Ready for Climate Finance: GIZ s Approach to Making Climate Finance Work

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1 UPDATED VERSION Introduction Ready for Climate Finance: GIZ s Approach to Making Climate Finance Work Building on climate expertise and good financial governance Adapting to climate change and reducing greenhouse gas emissions at scale requires an unprecedented mobilisation of financial resources. Currently, the financing of the necessary actions is being carried out in a complex setting. Resources are channelled through an increasing number of international funds and financing mechanisms. Climate finance initiatives are heterogeneous, with diverse modes of access and funding priorities. Governments of developing countries and emerging economies as well as other stakeholders often lack a full overview of financing options. Access modalities and spending rules are sometimes perceived to be difficult and not fully transparent. Furthermore, national public finance systems in developing countries and emerging economies often face difficulties in absorbing the additional funding. The increasing volume of climate finance presents numerous opportunities for developing countries and emerging economies to enhance GIZ s Ready for Climate Finance approach 5 Promoting private sector engagement 4 Effective and transparent spending and implementation 1 Strategic planning and developing policies 2 Strengthening institutions and good financial governance 3 Accessing international climate finance their climate activities. At the same time, many countries face challenges in meeting some of the standards for accessing these funds, such as financial integrity, institutional capacity and transparency. This may create serious fiduciary risks. In many countries, however, relevant ministries or national institutions have not yet taken all the necessary steps for administering resources and ensuring their effective allocation. There is growing recognition that it is important in climate financing to use existing national systems, jointly manage national and international funding, and take development effectiveness principles into account. Climate finance readiness activities support the capacities of developing countries and emerging economies to access and use international climate finance as effectively as possible. In addition, an effective response to climate change requires the mobilisation of significant national financial flows both from national governments and the private sector. In recent years, supporting countries in preparing for climate finance has become a core part of GIZ s support in the field of climate change. In more than 25 projects across all regions, GIZ supports developing countries and emerging economies in planning for, accessing and managing climate finance, establishing and managing national institutions, and developing capacities for climate finance. Approach The approach Ready for Climate Finance is the conceptual base of GIZ s support in the field of climate finance. It consists of the following five modules which address areas that are key in dealing with climate finance: strategic planning and developing policies strengthening institutions and good financial governance accessing international climate finance effective and transparent spending and implementation promoting private sector engagement.

2 Depending on the context and the request of the respective partner country, GIZ s support may focus on individual modules or provide full support in all areas. The Ready for Climate Finance approach draws on practical experience gained in GIZ climate finance projects. These have been backed by a substantial amount of conceptual work, often carried out with national and international think tank partners. It also integrates know-how from GIZ s work in public finance reforms, good governance reforms, biodiversity, energy, climate and other fields of work. For instance, GIZ has assisted numerous countries in the field of development finance for more than 20 years. CliF Reflect The necessary capacity development activities on the ground addressing different challenges in the field of climate finance can be guided by GIZ s climate finance readiness assessment CliF Reflect which follows the five modules. To start off GIZ s work in climate finance, CliF Reflect supports national institutions and experts in assessing their institutional capacities to deal with climate finance and challenges. The results of the assessment are laid out in a clear graph. They are often also used for designing a climate finance readiness roadmap which describes current capacities and outlines further capacities needed to make more effective use of climate finance. GIZ s Climate Finance Trainings GIZ has developed a flexible training concept on the latest developments in international funds and how they can be utilised. It includes interactive sessions on various aspects of climate finance readiness priorities, the five Ready for Climate Finance modules and how to apply for funding. The target groups may be representatives of partner institutions, national/governmental or non-governmental institutions, or GIZ staff. The training is tailored in terms of both content and length to the interests and needs of the specific target group. The courses can be designed to last between three hours and two-and-a-half days. These training courses have been successfully used in many GIZ climate finance projects. GIZ s way of working GIZ offers expertise