November 25, 2024
The Global Innovation Lab for Climate Finance (the Lab) convened over one hundred climate finance practitioners for its 10th Anniversary Summit during New York Climate Week to discuss progress on mobilizing climate finance over the past decade. The summit identified key trends, challenges, and opportunities in the field of climate finance, informing the broader climate finance investment landscape.
Summit participants included Lab members, observers, and guests from government agencies, development finance institutions, philanthropic organizations, and private sector institutions focused on sustainable investment in emerging markets.
This blog highlights the key takeaways from the discussions, informing the Lab’s ongoing work and contributions to the broader climate finance community. Themes included simplifying financial structures to attract investors, leveraging guarantees to unlock institutional capital, developing robust project pipelines, engaging locally to build capacity in emerging economies, and broadening partnerships with insurers, commercial banks, pension funds, and corporates.
As detailed below, these takeaways build on learnings from the ten instruments endorsed by the Lab this year.
1. Keep it simple by using proven financial structures that have achieved scale and impact
Financial innovation is at the heart of the Lab and is central to scaling investment in emerging markets. However, complicated structures that are financially overengineered are rarely effective in securing investment and typically prove unsuccessful. Thus, it is necessary to balance innovation and investor familiarity.
Take, for example, the CoolPact Capital India Fund, which uses a standard blended venture capital structure familiar to DFIs and impact investors to invest in India’s overlooked cooling sector. Similarly, Regenera Ventures Fund leverages a well-established equity structure that has received support from USAID to finance SMEs using regenerative practices in rural Mexico.
To help expand familiarity with proven financial structures, the Lab, through the Climate Finance Learning Hub, aims to build out standardized playbooks that highlight successful financial mechanisms and detail successful replication strategies.
2. Leverage guarantees to unlock institutional capital for riskier markets and neglected sectors
Guarantees have received growing attention recently as a highly effective and efficient mechanism for catalyzing private climate investment in emerging markets. CPI’s Landscape of Guarantees for Climate Finance in EMDEs, published in February 2024, identified 52 cross-border guarantee instruments that support more than a quarter of all private finance for climate.
Although guarantees promise to address perceived risk and mobilize significant private capital for climate, they are still underutilized. Several barriers exist, including high transaction costs, mismatched time horizons between borrowers and creditors, and a lack of robust pipelines for bankable projects. Lab Summit participants were unanimous on the need for guarantees to unlock capital for the most vulnerable geographies and overlooked sectors.
Two financial mechanisms from the Lab’s 2024 class leverage guarantees to de-risk their underlying investments and crowd in private capital. SPV for Silvopasture Scaling uses a guarantee to mitigate the risk of low-likelihood, high-impact events such as productivity failures. Amazon Food & Forest Bioeconomy Financing Initiative’s guarantee addresses potential loan default, reducing the need for a large, subordinated tranche where fundraising can be difficult.
3. Develop project pipelines while working on financial structuring to ensure a viable pathway to capital raising and implementation
A strong, transparent, and tested project pipeline is central to the success of any financial instrument. While designing an innovative structure that theoretically offers investors market-rate returns and climate impacts is crucial, identifying a robust pipeline of bankable projects must be a core focus.
This is especially important for sectors traditionally seen as less commercially viable, such as adaptation projects, oceans, and nature-based solutions. Lab summit participants suggested a phased approach: initially focusing on projects within these sectors with the clearest revenue streams. Over time, investment should expand to include projects that are more difficult to finance but have the potential for greater climate impact.
The Lab’s 2024 class features two unique approaches to developing pipelines for underserved sectors. Structured Finance for Nature invests in ecosystem protection by financing a diversified natural assets portfolio developed by local stakeholders in Southeast Asia. Growth Next-Generation Agricultural (GAN) finances investments in bio-inputs SMEs to enable healthier soils, leveraging existing relationships within the Brazilian agricultural input market.
4. Engage locally by working with local fund managers and project developers to build capacity in emerging economies
The Lab’s theory of change revolves around supporting local climate finance fund managers and innovators, as well as engaging with local and regional investor communities. While most climate finance still does not flow through local actors, with South-South finance accounting for under 2% of total climate flows, locally-led solutions are essential. These solutions build capacity, mitigate currency risk, draw in local market knowledge, and reverse South-to-North repayment cycles, which have plagued international development and climate finance for decades.
The Lab has supported many local fund managers and prioritizes geographic considerations when selecting new instruments. However, developing local capacity should also be balanced with solutions that leverage international capital to achieve speed and scale quickly.
This is the case of Clean Utilities for Affordable Housing, developed by Mzansi Clean Energy Capital, a South African clean utilities fund, with International Housing Solutions, a South African real estate fund manager, as the implementing partner. The InvestHer Climate Resilience Bond, led by the Grameen Foundation, is another example. While the foundation is headquartered in the U.S., the team has a strong local presence and experience in Uganda, where the pilot project will be implemented.
5. Broaden partnerships to include institutions that need to help lead the way, such as insurers, commercial banks, pension funds, and corporates
The Lab’s success results from strong partnerships with the public and private sectors to bring catalytic capital to climate solutions. With a network of over 100 members, the Lab is well-positioned to engage a broader range of financial institutions, including pension funds, insurance firms, and corporations. This presents an opportunity to unlock additional capital and accelerate climate solutions.
Two 2024 Lab Alumni are leading the way in developing partnerships with underrepresented financial institutions in the climate finance space. The Landbanking Nature Fund aims to mobilize corporate finance for climate by developing Nature Equity Assets to put nature on the balance sheet. Resilient Municipal Markets Fund (ReMark) targets local commercial banks by establishing public-private partnerships (PPPs) to mobilize finance to upgrade African urban food markets.
In conclusion
The Lab Summit provided a valuable platform to exchange insights and identify key strategies to accelerate climate finance. By prioritizing simplicity, leveraging guarantees, developing robust pipelines, engaging local actors, and expanding partnerships, the Lab and its members are well-positioned to drive investments into climate action. As we look to the future, these five takeaways will guide our efforts to source and develop climate finance mechanisms with the potential to mobilize billions of dollars for emerging markets.
