M02_L1_Presentation_Script.pdf

Module 02Climate FinanceLesson 1Innovative Approaches to Leverage and Deliver Climate Finance

Climate Finance Module 2

Presentation Script

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Module 2: Lesson 1 – Innovative Approaches to Leverage and Deliver Climate Finance Presentation Script

Welcome to Module 2 of the Climate Finance e-learning course.

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1.2 Introduction

Module 2 is divided into three lessons: Lesson 1 covers Innovative Approaches to Leverage and Deliver Climate Finance. Lesson 2 examines Risk Mitigation Instruments. And Lesson 3 describes the Role of National Development Banks (or NDBs) to Scale-Up Private Climate Finance.

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1.3 About Lesson 1

In this first lesson, you will learn the concept of innovative finance and some innovative financing solutions for climate investment. In particular, you will learn what instruments are used to leverage and deliver climate finance and some concrete examples of innovative finance supporting climate action.

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1.4 About Lesson 1

The following are key questions that will be addressed in this lesson:

What are the key obstacles to climate investment?

What is innovative finance and how is it used to meet these obstacles?

What are innovative climate finance solutions and which instruments are used?

What are some concrete examples?

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1.5 Key Obstacles to Climate Investment

Private sector investors face many obstacles when considering to invest in climate change mitigation and adaptation: for example, higher upfront costs and insufficient returns; excessive risk, as most climate-related technologies have not penetrated local developing country markets yet. Also, local and foreign investors perceive foreign exchange availability, regulatory uncertainty and the risk of default by local institutions as major impediments to private investment. Another obstacles is insufficient access to financing due to unavailable, or unaffordable, financial instruments that correctly price risk.

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1.6 Innovative Finance

Because of the many obstacles to climate investment, a huge gap exists in current climate finance flows. To address this gap, development banks like the World Bank Group have launched innovative finance initiatives to help increase climate investment flows.

At the World Bank Group, innovative finance includes any financing approach that aims to:

• Generate additional development funds by tapping new funding sources, like solidaritytaxes, or emerging donors, like institutional investors

• Enhance the efficiency of financial flows, by reducing delivery time and/or costs,especially for emergency needs and in crisis situation

• Link financial flows to results, by using results-based financing or instruments linkingflows to measurable performance on the ground

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1.7 Innovative Climate Finance Solutions

To achieve the aims of innovative finance, four innovative climate finance solutions have emerged: leverage, blending, combined finance and alternative source of financing for Small and Medium enterprises (or SMEs). Each solution is enabled by a range of financing instruments to leverage and deliver climate finance. In the following slides, we will learn more about each of these innovative climate finance solutions.

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1.8 Leverage

We will start with the innovative climate finance solution called Leverage. In order to fill the climate finance gap, it is necessary to leverage sources of funding to scale-up climate actions. While there is broad agreement on the need to leverage climate investment, there is no single, universally accepted definition of the term ‘leverage', or a methodology to quantify leverage.

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1.9 What is Leverage?

In this course, leverage is defined as “the process by which private sector capital is ‘crowded in' as a consequence of the use of public financial intermediaries and financial instruments”. Leverage can also be interpreted as the amount of private financing that can be mobilized per dollar of public or quasi-public support. Leverage shows how much money was mobilized on the back of a public dollar. In financial terminology, leverage refers to the ratio of equity to a blend of debt. As you can see, leverage implies the use of a lever to enhance an action. Click the buttons for an example and further definitions.

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1.10 Understanding Leverage

The amount of climate finance delivered through leverage depends on many factors. Take a moment to read the list on the left. Given all of these, leveraging private resources is best accomplished through some combination of policy reforms that shift incentives for private investment and address key market failures, combined with public financial interventions or investments. The list on the right shows the most common instruments used to leverage private climate investment. Click the button to view one of many examples of leverage supporting climate action in developing countries.

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1.11 Blending

The next innovative climate finance solution is blending. As you have learned in module 1, blended climate finance refers to financing provided to a project at below market terms due to “blending” of concessional donor funds with commercial investment.

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1.12 What is Blending?

Blending finance refers to funds invested at concessional, or below market, rates invested alongside an implementing entity's own funds. Blending concessional funds helps to catalyze investments and accelerate impact that would not otherwise happen due to market barriers. Blending finance also enables projects to take place over time, demonstrating their viability on fully commercial terms. Blended funds are not a subsidy but rather donor-directed investment used to balance challenging market barriers. These funds “make” projects happen and increase climate-smart investments.

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1.13 Understanding Blending

Blended Finance can take the form of a variety of products and structures, like the ones listed. Blending resources also requires more complex financial capacities that draw upon banking functions, restricting the type of institutions at the national level that can be involved. Building and strengthening these systems is complex and may require legal status, fund management capacities, and a formal connection to Ministries of Finance. Click on the button to view just a few examples of blending, one from Mexico and another one from Thailand.

