Climate Action 2011-2012

countries. This would be in a similar fashion as what the
Multilateral Investment Guarantee Agency (MIGA) does
for conventional investments. Coverage may go beyond
pure political risk and may include currency and legal risks,
for example.
Further risk reduction mechanisms. Instruments widely in
use today for de-risking include cash grants, loan guarantees
and concessional financing.
Waterfall structure. Combining both private and public
capital in a public-private partnership (PPP) will become
more feasible through the tiered risk-sharing structure
known as ‘waterfall’. The liabilities of a waterfall structured
fund will consist of several tranches with different degrees
of risks. While private investors could invest at a less risky
senior level, donor countries may hold more risky junior
tranches. First loss provisions for the public sector can
also be considered. This type of structure mitigates risk for
private investors, thereby helping to leverage private capital
for what may be considered high-risk investments.
The strength of the GCF, as seen
by the private sector, will be in
increased investor confidence.
Therefore it is the role of the international community
to make the resources available to shoulder the incremental
costs, as well as to equip governments with the capacity
needed to put in place the signals, incentives and sanctions
needed. The GCF can, and should, address these two
fundamental concerns, and engaging the private sector
in such endeavour will maximise its chance for successful
implementation of its mandate.
Another critical factor for the success of the GCF will be
in fully utilising the expertise and know-how of the private
sector. Inviting the private sector to systematically engage
in the GCF processes, and further the international climate
finance regime, will allow the international community to
better understand, react to and guide the dynamics of the
market in addressing the challenges of climate change.
The strength of the GCF, as seen by the private sector, will
be in increased investor confidence which can unleash large
volumes of private capital. Its focus on providing market
access to developing countries so far under-serviced by
international investors and by existing IFI programmes will
be another important value of the proposed model. A wellstructured
GCF can unlock the strengths of markets and the
power of private initiative to enable low-carbon and climateresilient
growth in the developing world.
68 climateactionprogramme.org
Climate bonds. Climate (or Green) Bonds could be
guaranteed by the GCF in a later step as part of a waterfall
structure to support the financing of the projects. Climate
bonds are designed to have comparable credit risk and
returns as conventional bonds, and therefore represent an
important instrument to attract mainstream fixed income
investors. Although guaranteed by the GCF, climate bonds
would need to be backed by real assets with sufficient cash
flows to provide returns.
PrivaTe FinanCe observers
Inviting representatives of private financial institutions and
the capital markets as permanent observers and advisers to
the board of the GCF would enable expertise and know-how
to be provided at a strategic level. Financiers could share
experience and could identify investment requirements at
both the policy and project levels. Given the innovative
nature of the GCF, this participation could play an
important role in feedback and learning, as well as providing
input on overall principles, governance, standards and
investment criteria.
lookinG ahead
What is missing in many countries, particularly developing
ones, are clear economic signals, incentives and sanctions
to private sector actors that clearly state and make evident
governments’ commitment to facilitate the transition to
a low-carbon economy. Also, for historical responsibility
considerations, developing countries should not be burdened
with the ‘incremental costs’ of this transition.
Paul Clements-Hunt has been the Head of UNEP FI since November
2000. Prior to joining the United Nations, Paul spent 1998-2000
representing the Paris-based International Chamber of Commerce (ICC)
directing the organisation’s policy work in energy, environment and
sustainable development. From 1991 to 1998, he was based in Bangkok,
Thailand, where he founded the country’s first environmental strategy
consultancy which developed projects throughout South-east Asia.
The UN Environment Programme Finance Initiative (UNEP FI)
is a global network of over 200 financial institutions. It is a unique
public-private partnership between UNEP and the private financial
sector, working to understand the impacts of environmental and
social considerations on financial performance, and to channel
private sector views and insights into environmental policy processes
at international level, including the UNFCCC negotiations. Over the
past few years, UNEP FI and partners have addressed the question of
how public funds can be used most effectively towards enabling and
catalysing low-carbon economic growth in developing countries.
UNEP FI is in an optimal position to bring the private finance sector
into partnership with the public sector, and in particular to support
the TC and the GCF in structuring an agenda for engagement with
the private sector.
UNEP Finance Initiative, International Environment House
Office D-512, 15 chemin des Anémones, CH-1219 Châtelaine
Geneva, Switzerland
Fax: +41 (0) 22 796 9240
Email: communications@unepfi.org
Web: www.unepfi.org