Green Climate Fund (GCF): crucial questions with a view toward Paris

The GCF building in Songdo
© Brandon Wu, ActionAID

The 10th Board meeting of the Green Climate Fund (GCF) was its last gathering prior to the potentially historic 11th meeting in November 2015, in which the first GCF projects and programs are due to be approved shortly before the Paris climate summit. At this point at the latest, all of the key policies will have to be adopted and the necessary prerequisites put in place to select the “right” projects from a variety of proposals, concepts and ideas and present them in Paris as an initial documentation of the Fund’s performance. This is an indispensable outcome of the GCF’s activities this year, the lack of which would impose a serious political handicap on the decisive UN summit toward a new global climate agreement before it even starts.

With the 10th meeting, the basic framework that will permit the Fund to make its first project decisions in November has indeed been put in place. There were nevertheless a number of controversial decisions that have only been partly resolved in a satisfactory manner following intense debate:

• the terms for the granting of public loans,
• details surrounding the investment framework and
• the accreditation of new implementing entities.

On the positive side, the Board succeeded in making decisions on a number of agenda items that had been repeatedly discussed and postponed:

• on enhanced direct access and
• issues surrounding the private sector facility.

With the decisions made at this meeting, all of the necessary mechanisms are in place to approve the first projects and send a positive signal to the 195 parties of the Paris conference. But one thing is already apparent: there are still some ambiguities in the individual processes that create the risk that the decision on the first project to be financed by the GCF will be, above all, a political one that will entail a significant lack of transparency.

In addition to the individual decisions, the 10th Board meeting session triggered an important debate regarding the role of the Secretariat and its relationship to the Board, as the actions of the Secretariat in some of the decisions caused considerable controversy in the Board. The lack of transparency that manifests itself at various points was also sharply criticized by Board and civil society.

Furthermore, the long-term model and vision of the GCF – i.e. “It’s a fund, not a bank!” – are at the core of many decisions. The GCF is at a crucial juncture in this regard, and many questions relating to these fundamental differences in understanding have been postponed to a later date. As stated in its Governing Instrument (GI), the GCF is a “continuously learning institution” that is constantly developing further.

For the GCF to send a powerful signal to the Paris conference, the first project it finances must symbolize the Fund’s stated ultimate objective: to promote the paradigm shift toward low-emission and climate-resilient development pathways. This will only be possible if it promotes genuine transformation in developing countries characterized by a high degree of country ownership. Were the GCF to operate in “business as usual” mode, it would run the risk of not living up to its own objectives and becoming just another fund among many.

The 11th Board meeting, which is scheduled for early November in Zambia, with thus be another “particularly important” meeting in the brief history of the GCF.

The Songdo decisions in detail

As is now customary at the GCF, the 10th Board meeting, which was held in Songdo, South Korea from the 6th to the 9th of July, featured a packed agenda. In wise foresight, the meeting had been extended by one day already in March.

The biggest sticking points of the meeting – topics that had already caused lengthy discussion and debate at the previous gathering – were already apparent in advance. Two of the topics were direct continuations of the decisions made at the 9th meeting and concerned the terms for the award of public loans and details surrounding the investment framework. The third hotly debated item on the agenda was once again the accreditation of new implementing entities for the Fund.

Which model should be used for loans and grants, and who should receive them?

With regard to the terms for the award of public loans, the associated background document that the Secretariat had prepared for the meeting was particularly surprising. In essence, it addressed a fundamental question: which country will get money from the GCF on what terms? Rather than presenting options that could serve as the basis on which to award loans with low or high concessionality (i.e. terms that are slightly or far below the prevailing market interest rate), the paper focused primarily on awarding grants. The Secretariat proposed to greatly restrict the awarding of grants, only providing them to a subset of the least developed countries (LDCs) for certain types of projects. As a reason, it cited the scarce resources of the Fund that make it necessary to use financial instruments that generate maximum possible returns.

