Can international climate sources and carbon markets work cooperatively to scale private sector capital? Yes, they can.
The Green Climate Fund and Global Environment Facility could play a pivotal role to scale climate finance mobilisation from the private sector and shield against the early risks that prevent investment in the initial stages of a GHG reduction project.
Many of these projects, from nature-based solutions to landfill gas projects, operate on a results-based system – only generating capital after results are delivered on the ground.
But projects require upfront funding to cover startup costs.
A project looking to restore millions of hectares of land in Latin America needs to:
– Acquire, plant and nurture seedlings
– Build relationships with local communities
– Develop the necessary technical documentation
For many in the private sector, this all generates too many risks and uncertainties with the current market landscape.
Not only could the success of the project be derailed by severe weather events and political or social instability, but the voluntary carbon market itself is generally seen as volatile and difficult for mainstream private sector investment.
That is why international climate sources under blended finance alternatives are so important.
These public sector funds have the capacity to shoulder the risk associated with upfront investment in a way the private sector does not. They have the cash to incur initial losses, getting many GHG reduction projects off the ground. Aligning public and private capital under blended finance approaches can deliver transformational change and impact.
It’s important to clarify the financing tool in question: GCF, GEF should not only look to deliver concessional grants. This practice could lead to projects being “paid twice”, could remove the incentive for developers to see the project through and undermine its integrity.
Alternatively, a loan would help a project become operational, incentivise developers to generate a high return on investment and create favourable conditions for eventual private sector funding.
There is currently no mainstreamed playbook on this under GCF or GEF, making funds understandably hesitant with their investment.
We no longer have the luxury of time.
We need big moves by big players to unleash the climate and financial capital housed within the private sector.
Cooperative working between international funds and the voluntary carbon market looks like an answer.
Pedro Carvalho, Head of Policy and Markets, EcoSecurities