A decade of the Lab: Finding a balance between climate finance innovation and actionability

Back to all news

September 24, 2024

Barbara Buchner

Global Managing Director

This is part of a blog series celebrating the Lab’s 10th anniversary. The series shares insights and lessons learned over the past decade, exploring practical knowledge from accelerating climate finance solutions in emerging markets. See all entries here.

In the decade since its founding, the Global Innovation Lab for Climate Finance (the Lab) has played a critical role in shaping the climate finance landscape. Its mission—sourcing, developing, and helping launch innovative solutions that mobilize finance to combat climate change—has never been more urgent.

As a market-builder and pipeline incubator, the Lab addresses a unique challenge: balancing a demand-driven approach while fostering innovation. The Lab plays a crucial role in supporting financial instruments in sectors emerging as important for climate change while leveraging domestic capital markets that are not yet mature and international private capital that is risk-averse and ill-suited for these immature markets. Striking the right balance between these needs—innovation and actionability—is essential to the Lab’s impact.

Since 2014, the Lab has helped mobilize over USD 4 billion in investment by supporting 78 instruments that address barriers to climate and sustainable development action, including USD 1.6 billion from the private sector. The Lab’s diverse portfolio has served a number of sectors, addressing mitigation and adaptation needs and offering practical blueprints for scaling finance towards a resilient, net-zero future. Our 10th anniversary provides an opportunity to share the valuable lessons learned and help accelerate and replicate business models that unlock private finance for emerging markets. So, here are some key learnings from the Lab’s experience balancing climate finance innovation with actionability over the past 10 years.

Scalability and practical implementation

Enable market creation while prioritizing scalable, bankable solutions. The climate finance space is filled with bold ideas and innovative approaches, but not every solution is ready for implementation. While experimentation is essential to drive solutions that address climate finance needs in difficult sectors and geographies, it is equally important to focus on projects that have both the potential to scale and the capacity to attract private capital. The Lab is an innovation-focused program, and the failure of some of its instruments to launch is one of its most important learnings. Every idea the Lab has supported is bold and challenging, though some were ready to scale in hindsight while others were not. Climate finance must ultimately serve dual purposes: delivering real-world impact and providing returns for investors. Prioritizing bankable projects helps ensure great projects don’t get stuck in the pilot stage but instead grow to the scale needed to tackle global challenges.

Speed and scale: Fail fast, learn faster. Climate scientists have made it resoundingly clear we are in a race against time. As the effects of climate change accelerate, the need for large-scale climate solutions becomes increasingly urgent. The Lab’s approach is clear: move fast, fail fast, learn quickly, and repeat. Not every project will succeed, but the key is to get promising solutions to the market as soon as possible. If they succeed, scale them; if they fail, learn and pivot. The goal is speed and scale, not perfection. Using this approach, more than 50% of instruments incubated in the Lab have gone on to mobilize at least an initial round, a success rate on par with most private venture investment portfolios.

Risk mitigation and capital mobilization

Use blended finance to mitigate risk. One of the most effective tools to achieve actionability in climate finance is blended finance—using below-market-rate public and philanthropic funds to de-risk projects and attract private investment. Blended finance is a way to leverage risk-tolerant and patient capital to unlock private finance for projects in sectors and geographies that would otherwise struggle to attract funding. By leveraging limited public resources to absorb market and project-level risks, blended finance mechanisms make climate projects more appealing to private investors who might otherwise shy away.

Align private sector incentives with climate goals. Climate finance must work within a clear but sometimes uncomfortable reality. While private investors vary widely in their mandates, ability to take risk, and integration of climate into decision-making, their capital is driven primarily by the need for reasonable risk-adjusted returns. This is simply how financial markets work at the moment as they are not required to and usually do not price in the risks related to the climate crises. In the absence of carbon pricing and other mechanisms to address the global externality, what we can do is to try and channel significant capital toward climate action by creating financial instruments that align private sector incentives with long-term climate goals.

Climate finance’s challenge is making investing in decarbonization and resilience profitable, which requires structuring investments to reflect attractive risk-adjusted returns while simultaneously focusing on impact and avoided risks.

Building strong local ecosystems by empowering local actors, financial markets, and solutions is essential for accelerating climate finance and addressing community needs in regions like Sub-Saharan Africa, Latin America, and South and Southeast Asia.

Local relevance and early-stage support

Build strong local ecosystems. If there is one takeaway from working in regions like Sub-Saharan Africa, Latin America, and South and Southeast Asia, it is that local networks, local capacity, and local solutions matter. We must work to build a future where climate solutions are locally led and access to funding by local entities is simplified. Encouraging the development of domestic financial markets and supporting local financial institutions, investors, and entrepreneurs are critical steps in making climate finance actionable in these regions. When local actors lead, projects tend to move faster and better address the needs of local communities on the ground.

Early-stage capital is crucial. Many of the Lab’s proponents face a significant barrier: they cannot access the small but essential amounts of capital needed to hire or maintain teams, conduct research, or engage with investors. Early-stage, flexible working capital is consistently highlighted as one of the most important factors in getting climate finance solutions. Programs like the Lab’s Pre-seed Capital Facility are steps in the right direction, providing small but catalytic amounts of capital to help innovative teams bridge the gap between ideation and implementation.

A vision for the future

The climate finance landscape has evolved dramatically in the past 10 years, but the path ahead remains challenging. If we are to mobilize finance for mitigation and adaptation action at the scale and speed necessary to meet our international climate targets, we need to focus on not only innovative but also actionable financial solutions. This balance—between creativity and practicality, between finance and real-world impact—will define the future of climate action.

Ultimately, the goal is to make all finance become climate finance, embedding climate and development considerations so deeply into how capital is allocated that we no longer need a separate term. Until then, the Lab’s role remains vital: catalyzing the next wave of innovation while ensuring that the projects we fund today lead to the climate solutions of tomorrow.