Green Climate Fund overview:
At the Q1 FaithInvest FCI Interest Group Forum, we welcomed PS Srini Srinivas and Kavita Sinha to speak about the Green Climate Fund (GCF), established through the United Nations Framework Convention on Climate Change (UNFCCC) to finance climate-impact projects. Its objective is to assist developing countries finance climate change adaptation and mitigation activities.
GCF represents a 200+ strong network of public- and private-sector partners, which enables it to build novel coalitions and investments for climate action.
Importantly, GCF serves as a catalyst to accelerate green market creation and unlock financial flows needed to respond to the climate crisis by taking on risk projects, using blended finance and making first-mover investments. In doing so, it can de-risk investment projects in new climate solutions and 'crowd in' private finance.
Forum attendees learned that GCF projects can be categorised into three main types:
Adaptation projects that focus on enhancing resilience to climate impacts, crucial for vulnerable communities and ecosystems.
Mitigation projects that aim to reduce greenhouse gas emissions, targeting energy, industry, and land use sectors.
Hybrid projects that blend adaptation and mitigation strategies, addressing climate change comprehensively.
There are a variety of ways that investors can participate in GCF projects, which provides opportunities for many different kinds of investors to get involved, via either equity or debt.
Under discussion presently is the development of a commingled fund designed to provide the faiths with an investment vehicle that can enable them to pursue GCF projects as described above.
GCF Multi-Faith Just Transition Fund characteristics
The proposal: develop a GCF Multi-Faith Co-Investment Commingled Investment Platform for developing-market climate adaptation and mitigation.
The potential parameters:
Overall Objective(s): Support climate adaptation and mitigation in developing countries,
Return Expectation: Risk-adjusted market-rate
Investment Types: Equity or debt
Liquidity: TBD – Flexibility may be very important
Fee & Costs: TBD – Goal will be to minimise these
Minimum Ticket size: TBD – Goal is to allow smaller faith asset owners the ability to commingle and participate
Jurisdictions: available to US, UK, Eur institutional investors
GCF FaithInvest FCI Interest Group Forum: follow up questions
In response to questions asked at the Q1 FCI Interest Group Forum, Srini and Kavita have provided some further details.
1. During the event you mentioned that a basic goal is to make climate investments attractive to faith investors by 'taking on the risks that you would not be interested in taking on, and by making the returns interesting to you by taking lower returns ourselves if necessary'. How does GCF approach risk mitigation for investors and how have you addressed concerns about risk – or perceived risk – for investors in developing markets in particular? More basically, can developing-markets impact be achieved while also generating market rate returns – can investors have both?
Yes, both can be achieved. GCF provides catalytic or de-risking capital to help its investment partners achieve climate impact in developing countries while simultaneously generating risk-adjusted market rate returns. To achieve this, GCF bears the cost of concessionality. There are three basic concessionality approaches that GCF deploys:
Concessionality in the form of reduced return for GCF for the risk. For instance, in a recent project to provide 24x7 renewable energy power (solar power plant, battery storage system, hydrogen storage with electrolysis and fuel cells technology) to a high, climate-vulnerable country at an average power tariff below the current fossil fuel-based grid power, GCF’s concessional financing was structured such that we would accept a lower return to ensure that the revenue generated from the underlying climate asset was sufficient to generate market-to-market return for other private sector investors/financiers.
Concessionality in the form of first loss buffer. GCF is one of the few international financial institutions that provides a first loss buffer in the form of junior equity in private equity funds that are primarily seeking climate impact in developing countries. This de-risking buffer protects the senior equity holders from the downside risks and achieves their hurdle rates based on their own risk-return profiles while achieving climate impact. GCF has used this solution in several funds. A good indication of the success of this model is that some of the investors in these funds are now returning to invest in successor funds with lower concessionality from GCF.
Concessionality in the form of risk transfer. In February 2024, Green Guarantee Company (GGC), launched its operations on the London Stock Exchange, as the world’s first climate-focused guarantee company set up to unlock billions in climate finance for developing countries by credit enhancing developing country green bonds listed in LSE and green loans issued in the private credit market to an investor grade, thus enabling institutional investors access to good quality climate assets in developing countries. GCF through its partner, MUFG, provided U$40.5 million as one of the first subscribers of the Green Guarantee Company’s direct equity position.
