TWN Info Service on Climate Change (May14/07)
28 May 2014
Third World Network  

GCF decides on investment framework

Delhi, 28 May (Indrajit Bose) – The Board of the Green Climate Fund (GCF) adopted an important decision on its ‘Initial Investment Framework’ on 21 May at the Seventh GCF Board Meeting in Songdo, South Korea. It was among the eight essential requirements to begin mobilizing financial resources into the GCF.

According to the Secretariat paper prepared for the consideration of the Board, the purpose of the initial investment framework (IF) is “to translate the Fund’s overall objectives into clear guidelines for investment decisions.” The IF agreed to comprises of the Fund’s investment policies; investment strategy and portfolio targets and investment guidelines.  The Board decided that the GCF’s IF “will reflect the Fund’s theme/activity based resource allocation system as was decided in Paris at its October meeting last year.

The Board members spent considerable time discussing the IF over the four days of the meeting, from May 18-21, as they could not agree on a number of issues. Members formed a small group to discuss the sticking points, central to which was what should be the investment guidelines, which would describe the initial criteria for programme and project funding decisions. Board members also raised some operationalization issues related to the Framework.

Investment policies
It was agreed that the Fund’s initial set of investment policies would cover “grants, concessional loans and other financial instruments extended by the Fund”. It was decided that the Fund would “finance projects and programmes that demonstrate the maximum potential for a paradigm shift towards low-carbon and climate-resilient sustainable development in accordance with the Fund’s initial results management framework, its initial result areas and subsequent decisions on additional results areas for adaptation, and consistent with a country-driven approach”. This was in response to the demand by Board members that IF policies need to be coherent with decisions being taken on other crucial issues because they are interconnected to each other. 

The other policies outline that the funding received and extended by the GCF would be accounted for in grant-equivalent terms; the Fund would provide “minimum concessional funding” to make a project or programme viable; intermediaries may use to blend the funds they receive from the GCF with their own financial resources; the Fund would not crowd out potential financing from other public and private sources; and only revenue-generating activities “intrinsically sound from a financial point of view will be supported through loans by the Fund”.

Investment strategy and portfolio targets
The Fund also decided on an initial investment strategy, which includes portfolio targets and investment guidelines. The Board members agreed on some initial allocation parameters and set initial portfolio targets against each. The initial allocation parameters and initial portfolio targets decided were:

  • For the parameter “Balance between mitigation and adaptation”, the portfolio target would be “50-50 (over time)”
  • For the parameter “Adaptation allocation for vulnerable countries”, a floor of 50 per cent would be for adaptation allocation
  • The parameter “Geographic balance” would see “reasonable and fair allocation across a broad range of countries”
  • For engagement with the private sector, the portfolio target is to “maximize fund-wide engagement, including through significant allocation to the PSF (private sector facility)” 
  • For the parameter “Readiness and preparatory support”, the initial portfolio target was to have “sufficient support for readiness and preparatory activities”. This parameter was added after developing country Board members advocated strongly for it.

Investment guidelines
After a lot of deliberation, it was decided that the investment guidelines would comprise six criteria and 25 coverage areas. A new criterion – “sustainable development potential” - was included, which was a demand of developing country Board members.

Following are the criteria and coverage areas agreed to: 

  • Impact potential criterion was defined as the “potential of the programme/project to contribute to the achievement of the Fund’s objectives and result areas. Mitigation impact and adaptation impact were the coverage area.
  • Paradigm shift potential was defined as the “degree to which the proposed activity can catalyse impact beyond a one-off project or programme investment. The coverage area were: potential for scaling up and replication and its overall contribution to global low-carbon development pathways, consistent with a temperature increase of less than 2 degrees C; potential for knowledge and learning; contribution to the creation of an enabling environment; contribution to the regulatory framework and policies; and overall contribution to climate-resilient development pathways consistent with a country’s climate change adaptation strategies and plans.
  • Sustainable development potential was defined as “wider benefits and priorities” and the coverage areas were: environmental co-benefits, social co-benefits, economic co-benefits and gender-sensitive development impact.
  • Needs of the recipient defined as “vulnerability and financing needs of the beneficiary country and population” had the following coverage areas: vulnerability of the country; vulnerable groups and gender aspects; economic and social development level of the country and the affected population; absence of alternative sources of financing; need for strengthening institutions and implementation capacity. (In the initial draft of the decision provided by the Secretariat, there was reference to “income levels of affected population” which was resisted by several developed country Board members which led to the alternative formulation of “economic and social development level of the country and the affected population.”)
  • Country ownership was defined as “beneficiary country ownership of and capacity to implement a funded project/programme”. The coverage areas were existence of a national climate strategy; coherence with existing policies; capacity of implementing entities, intermediaries or executing entities to deliver; engagement with civil society organizations and other relevant stakeholders.
  • Efficiency and effectiveness was defined as “economic and, if appropriate, financial soundness of the programme/project. The following were the coverage areas: cost-effectiveness and efficiency regarding financial and non-financial aspects; amount of co-financing; programme/project financial viability and other financial indicators; and industry best practices.