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1.14 Blended Finance Unit at IFC

The Blended Climate Finance Unit at the International Finance Corporation (or IFC) manages concessional donor funds that aim to address climate change by catalyzing private sector investments and advisory projects that would not otherwise happen due to existing market barriers. These funds can be used to undertake high-risk, high impact projects with significant climate impact. For these projects, IFC co-invests concessional funding provided by the Global Environment Facility, the Climate Investment Funds and bilateral sources such as Canada alongside its own funds. Click the buttons to learn more.

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1.15 Combined Finance

The next innovative climate finance solution is combined finance.

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1.16 What is Combined Finance?

Combined finance bundles different types of finance within a single project or program. It can make otherwise unattractive low-carbon projects attractive.

Capacities are required to allocate resources in a transparent and accountable way. Combined finance entails few financial complications as no additional financial risk taking is required and results can be easily attributed to each financing source.

For example, resources can be combined through a national financial mechanism, such as a National Development Bank, a National Carbon Fund, or a trust fund, where resources are allocated together side by side.

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1.17 Understanding Combined Finance

Combining finance can reduce transactions costs, gather a larger package of resources to address the same issue, and leverage a greater quantity of both human and financial capital toward implementation. Combining finance and maximizing synergies among multiple climate and development financing instruments will remain critical to achieving impact and responding to the challenges posed by climate change. However, combined finance faces several barriers and challenges that need to be addressed in order to enhance efficiency. Take a moment to read these barriers and challenges highlighted in red text before clicking Next.

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1.18 Combined Finance Mechanism: National Climate Fund (NCF)

One mechanism that enables countries in combined finance for climate action is a National Climate Fund. The key goals of an NCF are the collection, blending, and coordination, as well as strengthening national ownership, of climate finance. NCFs can be designed to combine sources from international climate finance flows, the Global Environment Facility, Adaptation Fund and the emerging Green Climate Fund with others resources at the project level.

An example of a NCF is The China CDM Fund. It combines capital from revenues and levies from CDM business operations, grants and other types of support from multilateral development institutions to advance climate action. Click the button to learn more about a combined finance example from China.

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1.19 Alternative Source of Financing for SMEs

The last innovative climate finance solution that we will introduce is alternative source of financing for SMEs.

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1.20 What are Alternative Sources of Financing SMEs?

In module 1, you were introduced to mechanisms that deliver alternative sources of financing that support private household investments in renewables. These included microfinance for energy, property assessed clean energy, Pay As You Save programs and publicly-traded investment funds. In the next slides, we will focus on crowdfunding which aims to pool private resources for small and medium enterprises.

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1.21 What is Crowdfunding?

Crowdfunding is defined differently by different institutions. According to a recent World Bank report, crowdfunding is an Internet-enabled way for businesses or other organizations to raise money in the form of either donations or investments from multiple individuals.

Crowdfunding takes advantage of collective decision-making and innovation, and applies it to the funding of projects or businesses.

The possible market potential for crowdfunding in developing countries could reach up to $96 billion a year by 2025, making it a viable innovative climate finance solution for scaling-up climate action.

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1.22 Crowdfunding Models

There are several categories of crowdfunding:

Donation or reward based crowdfunding, which raises nonequity capital ratherthan the sale of securities for creative projects or charity causes.

Crowd investing, which refers to raising capital by selling financial instrumentsrelated to the company's assets and/or financial performance. This includesraising debt capital in the form of loans, selling claims to the company'sintellectual property, and selling investors' ownership shares.

Advance to the next slide for more examples of crowdfunding models.

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1.23 Crowdfunding Models

On this screen, please take a minute to review each of the crowdfunding models.

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1.24 Understanding Crowdfunding

The following are unique characteristics making crowdfunding a promising alternative source of financing supporting small-scale mitigation and adaptation actions.

Crowdfunding represents a new and largely untapped source of private sector financing. Crowdfunding can potentially play a critical role to give direct financial access to micro and small entrepreneurs otherwise excluded from formal finance. Crowdfunding can potentially mobilize funds faster than Official Development Assistance. And lastly, crowdfunding can tap into a more risk-tolerant segment of investors in OECD countries and enable small-scale financing institutions to venture into new business fields. Click the button to view an example from Croatia.

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1.25 Summary

In summary, because the private sector faces obstacles to invest in climate action, innovative finance has emerged to help increase climate investment. Specifically, four innovative climate finance solutions were introduced (leverage, blending, combined finance and alternative sources of financing for SMEs) along with the various instruments and capacities used in these approaches to leverage and deliver scaled-up climate finance.

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1.26 References and Resources

You have reached the end of Lesson 1. Displayed are some links that you may visit for additional information.

M02_L1_Presentation_Script.pdf

Documents

private climate finance

climate financelesson

climate action

current climate finance

innovative finance initiatives

concept of innovative

climate investment flows

innovative approaches