2. In terms of working with multiple faiths, how would a commingled fund address potentially different priorities across faiths?
On the investor / financier end (or supply side), GCF has worked with multiple partners with varying mandates (such as geographical priorities, climate and sustainability impact mandates, taxonomy limitations, regulatory or prudential requirements, asset class, risk appetite, yield hurdle, etc) to generate a high-quality climate asset pipeline that addresses investor mandates. On the demand side, GCF’s country-driven approach and access to 128 partners, many of whom are present-on-the-ground in developing countries, ensures investments create local climate and sustainability impacts where it is needed most.
To facilitate faith investors' specific investment mandates, return hurdle and risk appetites; GCF has already invested in several commingled funds to simultaneously address investors with distinguishing priorities and developing country needs. GCF can structure separations and segregations of underlying assets by asset class, geography, risk appetite and other considerations, to ensure each LP has exposure to the asset class of their choice.
3. In the discussion of the Multi-Faith Just Transition Fund and considerations faith investors may be looking for such as liquidity, market return, etc, you mentioned 'no greenwashing'. How does GCF assess whether an investment is free from greenwashing?
GCF policies and operations experience ensure that its generated assets and its partner originated assets are free of any possible greenwashing.
GCF has a strong team of leading climate scientists with extensive knowledge and field experience in all aspects of climate mitigation and adaptation. GCF’s climate scientists play a critical role in the assessment and evaluation of all proposals seeking GCF financing to ensure strong climate integrity in its investments.
Further, all GCF investments are subject to GCF’s integrated result management framework (IRMF), which follows international standards of measurement, reporting and verification of climate impact. GCF has one of the world's most qualified teams dedicated to climate portfolio management, from post approval/disbursement until final repayment. This is enhanced by GCF’s disclosure and transparency requirements.
And finally, GCF has strong independent units reporting directly to its Board (Independent Integrity Unit, Independent Redressal Mechanism and Independent Evaluation Units) that further eliminate residual risks of greenwashing and create learning loops for GCF’s future investments.
4. Describe GCF’s commitment to change the model in the next few years to 'increase our capital base to bring in investors from other segments, such as the private sector or foundations or those around the table today [faith organisations]'
GCF’s governing instrument allows for different types of funders and investors including sovereigns, private sector, philanthropies and private citizens. GCF is committed to mobilise private capital and bring the investors together to finance climate assets in developing countries as per its mandate. Further, GCF’s private sector financing is already mobilising private capital for climate impact in developing countries. For instance, GCF commitment of $1.6 billion in private equity is expected to mobilise approximately $8 billion in capital as co-financing at the fund level and expects an equal amount in downstream portfolio level.
GCF’s Executive Director’s '50 by 30' vision aims to enable GCF to efficiently and impactfully manage $50 billion by 2030. One of the key tenets of this vision is to mobilise private sector participation. As part of that vision, GCF’s Board has approved a few large-scale co-investment initiatives targeting different investor types in its October 2023 and March 2024 Board meetings. Further, GCF will be bringing other co-investment platforms for its upcoming Board considerations in 2024/2025.
Another measure to operationalize the '50 by 30' vision, GCF’s Executive Director has created a new division of strategic investment partnerships and co-investments which will enhance capital mobilisation and syndication of additional resources into GCF’s investments, foster strategic partnerships to attract co-investors, and champion reforms to facilitate more capital into climate investments.
5. For follow up as we look to build momentum: What would you say are the next three (or so) steps to start getting a commingled fund off the ground?
In order to build on the momentum generated from the last discussion, GCF could co-develop with FaithInvest a new co-mingled fund for faith-based investors. To begin, this would require the following exploratory process:
Understand the appetite and quantum (size/number) of potential investors;
Understand main investment thesis, risk-return appetite and constraints of the top 3~5 investors; and
Understand the investment process of the potential investors.
GCF believes that a platform/fund size of $1 billion would be a good size to target initially though the minimum asset size would not impose any challenges if the investors were open to asset-backed financial instruments with credit enhancement optionality. GCF (through its appointed service provider or directly) will play a role of asset aggregator, underwriter, operational service provider.
Thank you, Srini and Kavita!
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