This “bank logic” was strongly criticized by parts of the Board – from both the industrialized and developing-country camps. In particular, the attitude of the Secretariat, which had reportedly already denied grants to applicants that had submitted initial project concepts and ideas to the Secretariat, came under heavy fire. Rather than a rigid structure that defines precisely which country is eligible for which financial instrument and under what circumstances, the Board members advocated an approach in which grants or concessionary lending would be selected as appropriate for a project on a case-by-case basis. Further rules could provide the Secretariat with the necessary orientation.

Yet the Fund did not succeed in adopting further guidelines and instructions for the Secretariat that would, for example, favor the most vulnerable countries and small island states in the awarding of grants. Instead, the Secretariat will now review the individual cases according to very general principles, which had already been adopted at the 5th Board meeting, when choosing the financial instrument available to an applicant. The issue has thus not been solved but merely postponed. The crucial question of the appropriate financial instrument will most certainly arise again, at the latest when projects are actually approved. The Board does not intend to revisit the topic of more detailed guidelines for the awarding of grants and loans until its 12th meeting next year.

The investment framework: how comparable do projects have to be, and who will assess them?

The further refinement of the investment framework also made for considerable controversy, especially in the run-up to the meeting. Already in March, negotiations on this topic ran into the wee hours. Specifically, the issue of scaling was discussed. ‘Scaling’ means that project proposals must not only demonstrate how they fulfill the six individual investment criteria, but that their expected performance is also rated in each category. This is intended to provide comparability when selecting the actual “best” projects. Internally, the topic of scaling was so controversial that it initially was not even possible to agree on the content of a background paper. The responsible Investment Committee (consisting of the UK, Australia, Norway, China, India and Chile) met several times, both before and during the 10th meeting, in order to reach an agreement. The biggest point of contention was the question of which groups of projects, in terms of size, should be subject to scaling. The Board finally chose an option that had already taken shape at the previous meeting: scaling would initially be applied only to medium and large projects, i.e. those with a volume of more than $50 million. It also established that projects would only be compared under similar circumstances and conditions (e.g. adaptation projects would not be compared to mitigation measures).

The discussion on the appointment of the six members of the Independent Technical Advisory Panel (ITAP), which has the important task of reviewing and evaluating incoming project proposals, was closely linked to the debate about the investment framework. While consensus was reached on four of the members, the Investment Committee was unable to agree on the remaining two candidates [1]. The final decision was thus left to the GCF Board. The suitability of candidates 5 and 6 was questioned, and a further issue was that the majority of the six proposed ITAP members have strong professional backgrounds in regional development banks. Many representatives of developing countries on the Board criticized their lack of experience with the UNFCCC process – a point that, according to them, especially applies to candidates 5 and 6. The Board ultimately decided to appoint the four ITAP members for whom there was agreement: representatives from Germany, Japan, Colombia and Bangladesh. The Board will be searching for suitable candidates to fill the remaining two positions until the 12th Board meeting.

The accreditation of implementing entities: controversial choices and lack of transparency

As expected, the final sticking point was once again the accreditation of new implementing entities for the Fund. In addition to a need for discussion on the individual institutions, the lack of transparency in the accreditation process has been harshly criticized – both by the Board and civil society observers. As in the previous meeting, the names of the applicant institutions were known only to the Secretariat and kept confidential to the end. The names of the applicants were not even disclosed to the Board members until a week before the start of the 10th meeting. The public was kept completely in the dark until the names of the accredited institutions were officially announced.

The Secretariat unfortunately exhibits this lack of transparency in many areas of its work. An example: both in a press release and again at the 10th meeting, the Secretariat reported that it had already received more than 100 project ideas and concepts with a total volume of around $6 billion. Of these, projects for around $500 million looked “promising”. When queried in greater detail by the Board about the origins of these project ideas and concepts (e.g. whether this included old projects that had been rejected elsewhere), the Secretariat only gave evasive answers. Strictly speaking, only the seven institutions accredited at the last meeting in March would be eligible to submit project proposals. The Secretariat conceded, however, that it had already received projects from other sources. This lack of transparency leaves a bad aftertaste at the very least, also with regard to the selection of projects that will ultimately be up for approval in November.