and advisory services that develop the capacities of individuals, organisations and societal systems. GIZ offers long-term capacity development services that are tailored to meet its partners individual needs to build up recipient countries strong institutional foundations. GIZ s advisory services make use of reputed and qualified international and national experts and develop innovative methods and close partnerships with recipient governments. It builds on a wealth of regional and technical expertise and tested management know-how. With a mandate to support sustainable development worldwide, GIZ is a global player. It works on behalf of the German Federal Ministry for Economic Cooperation and Development (BMZ) and the Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU), international development institutions and partner countries. GIZ is currently operating in more than 130 countries. MODULE 1 Strategic Planning and Developing Policies All over the world, climate change is a challenge for economic development and livelihoods. Many countries have established national climate change strategies. As soon as priority areas for adaptation and mitigation action are identified on the basis of reliable data and sound criteria, countries need to choose approaches and instruments to achieve those objectives. After a strategy has been formulated and substantiated into policies, the partner country can, in line with the principles of development effectiveness, request and target the capacity-building support from development partners. It is often a challenge to implement a sound intergovernmental decision-making process for climate finance issues and to consider different options and instruments based on needs on the ground, effectiveness, feasibility, costs, and alignment with development priorities. Countries can only plan for financing and successfully tap domestic and international climate finance sources if the costs of climate change measures are known, priorities are identified and financial demand is articulated. 2

3 GIZ provides support in the following areas: Developing and updating effective cross-sectoral climate change strategies as a basis for appropriate adaptation and mitigation action and attracting and allocating finance. In addition, GIZ helps integrate climate change into new or updated sector strategies, overall development strategies and investment plans. Identifying and prioritising action on all levels, for instance through quantitative and qualitative cost-benefit analysis. Analysing costs and financial needs as a basis for sound national financial planning. Choosing the appropriate public policy instruments, such as regulatory, economic and information instruments, and providing the necessary public goods and services. Collecting and using climate change related data as a prerequisite for strategy development and funding decisions (e.g. climate change projections, vulnerability assessments, greenhouse gas emission forecasts). MODULE 2 Strengthening Institutions and Good Financial Governance PHOTO: GIZ/MARKUS KIRCHGESSNER State Action Plans in India for decisionmaking on funding All Indian States have been preparing State Action Plans on Climate Change (SAPCC). The plans specify necessary action at State level that is in line with the National Action Plan on Climate Change and relevant sector policies. The Government of India requested GIZ to support 18 state governments in developing SAPCCs. GIZ provides support through the CCA- RAI ( Climate Change Adaptation in Rural Areas of India ) project, which it implements on behalf of BMZ. GIZ assisted in setting up a suitable steering structure and framework for developing the plans and facilitated working groups in analysing and prioritising action points. For example, GIZ supported West Bengal in identifying mitigation and adaptation needs. Based on the results in West Bengal six sectors and two regions (Sundarbans and Darjeeling), were prioritized and appropriate adaptation action plans were formulated. The plans and priorities set are now being used by the Indian Government for funding decisions. Developing countries face the challenge of establishing a coherent national architecture for climate finance that manages domestic and international public climate finance most effectively. Good practice requires the management of these funds according to to the principles of good financial governance, i.e. legitimacy, transparency, accountability, efficiency and development orientation. The process of setting up this institutional framework must include the clear definition of roles and responsibilities as well as the coordination between ministries, departments, agencies and sub-national institutions. Public climate finance is usually channelled in-country through extra-budgetary climate funds or the national budget. The use of national and subnational partner systems is crucial for sustainable and participatory climate financing structures and processes. The national budget is the key instrument for allocating resources according to a government s priorities and mitigation/adaptation activities. However, this requires precise information on climate-relevant public expenditures in the budgets of ministries and public authorities as well as effective coordination. Climate Fiscal Frameworks link national climate change priorities with public finance and make climate-relevant expenditures transparent. A large part of the public climate budget is implemented at the sub-national level. It is crucial that resources reach the local level and that local 3

