Closing the Climate Finance Gap

The climate crisis is a pressing reality, and climate finance is a crucial component in mitigating and adapting to its impacts. However, the funding allocated for this cause is still vastly insufficient. As of 2019/2020, total global climate finance reached USD 653 billion, far below the estimated need of at least USD 4.3 trillion in annual finance flows by 2030 to avoid the worst impacts of climate change (CPI, 2022). This shortfall is especially evident in developing and emerging economies, which receive less than a quarter of the total global climate investment despite being the countries that are and will continue to be disproportionately affected by the climate crisis (CPI, 2021).

Climate finance distribution remains largely concentrated in developed regions, leaving emerging and frontier economies, which are the most vulnerable to climate impacts, underrepresented (CPI, 2021). Presently, mitigation finance, primarily aimed at renewable energy projects, overshadows adaptation finance, which constitutes a meagre 7% of the total global climate investment (CPI, 2021). Moreover, current climate finance mechanisms, predominantly financed through public debt, highlight the necessity for a greater private sector involvement to diversify investment sources, supplement, and stretch limited public funds (CPI, 2021).

Developing countries are committing to increasingly ambitious climate action. As of June 2023, 154 developing countries have communicated new or updated Nationally Determined Contributions (NDCs) to the United Nations Framework Convention on Climate Change (UNFCCC), demonstrating their readiness to move from planning to implementation (NDC Partnership, 2023). Already, countries are building their national capacities to turn plans into actionable mitigation and adaptation targets, strengthening enabling environments to attract financing and consolidating priorities into centralized project pipelines (NDC Partnership, 2023). Yet existing climate finance is insufficient to meet these needs and support NDC implementation (NDC Partnership, 2023).

In response to these prevailing challenges, a promising solution arises in the form of GAIA - a proposed USD 1.5 billion blended financing platform projected to reach nearly USD 20 million direct and indirect beneficiaries across 25 developing and emerging countries. GAIA is more than just a blended financing platform; it's a fusion of multiple public and private sector organizations, including three of the most prominent global philanthropies, FinDev Canada, MUFG, and a consortium of United Nations’ agencies and platform-based initiatives, informed by countries’ stated needs surfaced through the NDC Partnership.

These diverse entities converge with a unified purpose: addressing climate change through mitigation and adaptation. GAIA is committed to overcoming barriers that hinder private investment in climate projects in emerging markets. These barriers span across several dimensions, including public institutions' capacity limitations, small transaction sizes, high origination costs, credit risk, information gaps about climate risks and opportunities, macroeconomic barriers, legal and policy challenges, and technical capacity deficits.

In the intricate world of climate finance, GAIA is carving a new and potentially transformative path through innovation. This platform is more than just a provider of financing. It is a catalyst for a paradigm shift towards a more sustainable economy. GAIA will blend commercial capital with concessional and patient sources of capital, creating a model that not only scales, but also replicates in various markets. The result is the mobilization of private sector finance at scale to support the transition of emerging markets to low-carbon and climate-resilient growth pathways.

GAIA is committed to ambitious greenfield project development and portfolio allocation targets that align closely with the evolving prioritization of adaptation action by the UNFCCC. GAIA gives significant emphasis to investments in vulnerable jurisdictions, ensuring that they receive adequate support. Within the USD 1.5 billion GAIA portfolio, 70% is dedicated to climate adaptation projects. A minimum of 25% of the invested funds is allocated specifically to the least developed countries (LDCs) and Small Island Developing States (SIDS), recognizing their heightened vulnerability to climate change.

The platform provides efficient and sustainable long-term financing solutions, covering familiar climate mitigation projects like renewable energy and low-carbon transport. GAIA extends its financial support to a range of adaptation sectors traditionally overlooked by private financing. These include resilient water and waste management systems, sustainable agriculture, coastal rehabilitation, and nature-based approaches to the built environment. A demand-led approach is integral to GAIA's operations, ensuring that country ownership is prioritized and aligned with national climate objectives and local circumstances. We urgently need innovative, collaborative financing mechanisms to ensure countries have funding lined up to raise their ambition.

GAIA's platform is crafted with a scalable and replicable financing structure. It provides long-term loans in both hard and local currencies and is versatile enough to accommodate even small transactions. It incorporates a unique de-risking mechanism, including a junior concessional debt tranche, foreign exchange hedging on local currency loans, and a second-loss tranche. These risk management measures are designed to make investments more appealing to institutional investors. On a case-by-case basis, GAIA provides additional credit enhancements at the project level, such as sourcing single name commercial credit or political insurance.

Supplementing the financial aspects, GAIA offers a Technical Assistance (TA) facility to strengthen climate projects throughout their lifecycle, thereby improving their bankability. This TA facility provides support to projects at all stages, from feasibility and design to operational and scaling-up stages. Primarily grant-based, the TA facility supports project implementers to adopt a sustainable, long-term perspective from the onset, embedding a clear climate and sustainability rationale into their approach.

Partnerships also play a critical role in GAIA's strategy. The platform leverages the capabilities of its partners, which include financial institutions, philanthropies, bilateral development agencies, global multilateral climate funds, to select and develop high-impact climate projects that meet the needs of recipient countries. This collaborative – public, private and philanthropic - approach ensures a holistic solution to climate financing, accommodating investors with varying risk-and-return profiles and financing projects from inception to maturity.

GAIA's blended financing platform, with its innovative, scalable, and comprehensive approach, is redefining the landscape of climate finance. By addressing challenges and offering tailored solutions, GAIA is driving the transition towards a more sustainable and inclusive global economy.

As the global community approaches the Paris Summit for a New Global Financing Pact, GAIA's blended financing platform stands as a beacon of innovation. It aligns with the Summit's goal of establishing a new contract between the nations of the North and the South to combat climate change and responds to Barbados Prime Minister Mia Mottley's call for increased climate finance (Paris, 2023). GAIA breaks traditional siloed approaches, fostering a powerful convergence of public and private sector entities and creating a pathway that bridges the climate finance gap. Its unique blueprint is designed for scalability, enabling other organizations and countries to replicate and adapt it according to their unique contexts.

Authors

Please note, the views represented here do not represent the views of the authors' organizations and/or membership.

Christopher Marks, MUFG, Managing Director, Growth Markets and Innovative Financing
Paulo Martelli, FinDev Canada CIO and Vice President
Jyotsna (Jo) Puri, International Fund for Agricultural Development (IFAD), Associate Vice President, Strategy and Knowledge Department
Hon. Ryan R. Straughn, M.P., Minister of Finance, Barbados
Stacy Swann, Climate Finance Advisors (CFA), CEO
NDC Partnership Global Director Pablo Vieira

References

Climate Policy Initiative. Global Landscape of Climate Finance: A Decade of Data. 2022. https://www.climatepolicyinitiative.org/publica…;
Climate Policy Initiative. Global Landscape of Climate Finance 2021. https://www.climatepolicyinitiative.org/publica…
NDC Partnership. 2023. https://ndcpartnership.org/
Summit For A New Global Financing Pact – Paris. 2023. https://nouveaupactefinancier.org/en.php