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Tuesday, 22 November 2022

The logic behind the landmark climate finance guide Egypt launched at COP27

Egypt launched a landmark guide to climate finance for developing nations at COP27: The International Cooperation Ministry launched the Sharm El Sheikh Guidebook to Just Financing (pdf) on Finance Day at COP. Meant to provide a comprehensive roadmap to help developing nations attract the funds they need for the green transition, the guide was developed through year-long consultations with over 100 partners, including government representatives, DFIs, the private sector, banks, climate finance funds, and other stakeholders. It was written in partnership with international development partners including the African Development Bank, Citi, the Convergence network for blended finance, the OECD, UN, UNDP, and USAID, among others.

“Just financing” — another climate finance term to add to the growing lexicon. The guidebook “brings the idea of ‘justice’ to climate finance with the objective of translating commitments into implementable projects.” That means applying the tenets of climate justice to project financing — among them, that the drivers of climate change in the developed world should shoulder more of the costs of addressing its impacts, and that developing nations have a right to continued industrialization even as the world as a whole looks to decrease emissions. The concept of “just financing” spans loss and damage (compensation to developing nations facing climate disasters), adaptation (preventive measures to adapt to climate change), and mitigation (projects to reduce overall emissions.)

It’s significant that this was unveiled at COP27 — the COP of implementation, climate justice and Africa: The guide sets out a framework to boost climate finance to developing nations — in part by helping them create a pipeline of bankable climate-friendly projects. Key to its approach are some major COP27 themes: the right to development for all nations, financial compensation for loss and damage, access to financing and resources, and accountability based on countries’ “common but differentiated responsibilities.”

And we’re already seeing this in action with our newly-launched Nexus on Water, Food and Energy (NWFE) program: NWFE was hailed by a recent UN-commissioned climate finance report (pdf) as a “pioneering model” to help attract investments to climate-friendly projects in emerging markets in a concrete and practical way, we noted. The NWFE climate funding agreements Egypt secured at COP add up to nearly USD 10 bn, International Cooperation Minister Rania Al Mashat said recently.

The guide is clear — we can’t tackle climate change without private investment. Just 1.4% of the USD 410 tn in privately held global financial assets would be enough to bridge the gap in global climate finance, the guide tells us. By contrast, the collective funds of multilateral development banks, if directed to climate action, would make up only 4% of what’s needed. Every country needs private investment for climate action, so enhancing climate project investability — the “potential and capacity of a project to attract non-public investment,” is crucial, the guide says.

It outlines how financial and non-financial tools can be used to entice private investment by reducing risk:

#1- Mobilize concessional capital: The guide outlines ways of mobilizing concessional capital and risk ins. instruments to create investment prospects “with acceptable risk-return profiles for the private sector,” along with design-stage grants and technical assistance to improve project viability, impact measurement, and bankability. It lays out how “concessional catalytic capital” from public and philanthropic organizations could be awarded to blended finance vehicles that reduce investment risk.

#2- Increase debt sustainability: The framework also outlines how to increase investment quality in developing nations by offering more equity and local currency debt, increasing debt sustainability.

#3- Use non-blended finance, like carbon markets and resilience credits, to spur private investment.

#4- Share stakeholder knowledge + increase transparency and accountability to boost the investment environment: Governments need to work with other stakeholders to help identify and prioritize climate investment needs, along with existing technical and financial gaps, the guide tells us. And all stakeholders — including development partners and beneficiary governments — need to improve on transparency and accountability in their planning, reporting and communication, it adds.

The guide also offers specific recommendations for how stakeholders can spur investment in Africa:

Governments: African governments should generate pipelines of projects for blended finance, particularly in priority sectors like energy, agriculture, water, and health, which are “essential for sustainable development.” They can “crowd in” private sector investment and reduce risk by upping transparency in areas like land procurement. Where public sector investment is high, procurement policies should be reformed to “prioritize climate outcomes” (by requiring low-emissions construction, for example). Improving the ease of doing business and contract enforcement, removing subsidies for non-climate-friendly industries, and reducing import tariffs for key equipment would drive climate investment. Governments should also produce data on investment risks, allocation, and outcomes to show where funds — public and private — are being deployed, their impact, and alignment with country NDCs.

African governments should “leverage the potential of regional collaboration to create networks for mobilization of climate finance,” the guide adds.

Multilateral development partners (MDPs): MDPs can spur private investment by assuming some of the risk — both real and perceived — of climate-focused investment in African nations. They can do this by seeding early-stage projects, offering guarantees or first-loss capital, and exiting to private investors after de-risking the investments. Partnering with local lenders helps distribute capital more equitably within African economies, where many climate projects operate on a relatively small scale. MDPs can help strengthen the impact criteria and KPIs for financing climate-friendly projects to build investor confidence. And they can simplify the mechanisms for accessing climate finance — especially for low-income African countries.

Private investors: The private sector can provide essential “upward feedback” to help governments and MDPs understand their requirements and design climate and business policy accordingly. A proportion of their financing should be specifically allocated to adaptation and resilience projects — which are not typically attractive areas for private investment. By doing this, and making “first investments” in new sectors and geographic areas alongside “trusted co-investors,” they can help spur a virtuous cycle of de-risking and increase market maturity. They should also design new, “fit-for-purpose investment vehicles” that make more use of blended finance and employ market fund structures with longer durations than the typical ten-year model.

When all this works — as seems to be happening for the NWFE program — “you’ve got everybody coming to the party,” the EBRD’s managing director of climate strategy and delivery Harry Boyd-Carpenter told us recently. Under NWFE’s energy pillar, public money to upgrade our transmission network and close old fossil fuel plants will create the conditions for USD bns of inflows to our renewables sector from the private sector.


Your top green economy stories for the week:

  • COP is a wrap: Delegates from nearly 200 countries left COP27 with a landmark agreement to create a loss and damage fund to help vulnerable countries cope with climate disasters triggered by richer countries’ emissions.
  • A wellspring of new renewables projects: Initial agreements for green hydrogen and wind power projects worth up to USD 119 bn were signed during COP27.
  • The global population is now at 8 bn, a milestone that brings daunting — but not insurmountable — climate challenges.

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