Sticking points
There were divergences among Board members on some issues such as whether income levels should be considered at all; some members were keen on including the size of the population as a criterion; there were suggestions on adding a new criterion called “sustainable development” and removing the “financial viability criterion” which was initially suggested in the Secretariat paper.

Discussions on income level were quite contentious, with strong views. An option that was considered was on the development level of a country and eventually, agreement was reached on the “economic and social development level of the country and the affected population” as one of the coverage areas under the “needs of the recipient”. 

On the operationalization of the IF, Board members reiterated the need for coherence with other decisions and the need for the framework process to be closely linked to the initial approval process.

There were serious divergences also on how to treat funding proposals coming from developing countries to the Fund and developed countries led by the US that stressed the need for a comparative method to be adopted and also for a ‘scoring’ and ‘weighting’ approach in relation to the respective criteria for considering funding proposals.

The US said that to effect paradigm shift, it is important that the GCF receives the best proposals from all over the world, and for that to happen, there needs to be methodologies for ensuring competition among comparable groups of countries against a standard, prioritized list of requirements or criteria.

There was no direct reference to ‘weighting’ or ‘scoring’ in the final decision adopted. A compromise reached was for the Investment Committee (of the Board) to submit for consideration at the next meeting, with technical support from the Secretariat and other stakeholders, “identification and comparison methodologies, that enable the Secretariat to assess the relative quality and innovativeness of comparable proposals in comparable circumstances…”

These decisions were arrived at following several rounds of iterations and interventions by Board members at the plenary and in small groups. Following are some of the key interventions across the four days of the meeting:

Zaheer Fakir (South Africa) said that the IF is an important document and would tell people what the GCF finances and why it does so. Speaking passionately, Fakir said, “We talk about transformational changes and paradigm shift. We want to change the traditional. We want to go where commercial financiers dare not go. We are here to finance also those countries that are excluded from the mainstream finance. We want to crowd in action where inaction is the comfort zone. We are here to put the world on a path of low carbon development. This document doesn’t reflect those ideas,” he said. He also said that it seemed to him that loans from multilateral development banks (MDBs) were being made more attractive. He asked the Board to look at the recommendations of the Private Sector Advisory Group (PSAG) to effect behavioural change at the intermediary level. Responding to the provision in the paper that only revenue generating activities intrinsically financially sound would be supported through loans by the Fund, he asked, “If it were financially sound, why should it come to the GCF? He said the Board must think of these things.

Tosi Mpanu Mpanu  (Democratic Republic of Congo) said there were significant differences on indicators to assess investments; and for a coherent approach to investments, the indicators must be synthesized. He said that investment opportunities that increase country ownership must be given priority, and an investment facility should be developed for the private sector. Referring to the criteria, he said in considering the level of indebtedness of a country, the GCF must ensure that the country is not made more vulnerable. One must not just focus on economic efficiency because it would be counterproductive for adaptation, which is multidimensional and cannot be disaggregated to a single rationale. He pushed for the income level of a country to be included as a coverage area under the ‘needs of the recipient’ criterion.

Omar El Arini (Egypt) said he did not find linkages with other processes under the UNFCCC with the GCF and there should be coherence. He said the concept of incremental costs is missing from the document and that the Fund must provide for mitigation and full costs for adaptation. He called for the inclusion of non-revenue generating activities rather than just the revenue generating activities mentioned in the paper. On the proposed criterion “needs of the beneficiary country/alternative funding sources,” he asked who would determine the income level and would this border on impinging on the sovereignty of the country. He wanted to know how the economic efficiency criterion be calculated. “A tonne of GHG reduced per dollar?” he asked and wanted to know if this was easy to quantify or grade. After raising all these questions he said it would be prudent to stick to the Governing Instrument of the GCF rather than introducing foreign terms.

