Unlocking Climate Finance Potential at the Lab's 10th Anniversary
Keep it Simple with Proven Financial Structures
Financial innovation lies at the core of the Lab and is crucial for scaling investment in emerging markets. However, overly complicated structures often fail to attract investment. Take the CoolPact Capital India Fund, which employs a standard blended venture capital structure familiar to development finance institutions and impact investors. This approach enables them to invest in India's overlooked cooling sector. Similarly, Regenera Ventures Fund utilizes a well-established equity structure supported by USAID to finance small and medium-sized enterprises using regenerative practices in rural Mexico. To enhance familiarity with such proven financial structures, the Lab, through its Climate Finance Learning Hub, is working on building standardized playbooks that showcase successful financial mechanisms and replication strategies.Another example is the Green Energy Fund, which adopts a straightforward debt structure to provide financing for renewable energy projects in emerging economies. By doing so, it attracts both institutional and private investors who understand the model and its potential for generating returns while addressing climate change.
Leveraging Guarantees to Unlock Institutional Capital
Guarantees have emerged as a highly effective mechanism for catalyzing private climate investment in emerging markets. The CPI's Landscape of Guarantees for Climate Finance in EMDEs identified 52 cross-border guarantee instruments that support a significant portion of private climate finance. Despite their potential, guarantees are still underutilized due to various barriers such as high transaction costs and mismatched time horizons.During the Lab Summit, participants emphasized the need for guarantees to unlock capital for the most vulnerable geographies and neglected sectors. For instance, the SPV for Silvopasture Scaling uses a guarantee to mitigate the risk of low-likelihood, high-impact events like productivity failures. This allows for greater investment in sustainable land management practices. Additionally, the Amazon Food & Forest Bioeconomy Financing Initiative's guarantee addresses potential loan default, reducing the need for a large, subordinated tranche that can be difficult to raise.
Developing Project Pipelines for Capital Raising
A strong project pipeline is essential for the success of any financial instrument. While designing innovative structures is important, identifying bankable projects is equally crucial. This is particularly relevant for sectors like adaptation projects, oceans, and nature-based solutions that are often considered less commercially viable.The Lab's 2024 class showcases two unique approaches to developing pipelines for underserved sectors. Structured Finance for Nature invests in ecosystem protection by financing a diversified natural assets portfolio developed by local stakeholders in Southeast Asia. This not only provides financial support but also builds local capacity. Growth Next-Generation Agricultural (GAN) finances investments in bio-inputs small and medium enterprises to enhance soil health, leveraging existing relationships in the Brazilian agricultural input market.
Engaging Locally to Build Capacity
The Lab's theory of change emphasizes supporting local climate finance fund managers and innovators and engaging with local and regional investor communities. While most climate finance still flows through non-local actors, locally-led solutions are essential.For example, Clean Utilities for Affordable Housing, developed by Mzansi Clean Energy Capital and implemented by International Housing Solutions, builds local capacity while addressing the housing needs of emerging economies. The InvestHer Climate Resilience Bond, led by the Grameen Foundation and with a strong local presence in Uganda, demonstrates how local expertise can drive climate resilience.
Broadening Partnerships for Climate Finance
The Lab's success is attributed to its strong partnerships with the public and private sectors. With a network of over 100 members, the Lab is well-positioned to engage a wider range of financial institutions.Two 2024 Lab Alumni are leading the way in developing partnerships. The Landbanking Nature Fund aims to mobilize corporate finance for climate by developing Nature Equity Assets. Resilient Municipal Markets Fund (ReMark) targets local commercial banks through public-private partnerships to mobilize finance for upgrading African urban food markets.
In conclusion, the Lab Summit served as a valuable platform for exchanging insights and identifying key strategies to accelerate climate finance. By focusing on simplicity, leveraging guarantees, developing robust pipelines, engaging local actors, and expanding partnerships, the Lab and its members are well-prepared to drive significant investments into climate action. These strategies hold the potential to mobilize billions of dollars for emerging markets in the coming years.