28 November 2019
As she steps down after four years as a private sector observer to the South Korea-based fund, Alexandra Tracy shares her reflections
I first encountered the Green Climate Fund (GCF) back in 2011, when it was still a glint in the eye of the policy makers coming out of the climate negotiations at COP 16 in Cancun. There, governments had committed to establish a ground breaking new fund, which would be "designated as an operating entity of the financial mechanism of the Convention", in order to support projects, programmes and policies in developing countries.
The details of what this meant in practice were left in the first place to a Transitional Committee, which soon held a series of consultations around the world with experts and interested parties. In my then role as Chairman of the Association for Sustainable and Responsible Investment in Asia, a membership organisation for the sustainable finance industry, I was invited to participate in several events - my first glimpse of Planet GCF.
Now, I should admit that I had absolutely no idea at that point what the GCF was all about. I came from the mainstream financial sector and had no exposure to development funding or what we would now call "climate finance". So, I imagined that it was something like a very large private equity fund that would invest in green businesses in emerging markets.
The discussions during my first consultation meeting, however, suggested that there was something different going on.
The novel (to me) term "capacity building" was used regularly with regard to the aims of the fund. There was uncertainty and, in some cases, real antipathy to the idea of allowing private sector organisations to collaborate with the GCF. Most striking was a group of representatives from the South Pacific islands, who angrily repeated that they didn't care about the technicalities, but they wanted lots of money!
Observing the GCF
Despite this slightly curious beginning, it was clear to me that the GCF was to be a considerable undertaking by the international community that had the potential for significant impact on the ground in developing countries. So, I stuck around and have been watching its development ever since.
In particular, for the last four years I have had the opportunity to participate in GCF board meetings as an Active Private Sector Observer.
This is an interesting role, not to be found outside United Nations or other government-driven funding initiatives. It is part advisory - representing the needs and concerns of the private sector to decision makers who are usually public sector people - and part communications - putting out information into the business community about the operations and goals of the GCF.
In many ways, this kind of interaction is especially important for the GCF, which brands itself as "unique" within the climate finance ecosystem for its ability to mobilise private capital at scale into its projects and programmes, and therefore needs to be engaging closely with the wider commercial world.
But as a person from the mainstream private sector, watching and taking part in GCF board meetings, it has sometimes been like entering a parallel universe, where the norms and standards of the business world do not apply.
At some meetings, board members spent as much time caucusing outside the board room as they did at the meeting table. Proceedings would grind to a halt.
During one meeting at the GCF headquarters in Korea last year, they didn't even start until the end of the second day because of wrangling over the agenda.
Board members would then continue discussions late into the night - finishing at 4.00am at the Barbados meeting in 2014. What I didn't then understand was that many board members are experienced climate negotiators, for whom night time debating is normal!
Board governance and decision making has at times also been hard to understand. Decisions have been made by the full board for the most part, even on relatively minor operational issues.
This has meant that discussions are protracted and often it has been impossible to reach a conclusion, so that important policy issues are delayed from meeting to meeting.
There has been enormous reluctance to delegate to the GCF Secretariat or to allocate decisions to those experts most capable to make them, such as a credit or investment committee, which would be the case in a typical financial institution.
"Perhaps the most challenging element of GCF governance has been the traditional requirement for all board decisions to be agreed by consensus ... this rule has caused significant delay and frustration"
Perhaps the most challenging element of GCF governance has been the traditional requirement for all board decisions to be agreed by consensus. In the business context, rules of procedure which allow one board member to block a decision against the wishes of the overwhelming majority would be viewed as unfeasible. At the GCF, this rule has caused significant delay and frustration, leading to uncertainty for project partners, unfavourable media coverage and serious concerns about the oversight of the institution.
To be fair, in the face of enormous pressure from potential contributors to the fund, this year the GCF board has managed to agree an alternative decision making process in the absence of consensus. At the most recent board meeting, a new voting process was tested for the first time, whereby members were able to approve a controversial project submission with two votes against and one abstention.
Looking away from the theatrics that sometimes occur at board meetings - which are always, unfortunately, distracting - the Green Climate Fund has been steadily evolving and maturing into a substantial institution, which is making a significant contribution to accelerating the flow of climate finance to developing countries.
The GCF does not put capital directly into transactions, but works with "accredited entities", or partners which have been approved to receive funding from the GCF (which they will onlend or invest in other institutions or projects). Nearly a hundred organisations are now accredited by the GCF, ranging from large multilaterals to local banks in a number of emerging markets.
By working with these partners, the GCF has built a portfolio of 125 projects and programmes, with a total funding amount of $5.7 billion and a total value of nearly $21 billion when co-financing is taken into account. This is far in advance of the other climate funds operating today.
The fund can also claim some success with encouraging private sector participation in its activities. Accredited entities range from global commercial banks, such as HSBC, BNP Paribas and MUFG Bank, to the Acumen Fund, an impact investing specialist.
And of GCF funding approved to date, approximately 40% will go to projects classified as private sector. These vary enormously in scope and size, including solar power in Nigeria, energy efficiency in Mongolia, a green mini grid programme in the Democratic Republic of the Congo and multiple renewable energy projects in Khazakstan.
Moreover, GCF support has even catalysed private sector investment in adaptation - typically much more challenging than mobilising capital for mitigation projects. One such example is a programme of sustainable landscape measures to enhance the resilience of smallholders in Madagascar, where the fund's involvement stimulated additional private debt and equity capital to fund the activity.
As I step down from my position as Active Private Sector Observer, I would sum up the Green Climate Fund over the last four years as having been somewhat ambivalent towards the business community at times.
The fund has serious aspirations to expand its activities with the private sector, reach out further to new commercial partners and aggressively leverage private capital into its projects. All of this is very welcome. However, there have been challenges in implementation.
The GCF Secretariat and the board have struggled to complete the framework underpinning funding proposals and evaluation metrics, and it has taken considerable time to fill critical policy gaps, some of which are still ongoing. The resulting lack of clarity on key points creates confusion and potentially deters some private sector entities from approaching the fund.
"As I step down from my position as Active Private Sector Observer, I would sum up the Green Climate Fund over the last four years as having been somewhat ambivalent towards the business community at times"
Going through the process of accreditation is a lengthy and onerous process, which relatively few private entities - especially where climate-related activities are only a small part of the business - have been willing to undertake. Proposals on alternative ways for these parties to work with the GCF, on a project-by-project basis, have been under discussion for a long period of time, but a decision was again deferred at the most recent board meeting.
And another initiative to draw in more private sector partners, by issuing a specific "request for proposals" to target them directly - an idea which we strongly supported - drew criticism for the fact that it then took two years for the GCF to approve any proposal.
Uncertainty kills transactions, and this lack of ability to make timely decisions is a problem. Private sector opportunities sometimes arise quickly, but may also rapidly unravel if the turnaround time is too slow.
This year, the Green Climate Fund has begun its first replenishment process: going out to raise funds for the next four years of operations. This has involved an extensive effort to review its progress to date and to evaluate its effectiveness. The outcomes of this internal and external appraisal will be fed into a revised strategic plan to guide the next phase of operations.
This creates an important opportunity going forward for the GCF to match its ambition for interaction with the private sector with execution. Since its operationalisation in 2015, the fund has achieved a great deal, but it can do more.
Now is the time to cut short some of the discussion around longstanding issues and move forward with bold decision making. The private sector needs clarity, transparency and consistency from the GCF. And in order to meet its critical investment goals, the GCF needs the private sector.
Alexandra Tracy is President of Hoi Ping Venture and represented the Climate Markets & Investment Association as active private sector observer at the Green Climate Fund.