7 April, 2016

From Paris to Songdo: How the Green Climate Fund’s new Strategic Vision supports the Paris Agreement

Felix Fallasch and Bianka Kretschmer

12th meeting of the Green Climate Fund Board — decisions reflect the 1.5° temperature limit and a five-year goal for decarbonisation of private banks’ investment portfolios.

Songdo, South Korea, home to the Green Climate Fund headquarters. Photo by Daesun Kim on Unsplash

While the Paris Agreement certainly made history, it is no secret that the real challenge still lies ahead: how do we successfully implement the Agreement to achieve its purpose of limiting warming to 1.5°C?

In March 2016, the Green Climate Fund (GCF) Board gathered for the first time in a formal decision-making setting since the the adoption of the Paris Agreement. Board decisions resulting from that meeting are a first indication on how the Fund positions itself in relation to the Agreement, in particular recognising its function as an operating entity of the Agreement’s Financial Mechanism.

Some good news came in at the start of the meeting: the US announced that their 2014 pledge of USD 3 billion had been formalised through a contribution agreement with the Fund, bringing total confirmed pledges to USD 9.9 billion – in other words covering almost the entire USD 10.3 billion pledged to the GCF.

The March meeting adopted a Strategic Vision for the Fund. By the time of the adoption of the Paris Agreement, the GCF had already come a long way: formally established in 2010 and equipped with its transformational mandate in 2011, it made significant progress in developing operational policies and procedures. And in late 2015, the Board of the world’s largest dedicated climate fund, approved the first portfolio of projects valued at USD 255 million. The strategic vision adopted is a timely move to guide the funds operational priorities for its first programming period which is expected to last until 2018.

What are the main messages of the GCF’s new Strategic Vision that take up important provisions from the Paris Agreement?

Governments in Paris agreed that financial resources for developing countries have to be scaled up, especially for adaptation, in order to achieve a balance between financing for mitigation and adaptation. They acknowledged that financing under the Agreement has to respond to the needs of vulnerable and capacity-constrained developing countries, such as the poorest countries and the island nations. The GCF Board aligned its strategic vision for the Fund with this provision by agreeing to deploy resources at scale in the coming years, while allocating 50% of its resources to adaptation and focusing on the Least Developed Countries, the Small Island Developing States and African States.

The Fund’s strategic vision also has a clear reference to the 1.5 °C temperature limit in the Paris Agreement. The GCF is now the first climate fund that directly recognises its role in the efforts to limit the temperature increase to 1.5 °C above preindustrial levels. At present the GCF’s investment framework is still guided by the 2 °C temperature limit requiring all GCF funded projects to be 2 °C compatible. This policy will need to be updated in the future as part of the first review of the investment criteria, to reflect the 1.5°C temperature limit.

Another great successes of the Paris Agreement is its almost universal participation: 161 countries and country blocs, representing around 95% of global emissions and 98% of global population, have submitted their national climate commitments (so-called Intended Nationally Determined Contributions, INDCs) that are to be improved and strengthened every five years.

The Strategic Plan of the GCF has now recognised INDCs as an important reference point for the Fund’s programming, along with other national climate plans. Developing INDCs has generated unprecedented levels of political interest and commitment to climate action. Linking these to financing can help catalyse action and additional resources, and will be essential to keep up the momentum.
With this move the GCF is sending a clear signal to developing countries that their national efforts and planning exercises –INDCs – can result in financial support if further developed into concrete projects and programmes consistent with the Fund’s objectives and investment framework.

Finally, the Board intends to leverage the role of the GCF as part of the Paris Agreement’s financial mechanism to set new standards for the global practice of climate finance including for country ownership, direct access and level of ambition.

Accreditation of implementing entities to the GCF: Shifting Financial Portfolios

As the Fund implements projects in developing countries through accredited entities that can apply for funding, accreditation decisions have strategic and operational implications for channelling its resources in line with its transformational mandate.

Therefore, when considering the accreditation of 13 new entities, the Board had to respond to major concerns expressed by civil society with regard to two large commercial banks – HSBC and Crédit Agricole – with large-scale financing portfolios in the coal industry. Between 2005 and April 2014, HSBC and Crédit Agricole together invested around €15 billion (€8 and 7 billion respectively) in coal mining and coal power companies.

The Climate Action Tracker analysis shows that CO2 emissions in the electricity sector continue to increase rapidly, with coal use as one of the main drivers: coal produces over 70% of the sector’s emissions but generates only around 40% of total electricity. The Paris Agreement provided a strong political signal that the electric power sector needs to be decarbonised by 2050 and emissions from coal use need to be phased out rapidly. Consequently, continued investment by entities in coal use would be inconsistent with GCF’s transformational mandate, and more fundamentally, inconsistent with the 1.5° temperature limit in the Paris Agreement.

Governments agreed that one of the aims of the Paris Agreement is to make finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development. The GCF Board faces a dilemma when considering whether to accredit these banks.

On the one hand, their current investment portfolios are in stark contrast to the objectives and guiding principles of the Fund. On the other, there is currently no strong regulatory lever in place to pressure and incentivise these banks to stop funding coal. By accrediting these banks, the Board must demonstrate and ensure that accreditation with the GCF is not a free pass and that commercial banks who accredit with the Fund take this as a starting point for rapidly decarbonising their investment portfolios.

Key strategic decisions

What appears strategically important is that decisions taken at the last three meetings by the GCF have begun to shape a mechanism that can hold partner institutions accountable:

  1. The Board decided that it accredits entities with the explicit expectation that they will shift their overall portfolios in line with the GCF’s goal of promoting the shift towards low-emission and climate-resilient development pathways in the context of sustainable development.
  2. The independent panel that assesses accreditation applications is now tasked to establish a baseline on the overall portfolio of all accredited entities to be able to assess to what extent these portfolios have evolved in the GCF’s direction (i.e. have de-carbonised) during their accreditation period that last 5 years.
  3. Five years after an entity’s accreditation, the Board will consider whether that entity should be reaccredited and continue to work with the Fund, based on the Accreditation Panel’s assessment of its overall portfolio.

The GCF was created as an open and game-changing institution that works with a wide variety of actors in order to promote change at various societal and economic levels.

To fulfil the GCF’s mandate, the Board needs to continue to strengthen the Fund’s accreditation framework to ensure that coal and other high-emission fuels have no place in its operations nor in the medium to long-term financial strategies of its partner institutions. Next to country ownership and direct access, this is one of the most important areas, where the GCF can become a standard-setting institution that impacts the global practice of climate finance.

While some first important steps were taken, the process on defining the GCF’s role in implementing the Paris Agreement is not yet completed. At its next meeting in June 2016, the Board will consider a more detailed proposal on how the Fund could support the implementation of the Paris Agreement.