Patrick McCaskie (Barbados) called for further elaboration of the paradigm shift potentials criteria, and added that another criteria for compliance with adaptation should be added.

Sergio Serra (Brazil) said the criterion on economic efficiency did not work and that it should be a sub-criterion. 

Liang Ziqian (China) said he had concerns about grouping countries because it was not the right way to approach investments, and would be complicated. He said he supported competition, but in a good way, which emerged by understanding the need for fairness and balance. He added that GCF is part of an international effort and so we need to set practical targets to maximize the potential for paradigm shift.

Ayman M Shasly (Saudi Arabia) was against the inclusion of income levels of the recipient country. “How low is low, how high is high? We do not accept the World  Bank’s income categorization,” he said.

Jan Cedergren (Sweden) said the criteria should be understandable and measurable, and suggested changes to the criteria and sub-criteria (which was later changed to coverage areas). Under the adaptation project allocation criteria, he suggested having the income level of countries and development potential to be the sub-criteria. Referring to the paradigm shift potential criteria, he cautioned against getting into large scale perspectives, but to have a Fund with diversity, different size and time horizon to deal with different types of projects that can promote paradigm shift in different ways.

Norbert Gorissen (Germany) iterated that the definition of paradigm shift potential criterion was not sufficient since it did not differentiate between mitigation and adaptation. He reminded the Board that the IPCC had issued scenarios to limit temperature rise beyond 2°C and for that, investments for renewable energy and energy efficiency need to increase dramatically. Investments should be guided accordingly, he said. Echoing a point raised by the civil society, Gorissen said that the GCF should not fund any fossil fuel related activities and this could be reflected in the decision.

Leonardo Martinez (USA) said the IF must be compatible with the Results Management Framework and project approval process. He wanted the Board to discuss how to operationalize the competition idea (in the consideration of funding proposals), saying in the investment sector, “competition is part of the DNA”. He wanted to know how to make sure that the competition is fair, given the reality that adaptation is all about incentives and on the mitigation side, one of the elements for paradigm shift is market transformation. On a “philosophical” note, he said that in the past the world has faced development challenges, but the problem of climate change was different. It called for new systems to reach farmers, to reach power plant generators, and to the society at large. The GCF is more than just about funding, he said, adding that it was meant to take technology to places where it does not exist and to add new technology. “That is why we are inviting the best proposals from all over the world,” he said. For that to happen, the methodologies should be compared among comparable groups. The GCF needs to have an ability to compare proposals based on quality and that he saw as the only way to be able to tackle the problem.

Rod Hilton (Australia) reiterated the need for the IF to be coherent with other related documents and said the issue of competition needs to be thought through.

Kentaro Ogata (Japan) said the relationship between investment policy and approval process is important, and was concerned over how a competitive process would work for a private sector facility. He reiterated the need to have the right set of criteria and sub-criteria. On the needs aspect, he said the focus should be on all financing resources and not jut ODA (Official Development Assistance). He wanted to know if a small share of ODA would indicate a gap in financing or that a country has graduated from receiving ODA? He said the GCF should not crowd out public financing in recipient countries.

Per Callesen (Denmark) said decision on the IF would determine if the GCF would be different from the other funds because this will send out strong signals of what are the policies the GCF is looking for when it is funding.  He stressed on the need to make a distinction between public sector and private sector issues since some issues could be more specifically targeted in the private sector facility

Arnaud Buisse (France) said paradigm shift is key. He encouraged the Investment Committee to work on the methodology of the criteria. Competition has to be fair and there needs to be consideration of country groups and sectors, he said. The issue of blending needs to be coherent with the risk management framework. He suggested an exclusion list of sectors to be clear on the areas that the GCF would not fund.

Henrik Harboe (Norway) supported US suggestion on weighting. Adam Kirchknopf (Hungary) said the criteria should go beyond looking at the income level of the affected population, and include the general income level of the recipient country. He advocated for a rating system and added that it would be different for LDCs and higher income developing countries.