The Global Climate Finance Innovation Lab (the “Lab”) convened more than a hundred climate finance practitioners for a 10th Anniversary Summit during New York Climate Week to discuss the progress made in mobilizing climate finance over the past decade. The Summit identified key trends, challenges and opportunities in climate finance and informed the broader climate finance investment landscape.
Summit participants include Lab members, observers, and guests from government agencies, development finance institutions, philanthropic organizations, and private sector institutions focused on sustainable investing in emerging markets.
This blog highlights key elements of the discussion, introducing the lab’s ongoing work and contributions to the wider climate finance community. include topics Simplify financial structure In order to attract investors, Leverage guarantee Free up institutional capital, Develop a strong project pipeline, local participation the ability to build emerging economies, and Expand partnerships Working with insurance companies, commercial banks, pension funds and businesses.
As described below, these points build on the ten tools the lab recognized 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 at the heart of expanding investment in emerging markets. However, financially over-engineered complex structures are rarely effective at securing investment and often prove unsuccessful. Therefore, it is necessary to balance innovation and investor familiarity.
Take the CoolPact Capital India fund as an example, which uses a standard mixed venture capital structure familiar to DFIs to influence investors to invest in India's neglected air-conditioning industry. Similarly, the Regenera Ventures fund leverages a well-established equity structure that has received support from USAID to provide capital to small and medium-sized enterprises adopting regenerative practices in rural Mexico.
To help expand familiarity with proven financial structures, the lab Climate Finance Learning Centeraimed at developing a standardized playbook that highlights successful financial mechanisms and details successful replication strategies.
2. Use guarantees to unlock institutional capital for riskier markets and neglected industries
Guarantees have recently received increasing attention as an efficient mechanism to promote private climate investment in emerging markets. The “Climate Finance Guarantee Overview of Emerging Markets and Developing Economies” released by CPI in February 2024 identified 52 cross-border guarantee instruments supporting more than a quarter of private climate finance.
Although guarantee commitments can address known risks and mobilize significant private capital to combat climate change, they remain underutilized. There are several obstacles, including high transaction costs, time horizon mismatches between borrowers and creditors, and a lack of a reliable pipeline of bankable projects. Attendees at the Lab Summit agreed that assurances are needed to unlock capital for the most vulnerable areas and neglected industries.
Two financial mechanisms for the Laboratory's 2024-level leverage guarantee reduce the risk of its underlying investments and attract private capital. Silvopasture Scaling's SPV uses assurance to reduce the risk of low-probability, high-impact events such as productivity failures. Guarantees from the Amazon Food and Forest Bioeconomy Financing Program address potential loan defaults and reduce the need for large, subordinated tranches that have difficulty financing.
3. Develop the project pipeline while formulating the financial structure to ensure a viable path to funding and implementation
A strong, transparent and tested project pipeline is critical to the success of any financial instrument. While designing an innovative structure that theoretically provides investors with market rate returns and climate impact is critical, identifying a strong pipeline of bankable projects must be a core focus.
This is particularly important for sectors that have traditionally been seen as less commercially viable, such as adaptation projects, marine and nature-based solutions. Lab Summit participants suggested a phased approach: Focus first on projects within those industries with the clearest revenue streams. Over time, investments should expand to include projects that are more difficult to finance but may have greater climate impacts.
The lab's 2024 class takes two unique approaches to developing pipelines for underserved industries. Natural Structured Finance invests in ecosystem conservation through financing a diversified portfolio of natural assets developed for local stakeholders in Southeast Asia. Next Generation Agricultural Growth (GAN) funds investments in bio-inputs SMEs, leveraging existing relationships within the Brazilian agricultural inputs market to achieve healthier soils.
4. Build capacity in emerging economies by working with local fund managers and project developers
The lab’s theory of change revolves around supporting local climate finance fund managers and innovators, and working with local and regional investor communities. While most climate finance still does not flow through local actors, with South-South finance accounting for less than 2% of total climate finance, locally-led solutions are crucial. These solutions can build capacity, reduce currency risk, incorporate local market knowledge and reverse the North-South repayment cycle, issues that have plagued international development and climate finance for decades.
The Lab supports many local fund managers and prioritizes geography when selecting new instruments. However, developing local capabilities should also be balanced with leveraging international capital to rapidly implement solutions at speed and scale.
South African clean utility fund Mzansi Clean Energy Capital and South African real estate fund management company International Housing Solutions jointly developed the “Clean Utilities Promoting Affordable Housing” project as executive partners. The InvestHer Climate Resilience Bond, led by the Grameen Foundation, is another example. While the foundation is based in the United States, the team has strong local presence and experience in Uganda, where the pilot program will be implemented.
5. Expand partnerships to include institutions that need to take the lead, such as insurance companies, commercial banks, pension funds and enterprises.
The lab’s success is driven by strong partnerships with the public and private sectors to bring catalytic capital to climate solutions. The Lab has a network of over 100 members and is able to work with a wider range of financial institutions, including pension funds, insurance companies and corporates. This provides an opportunity to unlock additional capital and accelerate climate solutions.
Two Lab alumni from the Class of 2024 are spearheading partnerships with financial institutions that are underrepresented in climate finance. The Land Bank Nature Fund aims to incorporate nature into the balance sheet by developing natural equity assets and mobilize corporate financing to address climate change. The Resilient Municipal Markets Fund (ReMark) targets local commercial banks and mobilizes funds to upgrade urban food markets in Africa through public-private partnerships (PPPs).
In summary
The Lab Summit provides a valuable platform to exchange insights and identify key strategies to accelerate climate finance. By prioritizing simplicity, leveraging assurances, developing strong pipelines, engaging local actors, and expanding partnerships, the Lab and its members are well-positioned to drive investment in climate action. Going forward, these five takeaways will guide our efforts to find and develop climate finance mechanisms that have the potential to raise billions of dollars for emerging markets.
