By Raluca Anisie, Carbon Impact Analyst and Paul Hailey, Head of Impact, responsAbility Investments AG
In the 3rd century B.C., Archimedes declared: “Give me a place to stand and with a lever I will move the world.” This phrase speaks to the potential of the right tools at the right time, but as anyone who has tried to build flatpack furniture will confirm, not having the right tools can derail any project, however grand.
In 2019, our quest to find and use the right tools to move the world is more urgent than ever. As UNEP stated at COP24, we are the last generation that can stop climate change. This challenge requires a mobilisation of investment on an unprecedented scale, yet enormous gaps remain, especially in the developing world. Filling these gaps will require ground-breaking investment approaches like blended finance, a method that uses public money to improve the risk profile of investments to catalyse private funding. However, tools such as blended products will also need to credibly demonstrate impact to attract and retain public and private investors.
The Global Climate Partnership Fund (GCPF) is one such instrument, mobilising investment to fight climate change. GCPF is a public-private partnership fund that was created in 2009 by KfW and the German Federal Ministry for the Environment, Nature Conservation, Building and Nuclear Safety (BMUB). The capital structure uses public money to catalyse private sector investment for climate change mitigation in emerging markets, and lends mainly through financial institutions to SMEs, corporations or individuals for energy efficiency (EE) and renewable energy (RE) projects. A smaller share of the fund is also dedicated to lending directly to companies or projects, mostly in the renewable energy space.
Prior to taking over in 2014, the primary focus of responsAbility – the fund manager for GCPF – had been on microfinance. Both the type of investor (public/institutional) and the sector (renewable energy) required responsAbility to develop capacity in new areas. Therefore, as a strikingly unique addition for an asset manager, engineers joined the investment team, their first task being to develop a reporting tool to make green lending possible at scale. This proprietary software, tailored to the type of banks and projects financed by the fund, was a key step to ensuring its success.
The carbon tool, named CO2rA, was set up to meet reporting requirements and ensure the eligibility of the end-loans while minimising effort from the investees’ side. It was designed with a user-friendly interface that offers banks simplified reporting and immediate feedback on project eligibility. Information is typically entered by bank staff and verified by energy specialists in the investment team. GCPF also requires investee banks to achieve certain milestones in terms of the amount of their loan that they on-lend to their customers. The software then tracks these targets and gives banks an overview of their portfolio with GCPF, visualising CO2 emissions and energy saved in various infographics. CO2rA also has the added value of providing GCPF investee companies with climate data on their investments, while ensuring continuous engagement with the investment team.
Since 2015, CO2rA has analysed over 85 000 sub-loans representing more than USD 650 million. These loans have enabled savings of more than 13 million tons of lifetime CO2 emissions in projects ranging from bakers in Ecuador to tuk-tuks in Cambodia. Meanwhile, the share of private investment in the Fund has increased from 11% to 33%.
At the same time, policymakers also have a role to play in encouraging the growth of climate finance and enabling a better standard of reporting. GCPF has thus formed a strategic alliance with UN Environment to develop energy baselines allowing them to measure the emission savings enabled by Fund investee companies. This partnership allows the Fund to obtain first-hand information on the development of sustainable energy policies in the countries in which it operates. In general, structured policies, such as energy-labelling programmes, have made it easier to identify eligible products to be reported to the Fund. And of course, a stable local regulatory environment is key for all investments, especially renewable energy projects.
In “On Spirals” (225 B.C.), Archimedes also critiqued those “who claim to discover everything but produce no proofs of the same”. Reporting may not be glamorous, but it is vital for attracting investment for a greener future. There is still a lot of progress to be made, but streamlining this process to the point that the final beneficiary receives immediate feedback, perhaps via mobile solutions, could even influence decision-making and customer behaviour. Funds such as GCPF, or the UN’s Green Climate Fund, have catalysed structural change in development finance, as well as energy savings across the developing world. Yet the fund also serves as an example of how public-private partnerships can act as an incubator for creating the right tools and methods to move the world and stop climate change.
responsAbility Investments AG is a fund manager specialising in impact investing in emerging and developing markets. The Global Climate Partnership Fund is a public-private partnership aiming to mitigate climate change and drive sustainable growth in developing and emerging markets.
responsAbility is one of the fund managers that took part in the 2018 OECD Blended Finance Funds and Facilities Survey. Click here to learn more about the results.