Ready for Climate Finance GIZ s approach for making climate finance work

Ready for Climate Finance GIZ s approach for 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. Investments are needed from both public and private sources and must be supported by appropriate policy and regulatory frameworks. Around the world, countries national funds are already investing in activities that reduce their vulnerability to climate change and curb greenhouse gas emissions. In recent years the amount of international funding available for these activities has significantly increased. Internationally there are also high expectations for the Green Climate Fund (GCF), which was set up under the United Nations Framework Convention on Climate Change (UNFCCC). The Fund is expected to become the channel for a significant proportion of international climate finance in the future and ultimately, is seeking to promote a paradigm shift towards a low-carbon and climate-resilient society. It is not, however, always easy for countries to access available funding and to direct funds to where they can be most effective for climate change adaptation or mitigation. This is where climate finance readiness activities come in, as they enhance developing countries 5 Promoting private sector engagement 4 Strengthening implementation capacities 1 Strategic planning and policy development 2 Preparing the national public finance system 3 Strengthening institutions for accessing international climate finance capacities for (a) accessing and using international and national climate finance in an effective, efficient and transparent manner, (b) aligning this finance with national public funds and (c) using public funds in a way that mobilises significant private sector investment. In recent years, supporting countries to prepare for climate finance has become a core part of GIZ s work in the field of climate change. For more than five years GIZ has on behalf of the German Federal Ministry for Economic Cooperation and Development (BMZ) as well as the Federal Ministry for the Environment, Nature Conservation, Buildings and Nuclear Safety (BMUB) worked with developing countries and emerging economies on planning for, accessing, managing and spending climate finance; supporting the development of national institutions; and developing relevant capacities at the individual, institutional and country-system level. Approach The Ready for Climate Finance approach constitutes the conceptual basis for GIZ s support on climate finance. It consists of the following five modules, which address key areas in dealing with climate finance: 1. Strategic planning and policy development 2. Preparing the national public finance system 3. Strengthening institutions for accessing international climate finance 4. Strengthening implementation capacities 5. Promoting private sector engagement Depending on the context and on what is requested by the partner country in question, GIZ s support may focus on particular modules or covers all areas. The Ready for Climate Finance approach draws on practical experience gained in GIZ s climate finance projects and is backed up by a substantial amount of conceptual work, often carried out with national and international partners from think tanks and consultancies. It also integrates know-how from GIZ s work on climate policy, public finance and good governance reforms as well as on biodiversity protection, energy and other fields of work. GIZ has, for example, worked with numerous countries on development finance issues for over 20 years. Page 1

Module 1 Climate Finance Readiness Training - CliFiT Practitioners in developing countries often find it difficult to get hold of reliable and easily accessible information on climate finance. For this reason the Climate Finance Readiness Programme (CF Ready) funded on behalf of BMZ Adelphi, a climate and environmental think tank, to develop the Climate Finance Readiness Training (CliFiT) toolit. The training material comprises presentations, exercises and background reading texts. GIZ also trained up a number of trainers to deliver the course. CliFiT increases knowledge in various fields, covering, for example, the availability of international climate finance, coordination between stakeholders, and engagement with the private sector. It is targeted in particular at professional staff in ministries of the environment, finance and planning, and line ministries. The training builds on the Ready for Climate Finance approach and, because of its modular design, can be structured according to beneficiaries requirements (depending on the kind of participants and the desired intensity of training). For further information visit www.clifit.org and https:// www.giz.de/fachexpertise/downloads/giz2015-en-climatefinance-readiness-training-clifit.pdf How GIZ works GIZ offers expertise and advisory services that develop the capacities of individuals, organisations and social systems. We offer long-term capacity development services that are tailored to our partners individual needs and that build up strong institutional foundations in recipient countries. GIZ s advisory services bring in highly qualified international and national experts and develop innovative approaches and close partnerships with recipient governments. GIZ draws on a wealth of regional and technical expertise and on triedand-tested management know-how. GIZ is also a global player with a mandate to support sustainable development worldwide. It works on behalf of the BMZ, the BMUB, international development institutions and partner countries. GIZ currently operates in more than 130 countries. Strategic planning and policy development Many countries have, by now, prepared national climate change strategies. To address climate change in a comprehensive and sustainable manner, these strategic documents need to illustrate priority areas and sectors and outline steps for a transformational change towards a low-carbon, climate-resilient society. Using reliable data and sound criteria, countries must first identify their priorities for adaptation and mitigation actions and then choose approaches and instruments for achieving those objectives. Cross-sectoral coordination on implementing the strategy in all sectors is crucial although, to date, this remains a challenge in many countries. To support the actual implementation of the strategy, the next step is therefore to analyse the funding options available for the prioritised actions, considering national and international public and private resources. Countries access to climate finance can be more strategic and therefore more effective for the implementation of climate change policies if the costs of climate change measures are known or can be reasonably estimated, if priorities are identified and if financial demand is articulated. GIZ provides support on: collecting and using climate-change-related data as a prerequisite for strategy development and funding decisions for instance, through climate change projections, vulnerability assessments and greenhouse gas emission forecasts; developing and updating effective cross-sectoral climate change strategies, including broad strategic documents such as national adaptation plans (NAP), low-emission development strategies (LEDS) and sectoral climate change plans as well as more specific documents such as GCF Country Programmes; identifying and prioritising action at all levels for example, through multi-criteria analyses, cost benefit analyses, cost effectiveness analyses, and consultation processes; developing a financing strategy for the implementation of climate-change-related measures, including analysing financial needs and the possible options for financing by national and international public and private funds; coordinating cross-sectoral strategy implementation, including multi-stakeholder coordination mechanisms; choosing appropriate policy instruments i.e. the regulatory, economic and information instruments, and public finance mechanisms needed to bring about the changes envisaged. Page 2

