Second Lab Principal Meeting of The Global Innovation Lab for Climate Finance

During the Second Lab Principal Meeting of The Global Innovation Lab for Climate Finance (The Lab), The Lab reached a key milestone in the completion of its first cycle of work, presenting four climate finance initiatives designed to overcome investment barriers in renewable energy, energy efficiency, and adaptation in developing countries. This marked the culmination of 9 months’ intensive work to identify, stress-test and develop proposals that have the potential to leverage private investment into low carbon development at scale.  The four ideas received endorsement and support from Lab Members and will now be taken forward to implementation phase. 

With this progress, The Lab has demonstrated that it can play a key role as developed nations work towards the commitment of mobilizing USD 100 billion per year by 2020 to address the needs of developing countries in scaling up climate finance.

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Hosted by Bank of America Merrill Lynch in New York on 16 April 2015, Climate Policy Initiative, acting as Secretariat for The Lab, brought together Lab Principals and Advisors, high-level representatives from governments, insurance companies, pension funds, investment banks, project developers, and development finance institutions, from across the world. The meeting marked a significant milestone for The Lab: after an initial call for ideas last June generated over 90 proposals for innovative climate finance instruments, four ideas were shortlisted by Lab members with the potential to unlock billions of dollars in new climate-friendly investment in developing countries. Rigorous analysis and stress-testing was conducted to develop them into robust, implementable proposals.  At this meeting, Lab members were presented with the refined analysis of the four instruments including concrete implementation paths for instrument pilots, allowing Principals and Advisors the opportunity to endorse or commit support to the instruments, and marking the completion of the first full cycle of The Lab.

The overarching objectives of the meeting were twofold: Firstly, for Lab Principals to endorse their top instruments, outlining how they will offer support and make recommendations on how, and where, the most promising instruments could be specifically piloted through Lab-backed public-private partnerships. And secondly, for Lab Members to come to agreement on the next steps of The Lab, with the Secretariat clarifying ongoing arrangements for The Lab, including the potential role of The Lab in taking pilots forward, and a possible second analytic cycle.

An update on the current status of The Lab instruments was provided and, key discussions and outcomes are summarized below:

  • The Climate Development and Finance Facility will facilitate early-stage development, construction financing, and refinancing to fast-track renewable energy projects in developing countries, mobilizing at least USD 2 billion in private finance out to 2020. The pilot is being taken forward by FMO, the Netherlands Development Finance Company, which proposed the idea to the Lab in partnership with PhoenixInfraworks from South Africa. FMO is exploring partnerships with guarantors and investors, including EKF, the Danish Export Credit Agency and BlackRock. The Dutch government has committed EUR 7 million to the Facility, and FMO is also interested in investing up to USD 75 million from its own balance sheet. This initial funding will support formal fundraising activity, legal documentation development and build out of operational capacity including regional offices in Africa and Southeast Asia. Assuming successful fundraising, the first round of projects are expected by Q1 2016.
  • The Agricultural Supply Chain and Adaptation Facility will partner with agribusiness companies to provide local farmers with technical assistance and access to finance for climate-resilient investments. The Inter-American Development Bank, in partnership with Calvert Investments, is committed to piloting the facility in Latin America and the Caribbean through seed funding from the USD 5 million Climate-Smart Agriculture Fund for the Private Sector. There was recognition that investment in adaptation needs to increase, and as such the need for an adaptation instrument to emerge from The Lab was highlighted. This instrument is unique in this field in that it is private sector driven, aligning and engaging corporations with their supply chain in new and innovative ways. While it was discussed that this instrument is at an earlier stage of development in terms of implementation and that agribusiness corporations’ engagement is a prerequisite to kick-off the pilot, advancing conversations with prospective partner corporations continues.
  • The Long-Term Foreign Exchange Risk Management instrument will provide tools to address currency and interest rate risk for climate relevant projects in developing countries. The TCX investment management company and IFC (International Finance Corporation) will act as implementing agencies for a pilot with the aim of mobilizing up to USD 2 billion in hedging capacity. While this instrument is complex, there was recognition that additional education, research and resources are needed in this field and this instrument could be a catalyst for this, as well as providing the potential to significantly scale up finance for climate projects by lowering the cost of that finance.
  • Energy Savings Insurance will insure the value of savings generated by energy efficiency investments. In Mexico, the Inter-American Development Bank (IDB) has already committed a USD 20 million credit line and secured USD 2.5 million in grants from the Clean Technology Fund (CTF) and the Danish Energy Agency, which constitute a fully-funded pilot expected to attract up to USD 25 million in private finance through 2020. In June 2014, a pilot was launched separate from The Lab process in Columbia, with USD 20 million in loans and USD 5 million in grants. A key lesson leaned from this pilot to date is that the third party verification process has had a positive impact of financial markets. The Danish Energy Agency will also provide USD 5 million to IDB to replicate the pilot in additional regions and sectors in Latin America and the Caribbean, which may in turn provide a platform for eventual expansion in Asia and Africa by additional implementing entities. Several institutions expressed interest in replicating this instrument into these regions.

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The four instruments have collectively raised over USD 100 million in initial funding, with more expected to follow through an ongoing process that will draw on expertise and resources of additional Lab member institutions, as well as other private and public stakeholders.

Consideration for options to support a successful continuation of The Lab’s work beyond the first Lab cycle is critical to ensure adequate support is available to encourage implementation of pilots once instruments are endorsed. There was agreement that one focus going forward should be to implement and execute the current instruments, fulfilling the Lab’s goal to move from talk to action, and demonstrating concrete progress in this vital year for climate action.  Key to getting these instruments operational will be to leverage networks and, a targeted communications and promotion strategy to establish the needed partnerships and source funding.

Lab Principals and Advisors also gave strong support for Climate Policy Initiative’s continued involvement acting as Secretariat for The Lab with indications that a Second Round of The Lab will be announced shortly, and initiated with a possible Advisor Meeting scheduled in late June or early July 2015 to set the strategic direction of the new cycle, which could include specific sectorial, regional or thematic streams.