Info Service on Climate Change (Oct13/06)
Green Climate Fund: Board agrees on financial inputs, instruments and allocation
Geneva, 17 Oct (Meena Raman) – The Board of the Green Climate Fund (GCF) at its recent 5th meeting in Paris, France, adopted several key decisions including the types of financial inputs that the Fund should receive, the nature of the instruments to be used as disbursements, and the way to allocate the financial resources.
Below are the key parts of the relevant decisions and some highlights of the related discussions.
On the issue of financial inputs, the main decision of the Board was that “the Fund will receive grants from public and private sources, and paid-in-capital contributions and concessional loans from public sources, and may receive additional types of inputs at a later stage to be decided by the Board”.
The Interim Secretariat of the GCF, “when developing the Fund’s risk management framework and investment strategy”, was also requested “to include the specific risks associated with accepting concessional loans to the Fund, including the risk of cross-subsidization.” It was also tasked “to prepare a document for understanding and defining alternative sources of financial inputs to the Fund for consideration by the Board at its second meeting in 2014.”
During the discussions prior to the adoption of the decision, various issues were raised. Most Board members adopted a more cautious and conservative approach (at least in the initial phase of the Fund) on the type of financial inputs to be received by the GCF, focusing mainly on grants. However, the United States, Japan and the United Kingdom wanted to expedite going beyond grants and concessional loans to other types of inputs which could involve the private sector.
France and Germany had concerns over the receipt of concessional loans as inputs and wanted consideration of the risks involved in this regard. France and Chile also raised concerns over the receipt of paid-in-capital contributions which could have drawbacks and conditions.
During the discussions, several developing countries including the Democratic Republic of Congo (DRC), Egypt and Zambia stressed the point that the GCF was a ‘fund’ and not a ‘bank’.
The issue of alternative sources of financial inputs was also raised. When some Board members from developed countries proposed that financial inputs be also received from developing countries that are in a position to do so, some developing country Board members reacted strongly saying that it was a commitment of developed countries to do so, under the United Nations Framework Convention on Climate Change (UNFCCC) and the Governing Instrument of the GCF.
Arnaud Buisse (France) said that concessional loans are complicated and have a lot of implications which need to be studied. This, he said, was the experience of the World Bank’s International Development Association (IDA) and there is need for risk management. The same, he added, applied to paid-in-capital contributions and he wanted the drawbacks to be addressed.
Manfred Konukiewitz (Germany) said that financial inputs will come from governments and that other than developed countries, it must also come from developing countries that are in a position to do so. While supporting the receipt of grants as inputs, he expressed concerns over the receipt of concessional loans as there are special risks, from his experience.
Matthew Kotchen (United States) said that while grants are important, other financial inputs are also important. The scope needed to move beyond grants and he looked forward to the recommendations of the Private Sector Advisory Group. He added that grants and concessional loans have different risk tolerance and the GCF should address this.
Kentaro Ogata (Japan) wanted the GCF to be open to all types of financial inputs but agreed that for the initial phase, it had to be more conservative. He referred to the need for resources from the private sector in future. He expressed concerns over the issue of ‘cross subsidisation’ and wanted it addressed under the risk management framework.
Nick Dyer (United Kingdom) could not agree that the GCF will only receive grants, paid-in- contributions and concessional loans in the first 5 to 7 years.
Beata Jaczewska (Poland) said that the Governing Instrument did not forbid voluntary contributions from developing countries.
Mpanu-Mpanu (DRC) in response to comments over the need for more
financial inputs beyond grants and concessional loans, said that the
needs of African countries must be considered in this context, adding
that they needed support for adaptation and readiness, which involves
grants. He also stressed that the GCF is a ‘fund and not a bank’ and
reminded members that the GCF Governing Instrument states that financial
inputs would be received from developed countries to the UNFCCC. He
cautioned against the draft decision just stating that ‘the Fund may
also receive financial inputs from a variety of other sources, public
and private, including alternative sources,’ which he viewed as ‘cherry-picking’
of provisions from the Governing Instrument.
Omar El-Arini (Egypt) reiterated that the Board had agreed previously to focus initially on grants and concessional loans and reminded members that the GCF is an operating entity of the UNFCCC and there is need for ensuring predictable and sustainable flows of money without conditions being attached. He stressed that the GCF is not a ‘bank but a fund’.
Cheikhrouhou (Executive Director of the GCF) in response to interventions
from Board members said that the decision proposed is a “conservative
option” as both grants and concessional loans are necessary as inputs.
She added that mitigation actions would require concessional lending,
while for adaptation projects, there needs to be a higher level of
concessionality like grants. These are most basic inputs, and are
straightforward in managing the liquidity risks.
As regards the financial instruments to be used by the GCF, the Board adopted, “for the initial operationalization of the Fund, the principles and factors for the terms and conditions of grants and concessional loans”. It also requested “the Secretariat to develop terms and conditions of grants and concessional loans for consideration by the Board at its first meeting in 2014” and to also “prepare a document for consideration by the Board at its third meeting in 2014 on the use of other financial instruments.”