Module 2 India: Using state action plans for funding decisions All of India s states have been drawing up State Action Plans on Climate Change (SAPCC). The plans specify necessary actions at the state level that are 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 to develop their SAPCCs through the Indo-German Environment Partnership Programme, which GIZ implements on behalf of the German Federal Ministry for Economic Cooperation and Development (BMZ). GIZ helped set up a suitable steering structure and framework for developing the plans and facilitated working groups to analyse and prioritise action areas. For example, GIZ supported West Bengal to identify its mitigation and adaptation needs, which were then used to prioritise six sectors and two regions (the Sundarbans and Darjeeling) and to formulate appropriate adaptation action plans. The Government of India is now using these priorities and plans to guide its funding decisions. Preparing the national public finance system for climate finance Due to the limited absorptive capacities of their public financial management systems, developing countries face challenges in managing domestic and international public climate finance effectively. The process to set up an institutional framework must clearly define roles and responsibilities as well as the coordination required between ministries, departments, agencies and sub-national institutions. In accordance with the principles of good financial governance, when managing climate funds 1. climate-change-related expenditure must be integrated into the national public finance system, especially in planning and budgeting processes; 2. public institutions must have the capacities to manage climate finance transparently and effectively (e.g. through the accounting and procurement system); and 3. an internal and external financial control system must be in place to ensure the efficient and effective use of climate finance. Parliament and supreme audit institutions improve the transparency and GIZ/ Markus Kirchgessner Page 3

efficiency of public administration for climate-changerelated activities, thereby promoting legitimacy and accountability in using these resources. The use of national and sub-national partner systems is crucial for sustainable and participatory climate financing structures and processes, not only for national contributions, but also for international climate finance. Externally financed investment projects are not sustainable if the recipient country does not plan to cover operating costs using its own resources in the medium to long term. The national budget is the key instrument for allocating resources according to a government s development and climate change priorities. In order to manage climate finance transparently and effectively through the national budget, it is essential to gather precise information on climate-relevant public expenditure in ministry and public authority budgets and to effectively coordinate the different stakeholders. Climate fiscal frameworks link national climate change priorities with public finance and make climate-relevant expenditure transparent. Structures, processes and capacities are needed for channelling climate finance to the sub-national level, where a large part of climate-relevant spending occurs. In some countries, national climate funds are set up to channel national climate finance, but they can also play a role in accessing international climate finance for example, if they secure accreditation under the Green Climate Fund (see Module 3). These funds are managed by national or international institutions and are usually off-budget. Extra-budgetary climate funds may be used to promote climate change flagship activities. However, to ensure they reflect national climate change priorities, they need to be designed so that they fit within the overarching national climate finance architecture and have a high level of ownership nationally. Namibia: The integration of climate change into national planning and budgeting In many countries, national climate strategies exist, but they are often not fully considered in national budgeting and planning processes. Namibia is a good example of this, as the full integration of its National Climate Change Strategy and Action Plan (NCCSAP) into national planning and budgeting systems remains a challenge. One way to address this is by integrating climate change into the planning documents that apply to line ministries such as annual sector expenditure plans, ministries strategic plans, sectoral plans and the national development plan when opportunities arise for their review. Moreover, the integration of climate change considerations is also needed if additional resources are to be requested from the national budget, because bud- get proposals must operate in line with ministries key strategic documents. GIZ s Climate Finance Readiness Programme, on behalf of BMZ, provided Namibia with technical assistance on this issue. Working with the Ministry of Environment and Tourism and the National Planning Commission, the Programme used a step-by-step approach to develop a roadmap for the integration of climate change considerations into different plans and budget preparation. Subsequently, the capacities of line ministry s planning and financing officers were strengthened, and approaches for incorporating NCCSAP and the use of climate finance sources in their activities were developed and promoted. GIZ provides support on: setting up a coherent institutional climate finance architecture that includes clear roles and responsibilities, and effective coordination among relevant national ministries and authorities, sub-national governments, legislative bodies, civil society and the private sector; improving good financial governance GIZ supports public finance reforms at the national and sub-national levels in various partner countries in order to increase their absorptive capacity for climate financing; integrating climate change into public finance, such as the revenue system, the planning and budgeting system, intergovernmental finance mechanisms and financial control (this can be done by, for example, establishing an institutional framework to manage the funding effectively and by integrating climate aspects into public procurement processes); 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 https://www.giz. de/fachexpertise/downloads/giz2012-en-climate-fundsinstitutional-strengthening.pdf); strengthening financial oversight for auditing and scrutinising the proper use and efficiency of climate finance through an approach that addresses both internal and external control mechanisms (of independent supreme audit institutions) and that aims to ensure compliance with good financial governance principles and international fiduciary standards. Page 4