4 self-government decisions are adapted to national and sectoral climate strategies. In practice, international funding for climate activities is often channelled through national climate funds. They are managed by national or international institutions and are usually off-budget. Extrabudgetary climate funds often promote climate change flagship activities and are conducive to international climate finance. However, they can only cover a minor portion of overall domestic climate public expenditures and need to be designed in such a way that they fit into the overarching national climate finance architecture and have high ownership of partner countries. This includes the participation of parliament and supreme audit institutions to set up and control these funds. These institutions improve the transparency and efficiency of public administration for climate-change related activities, thereby promoting legitimacy and accountability in using these resources. Supporting a national climate fund and fiscal transfer in Indonesia For more than four years, GIZ has been successfully helping build institutions for climate finance in Indonesia. This support is being provided through its PAKLIM (Policy Advice for Environment and Climate Change) programme on behalf of BMZ. After GIZ assisted in developing a climate change roadmap through studies and stakeholder consultations, GIZ was asked by the Government of Indonesia to support the establishment of the Indonesia Climate Change Trust Fund (ICCTF). The ICCTF, with support from the GIZ project, has established a set of basic functions, such as providing funding for projects in the priority sectors energy, land-based mitigation and adaptation. During the creation of the ICCTF s funding windows, GIZ supported with technical and economic analyses to guide its investment decisions and integrated cost curves for each of its investment windows. Furthermore, together with GIZ s decentralisation programme, PAKLIM supports the development of fiscal transfer mechanisms. The mechanisms facilitate the flow of resources from the national budget to provincial institutions to finance Nationally Appropriate Mitigation Actions (NAMAs) in accordance with the National Action Plan for Reducing Greenhouse Gas Emissions (RAN-GRK). GIZ provides support in the following areas: Setting up a coherent national climate finance architecture. This should include clear roles, responsibilities and effective coordination among all relevant national ministries and authorities, sub-national governments, legislative bodies, civil society and the private sector. Establishing and operating national climate funds. GIZ has supported a number of national climate funds and has compiled its experiences in a discussion paper (see link at the end of the factsheet). GIZ s support focuses on the key success factors of national climate funds: objectives and strategies, organisational structure, project cycle and procedures, as well as the monitoring and evaluation of results. Improving good financial governance. GIZ is supporting public finance reforms at national and subnational level in various partner countries in order to increase the absorptive capacity for climate financing. Integrating climate change into public finance, such as the revenue system, public expenditures, intergovernmental finance mechanisms and financial control. This can be done, for instance, by establishing an institutional framework to manage the funding effectively and integrating climate aspects in public procurement processes. Strengthening financial oversight to audit and scrutinise the proper use and efficiency of climate finance. This assistance aims to ensure compliance with good financial governance principles and international fiduciary standards. MODULE 3 Accessing International Climate Finance Developed countries have pledged significant resources to support developing countries and emerging economies in adaptation and mitigation via bilateral and multilateral mechanisms. However, the international climate finance architecture has become very complex and consists of numerous funds with different regional/sectoral focuses and modes of delivery and access channels. Due to a lack of overview and in-depth knowledge of the funds, many sources remain untapped by developing countries. While some international climate funds sources can only be tapped via international implementing agencies, direct access has become 4

5 an important access modality in international climate finance. It allows accredited entities from recipient countries to access financial resources directly from funds without passing through an international intermediary. It has been put into practice in the UNFCCC Adaptation Fund, has been piloted by the Global Environment Facility (GEF) and will be an access modality of the Green Climate Fund. In order to execute direct access, government-designated National Entities (National Implementing Entities in the UNFCCC Adaptation Fund) must be accredited by the fund. To achieve this, they have to fulfil fiduciary standards, including with regard to financial integrity, institutional capacity, transparency and self-investigative powers. GIZ provides support in the following areas: Providing information on the landscape of international climate finance, hands-on information material and tailor-made trainings. Understanding the specific requirements of individual funds. Executing direct