(This article was originally published here)
As the UN prepares to roll out a multibillion-dollar Green Climate Fund (GCF), it offers greater opportunities to engage the private sector to combat climate change risks. The GCF business model not only aims to raise money from institutional private investors, but also support local, small-scale businesses to invest in climate responsive technologies and ventures.
Small-scale businesses and local financial intermediaries can play a crucial role by joining hands with the public sector to combat climate change, but accessing finance remains a challenge for most small and medium sized enterprises (SMEs), particularly in least developed countries (LDCs). The private sector facility of the GCF aims to address some of these challenges by “allocating a significant share of its resources to finance private sector activities. It will also proactively promote the participation of local private sector actors” (GCF, 2014).
The space that Bangladesh needs to watch
Although the modalities are still under discussion, the GCF private sector facility plans to roll out a dedicated program to help SMEs access finance for investing in climate change. This will include concessional funding for Micro-SMEs (MSMEs), capacity building support, and a streamlined approval process.
The GCF is split between two pots of funding: mitigation and adaptation. 50% of all the adaptation funding will go to Least Developed Countries (LDCs). Upon request, governments can access grants or concessional loans for both adaptation and mitigation, and to finance the cost of overcoming policy barriers, address information gaps, and capacity constraints that impede local private sector activity.
The fund also seeks to minimise the transaction costs of working with SMEs by having accredited entities originate, approve, administer, and manage financing on behalf of the GCF through a programmatic approach. The accredited entities can be national, regional or international intermediaries that are accredited by the GCF for project management purposes and for the purpose of approving grants and loans.
How can Bangladesh harness its already established domestic financial innovations?
Bangladesh has had significant success in using its public sector intermediaries to incentivise the private sector, particularly in the renewable energy industry. The Bangladesh Bank launched an initiative that gives incentives to the financial sector to lend to SMEs and micro finance institutions (MFIs) aiming to invest in green technologies such as solar home systems, irrigation pumps, etc. The “policy guidelines for green banking,” introduced by the central bank in 2011, requires every bank to allocate a specific budget to finance green projects. This includes direct or wholesale lending for renewable energy projects. Banks are expected to set achievable targets and strategies and disclose these in their annual reports. Banks are also required to establish a green branch in the second phase.
Compliant banks receive preferential treatment through a refinancing model that provides access to low-cost finance. Bangladesh Bank is one such example of a central bank, but national development banks of a few other countries are also investing to provide adequate and appropriate finance through green credit lines. Experiences from other developing countries will be discussed in an upcoming meeting on South-South cooperation on the post-2015 development agenda organised by the Government of Bangladesh in Dhaka from May 17-18.
The Infrastructure Development Company Limited (IDCOL) is another example of a government-owned financial intermediary that channels donor and government finance to decentralised climate-friendly energy projects. IDCOL has supported the setup of more than 3 million solar home systems in Bangladesh, and its business model is now being replicated in several countries in Africa. The success of IDCOL lies in its one stop shop model. The model includes supporting the delivery of energy access projects, offering an end-to-end package that incentivises market creation, delivery networks, access to capital, quality assurance, after sales service, training, and institutional strengthening support for partnering organisations and SMEs, etc.
These existing institutions and policies provide evidence of tried and tested models of how local financial intermediaries can be instrumental in promoting the participation of private sector actors in Bangladesh. Such entities can also become accredited GCF intermediaries, fitting with the fund’s ambition to ensure country ownership and direct access. Accessing GCF funds directly through Bangladeshi organisations is an opportunity for more SMEs to access finance. However, a lot more needs to be done to ensure private enterprises fulfill their crucial role in the fight against climate change.
Written by: Neha Rai is a senior researcher with the International Institute for Environment and Development (IIED) and Barry Smith is an independent consultant working with IIED’s Climate Change Group.