from grants towards blended financing with increased use of loans and equity investments. Over the course of 2018, the NDF Board approved financing for nine projects with a total value of EUR 47.15 million. Of these commitments, EUR 16 million was allocated as loans, EUR 17.5 million as equity and EUR 5 million as reimbursable grants, while the remaining EUR 8.65 million was allocated as traditional grant financing. NDF’s shift in funding direction concentrates on: blending financing; catalytic financing for coastal resilience; and private sector adaptation.

Following from the Fund’s mandate to take on risks in testing new climate technologies, the report showcases NDF financing of a number of projects utilizing technologies in the areas of geothermal, geotechnical or biogas, as well as greenhouse gas (GHG) tracking, weather forecasting and communication. Among the nine NDF’s funding commitments made in 2018 is a EUR 10 million commitment to multiple regions under the Climate Resilience and Adaptation Finance and Technology Transfer Facility (CRAFT) to support the scaling-up of knowledge, technologies and financing options for climate resilience. [NDF 2018 Summary Report]

Lao PDR Invites GCF and GEF to Collaborate on Country’s Climate Action

In February, the Global Environment Facility (GEF) and the Green Climate Fund (GCF) visited Vientiane, Lao People’s Democratic Republic (PDR), to identify how each can support climate-resilient and low-emission sustainable transformational change in the country. Both agencies commended the Government of Lao PDR for initiating the first such joint mission, emphasizing that collaboration between GCF and the GEF can increase efficiency and impact of limited but increasingly strategic investments.

Lao PDR is currently working on multiple proposals for both institutions, including a proposal on adapting agriculture to climate change impacts. The two operating entities of the UNFCCC Financial Mechanism are both working towards increasing their impact. By the end of 2018, the GEF Council had adopted the first Work Program since the approval of the seventh replenishment of the GEF Trust Fund (GEF-7). In February, the GCF Board discussed the Fund’s first replenishment and strategic programming, and steps required to strengthen operations, reinforce standards and close policy gaps. [GEF Press Release on Joint Mission with GCF] [SDG Knowledge Hub Story on Work Program for GEF-7 Replenishment] [SDG Knowledge Hub Story on GCF’s First Replenishment]

March 2019 Reading List

Suggested institutional climate finance-related readings include publication listed below.

  • A World Bank report titled, ‘Beyond the Gap,’ presents data, scenarios and policy recommendations that support the realization of climate-smart infrastructure within a spending goal of 4.5% of gross domestic product (GDP) in developing countries. The report also emphasizes the need for ensuring a steady flow of resources for operations and maintenance estimated to cost an additional 2.7% of GDP per year.
  • A briefing by the Climate Bonds Initiative makes the case for a green bonds taxonomy to increase the capability of issuers and investors to identify eligible green and sustainable assets. The authors explore the role of green definitions in steering capital towards investments in climate-aligned assets, review green bond guidelines, and shine light on the development of the EU Taxonomy for Sustainable Finance.
  • A report by the Asian Development Bank (ADB) titled, ‘Pakistan: ADB’s Support to Pakistan Energy Sector 2005-2017,’ evaluates the impacts of its USD 6.2 billion energy sector assistance in Pakistan over a 12-year period.

Recommended are also a number of papers focusing on corporate climate risk evaluation and impact assessments, including:

  • A report by the Center for International Climate Research (CICERO) titled, ‘Physical Climate Risk: Investor Needs and Information Gaps’;
  • A World Resources Institute (WRI) study on ‘Estimating and Reporting the Comparative Emissions Impacts of Products’; and
  • A brief by the Institute for Climate Economics (I4CE) on companies’ implementation of climate-related scenario analysis to evaluate risks and opportunities.

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The SDG Knowledge Hub publishes monthly climate finance updates, which largely focus on multilateral financing and cover, inter alia, mitigation and adaptation project financing news and lessons, institutional events and news, and latest developments in carbon markets and pricing. Past IISD climate finance updates can be found under the tags: Finance Update: Climate Change; and Finance Update: Sustainable Energy.

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