access, which includes a very wide range of services, including selecting appropriate national institutions, submitting an application, providing evidence, developing technical capacities to fulfil the (fiduciary) standards and implementing the project successfully. GIZ assisted in the accreditation process of Preparing for the Green Climate Fund In its CF Ready Programme (Climate Finance Readiness Programme), GIZ supports a range of partner countries in preparing for the Green Climate Fund on behalf of BMZ. An important pillar is supporting national climate finance institutions in their coordination work and in gaining accreditation under GCF s direct access modality. The support for direct access will be fitted to the features of direct access in the GCF. Furthermore, the programme provides strategic and conceptual support in developing national climate strategies and policy packages for ambitious, climate-resilient low-carbon development paths and the global exchange of experiences. Work in each country is based on an initial assessment of challenges and barriers in preparing for the GCF. The exact services of the programme are customised in cooperation with the partner countries to best respond to their needs and optimally supplement existing programmes in this field. institutions from a number of countries in Asia and Africa to the UNFCCC Adaptation Fund and has summarised its experiences in a discussion paper (see link below). MODULE 4 Effective and Transparent Spending and Implementation The spending of climate finance and the implementation of the respective programmes and projects needs to be carried out effectively and efficiently. At project level, effective spending and implementation of public and private financing requires convincing, technically sound project proposals that maximise impact and have solid impact monitoring and evaluation systems. The development of projects and programmes requires technical know-how to identify the appropriate technological, project planning and development capacities, as well as financial expertise to optimise costs and returns for the project and to develop a project that is attractive to public or private investors. This often entails providing support in practical aspects of proposal writing and development. Capacities for project planning can include conducting feasibility studies or performing siting and permitting for wind energy plants, while capacities for project development can include securing land or buying licences. Good project implementation is based on advanced management and operational know-how. At the national level, effective and efficient spending of funds requires, amongst others issues, appropriate procurement guidelines under the public finance system. Furthermore transparent spending and implementation of these funds requires clear processes, sound accountability mechanisms and strong integrity management systems in relevant institutions. In addition, internal control mechanisms must make it possible to track how climate funding resources are used and to prepare reliable reports on income and expenditures. These procedures provide the necessary data for external financial control to arrange audits by independent authorities such as supreme audit institutions. GIZ provides support in the following areas: Developing programmes and project pipelines in line with national strategies. These include tailor-made trainings on project development and management. 5

6 Setting up and improving impact monitoring and evaluation systems. For example, GIZ, working in cooperation with the World Resources Institute, has developed a framework to monitor and evaluate impacts of adaptation programmes. This approach contains indicators specifically for adaptation. GIZ has also developed a new approach to monitor mitigative capacity. Implementing projects. This support involves providing practical advice on the ground, trainings on management and technical aspects, and assistance in designing pilot activities. Improving internal integrity management systems and internal control mechanisms of implementing partners. GIZ also supports procurement authorities in integrating climate and environment-related aspects to reduce the negative impact resulting from bidding procedures. PHOTO: GIZ Support to project developers and implementers in the Amazon Fund The Amazon Fund, managed by the Brazilian Development Bank (BNDES), was one of the first financial mechanisms at national level to acquire funds from international donors in exchange for reduced deforestation in the Brazilian Amazon Basin. On behalf of BMZ, GIZ provides technical advice to the Amazon Fund on identifying funding opportunities, designing funding modalities and financial mechanisms, developing impact monitoring systems as well as international cooperation. An important aspect of the project is the training of project developers and implementers for improved project quality. This specifically includes training programmes for civil society organisations (including smallholder and indigenous organisations) geared towards proposal development and project monitoring. Additionally, state governments receive training and direct support in the development of project proposals for programmes related to sustainable production systems and rural environmental registries, for example. Through this work, GIZ increases the absorptive capacity among project developers and supports the Amazon Fund in becoming an effective financing mechanism for forest