The Global Innovation Lab for Climate Finance – an Institution to Help Grow Climate Finance…
New finance instruments and regulations are now needed in order for climate finance to grow, and the Global Innovation Lab for Climate Finance has recently started supporting emerging ideas in the sector
2016 has been so far a very good year for climate finance, which has been developing strongly in the last few years. The Paris Agreement last December has indeed been a turning point for the sector, highlighting the necessity for financial institutions and investors to turn towards clean energy and low-carbon investment. $100 billion (PDF) per year has been committed by developed countries, thanks to the collaboration of the public and the private sector.
New finance instruments and regulations are now needed in order for climate finance to grow, and the Global Innovation Lab for Climate Finance has recently started supporting emerging ideas in the sector.
The creation of the lab
The lab was created in 2014, initiated by the US at the Climate Finance Ministerial of 2013, based on a public-private initiative embraced by the US, the UK and Germany. It aims at addressing the lack of financial instruments for climate finance and at appealing to private investors. Denmark, France, Japan, the Netherlands and Norway are also part of the project, and help funding the lab along with the Rockefeller Foundation and Bloomberg Philanthropies.
The lab was endorsed by the G7 last year, and the Climate Policy Initiative represents the secretariat of the lab. A group of global representatives of governments, institutional investors, project developers, and multilateral banks as well as financial advisors take the decisions within the lab.
Selection process
The Global Innovation Lab for Climate Finance has installed four criteria for the selection of the financial projects. Each project needs to be actionable – can be implemented in a few years, innovative, catalytic – mobilizes private investment, and transformative – has a significant impact and is replicable. The selection lasts one year and more than 90 applications were submitted to the lab.
Buchner said: "The lab aspires to reach a broad diversity of stakeholders. Thus, the application is open to everyone: research organizations, academic institutions, financial intermediaries and private companies."
He added: "The endorsed projects do not receive a monetary prize, but instead [get a] valuable six months of analytical support. They get connected with a network of influential funders affiliated with the lab and are introduced to the right entities that can facilitate their fundraising. We have already raised $500 million for the first four pilots.”
New finance instruments
Two new financial tools – more specific to energy efficiency – have been approved by the lab: the Energy Savings Insurance and the Energy Efficiency Enabling Initiative. The first one tries to mainstream investments in efficiency by limiting investors’ risk if there is evidence of underperformance. The second one is a recent project which aims at scaling the market within the developing world by operating as a private equity fund. The project could generate 225GWh of yearly savings with $100 million fund.
Various other projects in relation to water, agriculture, energy and infrastructure are also being reviewed in order to allow the development of renewables in Africa, Latin America and Asia. The projects involve notably: the Water Financing Facility – to enable resilient water infrastructure thanks to institutional funds, the Agricultural Supply Chain Adaptation Facility aiming at agricultural supply-chain resilience thanks to private fund, the Climate Investor One for infrastructure development.
Barbara Buchner, executive director of the Climate Finance program at Climate Policy Initiative said: "There is no fixed number of projects in either the mitigation or the adaptation space, although we are trying to strike a balance between the two. Ultimately, it comes down to the views and expertise of the lab members, who know where the barriers to green investment lie."
Future developments
New financial tools meet significant difficulty when operating in underdeveloped markets such as climate finance, and raising and deploying capital is part of these as it takes time. The impact of the projects that the lab supports is yet to be established.
Despite a huge growth in climate-resilient investment, $13.5 trillion need to be mobilised in order to be able to keep up with the Nationally Determined Contributions (NDCs), and it is therefore essential that the risks and rewards appeal to the private sector.
Buchner said: "The keys to success in scaling climate finance instruments are raising awareness, forging partnerships between stakeholders and soliciting support from implementing organizations... To bring in external capital, it is crucial to ensure that the risks and the rewards are appealing to the private sector."
The lab is not the only initiative of its kind, the India Innovation for Green Finance has been launched last November for example, and the Finance for Resilience platform is run by Bloomberg New Energy Finance.
To learn more about the lab, click here