In addition to the procedural criticism of the Secretariat’s lack of transparency, there was also considerable discussion with regard to content, specifically regarding the 13 institutions submitted to the Board for accreditation at the 10th meeting. Numerous members of the Board emphasized that the GCF would also have to consider potential reputational risks when choosing its implementing entities. A number of institutions among the 13 candidates for accreditation, among others Deutsche Bank[2], provided specific reasons for concern. An impending imbalance between national and international institutions in the accreditation portfolio was also repeatedly noted. That would run contrary to the purpose for which the GCF was originally established (i.e., not to be another money channel for the regional development banks). After tough discussions, the Board finally gave in and accepted the recommendation of the Accreditation Panel to accredit all 13 proposed institutions. Specifically, these are: the United Nations Environment Programme (UNEP), the World Bank (IBRD/IDA), the European Bank for Reconstruction and Development (EBRD), the Inter-American Development Bank (IDB), the Development Bank of Latin America (CAF), Deutsche Bank AG, the Agence Française de Développement (AFD), the Africa Finance Corporation (AFC), the Caribbean Community Climate Change Centre (CCCCC), Conservation International (CI), the Environmental Investment Fund of Namibia (EIF), the Ministry of Natural Resources of Rwanda (MINIRENA) and the Indian National Bank for Agriculture and Rural Development (NABARD).

Enhanced direct access strengthens the responsibility of developing countries

“Enhanced direct access” describes the concept in which decision-making authority over the approval of projects and programs or the general distribution of funds will be transferred from the Fund to the national level. The resulting enhanced “country ownership” and promotion of national institutions is intended to anchor the projects’ desired transformative effects in the respective countries. An initial prominent example of enhanced direct access is the South African Small Grants Facility financed by the Adaptation Fund. The Facility manages the awarding of grants for adaptation measures in local communities in two provinces.

The enhanced direct access concept will now also be realized by the GCF, as stated in the Fund’s GI. To this end, the Board approved a pilot program with a total volume of $200 million in Songdo. The Secretariat developed the modalities for an invitation to bid in which interested countries can submit their project proposals. It is already clear that at least 10 planned projects will be financed, of which at least four will be realized in the most vulnerable countries, the small island states and Africa. This agenda item has always been a special concern for the Board members from developing countries in particular. Next, an invitation to bid patterned after the enhanced direct access pilot project will be developed and opened to applications from potential actors.

Pilot projects in the private-sector facility

The Board was able to make two decisions pertaining to the private-sector facility. This came as a surprise, as it was not on the agenda for the meeting. The Board found the recommendations of the Private Sector Advisory Group so convincing that it was able to agree on a decision, prompted by a proposal from the industrialized countries.

• The Fund will realize a pilot program that will have up to $200 million at its disposal to support and finance micro, small and medium-sized enterprises (MSMEs) in developing countries. In a debate on the topic in March, representatives of both industrialized and developing countries on the Board advocated such a program.
• A pilot program was approved that is intended to mobilize additional financial resources for the Fund for adaptation and mitigation measures. A variety of concepts to this end, ranging from crowdfunding to the issue of GCF bonds, had already been discussed at the previous meeting. Up to $500 million will be provided for this purpose.

The Secretariat will now draw up the precise specifications for the implementation of the respective pilot programs and submit them to the Board at its 12th meeting.

David Eckstein, Germanwatch

[1] The names of the candidates were not disclosed to the public, so the Board held further discussions in a closed session.

[2] As with the discussion on the members of ITAP, the individual accreditation candidates were discussed in a closed session of the Board.