and climate conservation. MODULE 5 Promoting Private Sector Engagement Public financial resources will not be sufficient to finance the mitigation of GHG emissions and adapt to climate change to the extent needed. An effective response to climate change therefore requires the engagement of the private sector. Technology providers can offer innovative green products and services which help companies reduce GHG emissions and better cope with climate change. In this context, the financial sector needs to source, pool and effectively allocate capital to climate relevant investments in the manufacturing and service sector. Both national and international financial sector institutions should play a strong role in the transition towards a low-carbon economy. At the same time, climate change also poses significant risks to the private sector. For instance, agricultural losses, infrastructure damage as well as logistics interruption due to heavy rainfalls, floods and temperature peaks can lead to higher operational and capital costs. Low carbon-related regulation, including carbon pricing, emissions caps or new technical standards, may increase operational costs. Both trends may put enterprises in the agricultural, industrial and service sector at risk. This affects business and risk management practices of financial institutions such as banks, insurance companies and specialised financial service providers. 6

7 To mobilise the private sector for low-carbon and climate-resilient development, it is necessary to remove investment barriers and support private businesses and financial institutions in tapping new business opportunities and adjusting their risk management practices. Actors in the financial sector such as central banks, regulatory authorities, banks and insurance companies also need support in order to be more active in this field. GIZ provides support in the following areas: Assisting governments to improve the overall investment climate for private business, including developing and implementing environmental regulation and market-based instruments. GIZ also helps design, implement and monitor interdisciplinary policies on green finance. Green finance policies are overall strategies Financing NAMAs through Public and Private Sources in Mexico At the request of the Mexican Government, GIZ supports the development of Nationally Appropriate Mitigation Actions (NAMAs) as a key tool for national emissions reduction. On behalf of BMU, GIZ s Mexican-German NAMA programme is assisting to prepare Mexico s first NAMAs in three areas. The Sustainable New Housing NAMA is the first NAMA in the housing sector worldwide and internationally recognised both in terms of technical design and institutional arrangements. Most of the activities planned in the NAMA have short cycles for returns on investment and are attractive for private finance. GIZ supports the Mexican partners in developing a strategy to engage the private sector including banks, micro-finance institutions and equipment providers. The private sector is also mobilised through training courses and support for housing developers, as well as the development of a local market of ecotechnologies. Consultants analyse the improvements and the promotion of policy instruments for ambitious energy efficiency standards. At the request of the Mexican Government, GIZ is also developing a business plan which convinces small and medium-sized enterprises to improve their energy performance and ensure attractive return-on-investment conditions for them. to strengthen the financial sector to support the transformation into a low-carbon, resource-efficient economy. Facilitating public-private policy dialogues on climate-relevant issues such as sustainable business models or the role of institutional investors, project developers and policy makers. This helps mobilise private investors both in developed countries as well as emerging economies. Assisting central banks and supervisory/regulatory authorities in designing, implementing and monitoring green financial sector regulation, for instance modified green credit policies or reporting standards. This enables financial institutions and insurance companies to offer improved financial and climate insurance products. Supporting financial institutions in developing green financial products to promote a low carbon development and adaptation to climate change, e.g. micro-credits and loans for small and medium-sized enterprises for renewable energies or energy efficiency measures and climate risk insurance products. In addition, GIZ facilitates dialogue between consumers, product providers and financiers of product innovations. Enabling partners to develop products and services for private enterprises and business associations in order to implement sustainable value chains. GIZ support includes the promotion of market analyses, technical and economic (pre-)feasibility studies, environmental and social impact assessments, stakeholder consultations and consultation of markets for green business development. Helping private enterprises and financial institutions in integrating climate and environment challenges in corporate risk management schemes and value chains. Further information on our work on climate finance and good financial governance can be accessed online: 7

8 Imprint Published by Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH Registered offices Bonn and Eschborn, Germany Dag-Hammarskjöld-Weg Eschborn, Germany Phone: Fax: Internet: As at: May 2013