In the initial draft decision proposed for adoption, the Board was supposed to “adopt the criteria for the terms and conditions of grants and concessional loans”. The criteria were not adopted as concerns were expressed by Board members from Germany, the United States, the United Kingdom and France.
Another part of the decision which raised the concern of Zambia related to requesting the “Secretariat to prepare a document for consideration by the Board at its third meeting in 2014 on the use of other financial instruments, including guarantees and equity investments.”
Given that the GCF was now focusing on grants and concessional loans, David Kaluba (Zambia) questioned the need to consider “guarantees and equity investments” as further instruments. This then led to deletion of references to these instruments.
Allocation of resources
On the issue of ‘allocation’ of the resources of the Fund, the main agreement reached by the Board is as follows:
(a) It decided to adopt a theme/activity-based approach to the allocation of resources in order to meet the Fund’s objectives;
(b) It decided that the Fund will initially make allocations under adaptation, mitigation and the Private Sector Facility (PSF), and that there will be balance between adaptation and mitigation and the appropriate allocation of resources for other activities;
(c) It decided that, in relation to adaptation, resources will be allocated based on: (i) the ability of a proposed activity to demonstrate its potential to adapt to the impacts of climate change in the context of promoting sustainable development and a paradigm shift; (ii) the urgent and immediate needs of vulnerable countries, in particular LDCs, SIDS and African States;
(d) In relation to mitigation, resources will be allocated based on the ability of a proposed activity to demonstrate its potential to limit and reduce greenhouse gas emissions in the context of promoting a paradigm shift;
(d) In relation to the PSF, resources will be allocated based on the contribution a proposed activity makes towards promoting a paradigm shift and to: (i) Directly and indirectly finance private sector mitigation to limit and reduce greenhouse gas emissions and adaptation to the impacts of climate change activities; (ii) Promoting the participation of private sector actors in developing countries, in particular local actors, including small and medium-sized enterprises and local financial intermediaries, and activities to enable private sector involvement in SIDS and LDCs;
The Board also requested the Secretariat to develop and present to the Board at its second meeting in 2014 “a resource allocation system, … that facilitates: (i) Cross-cutting proposals; (ii) A results-based approach; (iii) A country-driven approach; (iv) A geographically balanced approach; (v) Private sector mitigation and adaptation activities at the national, regional and international levels.”
A key issue was over allocations being based on promoting a “paradigm shift”. While developed countries stressed the importance of the need for this, developing countries reminded members that in the Governing Instrument of the GCF, the paradigm shift is in the context of sustainable development. Several developing countries also questioned the need to allocate resources to the PSF, which seemed to be placed at the same level of adaptation and mitigation, when the PSF is viewed as an instrument or tool and not an objective in itself.
Highlighted below are some interventions by Board members in relation to the draft decision proposed prior to the adoption of the above decision.
Dipak Dasgupta (India) said if a paradigm shift is intended, then there is need to know what financial resources are available and there is no symmetry in the scale and urgency in this regard. He also questioned the allocation of resources to the PSF when it is an instrument and not an objective. Rationing of resources is going to happen and in the allocation of resources, there must be a guide between what are objectives and instruments. He said these issues should not be brushed under the carpet.
Omar El-Arini (Egypt) stressed the need to quote the Governing Instrument in full, stressing that the paradigm shift that the Fund will promote is in the context of sustainable development. He also did not understand the allocation of resources to the PSF when it is a tool, unlike the allocation of resources to mitigation and adaptation.
Jose Maria Clemente Sarte Salceda (the Philippines) objected to allocation for adaptation based on its ability to demonstrate its potential to adapt to the impacts of climate change. The impacts are ex-post, he said, and should not be required in the case of adaptation. He also proposed a set aside of allocations for sub-national/local governments and civil society organisations/ local communities.
Sergio Serra (Brazil) asked what a paradigm shift means in the context of adaptation. He was concerned that there were different interpretations about this and the context of sustainable development had disappeared (in the earlier version of the proposed decision).
Manfred Konukiewitz (Germany) said it was important to fund the results sought and this required an ex-ante assessment of the contribution to the paradigm shift. What is funded should be sector wide or economy wide and not isolated approaches. It should be applied to mitigation and adaptation and results can be measured. In adaptation, it is more difficult to measure but not impossible, he said. There is need to make assessments on what is best and effective in looking at various proposals. Assessments should be relative to each country.
Nick Dyer (UK) said that there is need to avoid mechanistic approaches, as in the case of other funds where there is inefficiency and resources are tied up. He wanted a simple and straight forward approach. He supported the view that the PSF also needs to be allocated resources.
Matthew Kotchen (US) was unsure about allocations based on a geographical approach. He said more clarity was needed on resources for adaptation and added that set asides are appropriate for the most vulnerable.
Beata Jaczewska (Poland) said that adaptation is a priority. She agreed with Germany on the need to look at the effectiveness of investments in relation to mitigation, encouraging countries for paradigm shift in their development.
Arnaud Buisse (France) also supported allocations for a paradigm shift rather than being activity based. He wanted a simple approach.