Module 3 Strengthening institutions for accessing international climate finance Developed countries have pledged significant resources to support developing countries with their adaptation and mitigation measures. These resources are channelled through a variety of multilateral funds or bilateral initiatives as well as through official development assistance, and they are disbursed through a range of channels that traditionally include development banks and development cooperation agencies. The climate finance architecture that results is therefore complex, and the variety of channels and differing prerequisites to access these resources means that recipient countries can struggle to make use of all the resources available. New international climate funds, such as the GCF and the Adaptation Fund, have the explicit aim of strengthening national ownership of the activities they support. A key instrument for this is the set-up of national designated authorities (NDAs), which are designed to strengthen coordination at the national level and are responsible for ensuring that all project proposals submitted to the GCF are in line with national development and climate change priorities and comply with national laws. A second key instrument for enhancing ownership is the direct access modality. This modality allows accredited entities from recipient countries to access financial resources directly, without passing through an international intermediary. To become accredited, national and regional institutions have to prove that, inter alia, social, environmental and fiduciary risk management systems are in place and are consistently applied when implementing projects (see Module 4). GIZ provides support: in the form of information and capacity building on the landscape of international climate finance (see www.clifit.org for further information); on strengthening national designated authorities by (a) supporting the design and implementation of NDA s no-objection procedures and (b) facilitating stakeholder dialogue and consultation processes; on getting national entities accredited by international funds like the GCF, which requires identifying appropriate national institutions, supporting the application process, developing the organisation so that it meets the required standards, and building technical and managerial capacities for successful project implementation (e.g. through training on environmental and social safeguards see the box below). Preparing for the Green Climate Fund the Climate Finance Readiness Programme Kreditanstalt für Wiederaufbau (KfW) and GIZ, on behalf of BMZ, are implementing complementary elements of the Climate Finance Readiness Programme (CF Ready). Since 2014, GIZ has also been receiving funding for the programme from the US Agency for International Development (USAID) and the Ministry of Environment of the Czech Republic. The Programme, which currently operates in 15 countries around the world, is designed to foster the conditions required for achieving a results-oriented, transformational and efficient use of climate finance and of the Green Climate Fund in particular. An important pillar of the Programme supports national climate finance institutions in their coordination work and in gaining GCF accreditation. Furthermore, the Programme provides strategic support on implementing national climate strategies and policy packages for ambitious, climate-resilient and low-carbon development paths and also on the global exchange of experiences. Work in each country is based on an initial assessment of the challenges in and barriers to accessing the GCF. The Programme provides specific services that are customised in cooperation with the partner countries to ensure that they precisely respond to these partners needs and optimally supplement their existing programmes in this field. Environmental and Social Safeguards Toolkit Meeting environmental and social safeguards requirements has proved challenging for many candidate institutions. To overcome these challenges, the Climate Finance Readiness Programme worked with the World Resources Institute to produce an Environmental and Social Safeguards (ESS) Toolkit. The ESS Toolkit enables institutions to plan, build and operationalise the necessary capacity required to meet the ESS requirements of the GCF accreditation process. It includes training modules on ESS for institutions seeking accreditation and for accredited institutions that would like to improve their ESS system. Additionally, it includes a selfassessment questionnaire that enables institutions to assess their suitability for accreditation. The ESS Toolkit was developed in cooperation with the GCF Secretariat. For further information on how GIZ supports the accreditation of national entities, visit https://www.giz.de/fachexpertise/ downloads/giz2015-en-climate-finance-readiness-gcfaccreditation.pdf Page 5

Module 4 Strengthening implementation capacities for climate finance In order to access international climate finance, implementing entities be they international or national need to demonstrate that they can successfully implement programmes and projects that respect the beneficiary country s laws and regulations. Having an effective programme/project management system in place also attracts funding from other sources (e.g. bilateral donors, the private sector) and also contributes to the successful implementation of nationally financed programmes/projects. Securing the financial resources needed requires the development of transformational, technically sound programme/project proposals that maximise impacts and incorporate solid monitoring and evaluation systems. Staffs with an interdisciplinary skill set are needed to identify the appropriate technical approach, and financial expertise is also needed to optimise costs and returns in a way that attracts both public and private investors. Required skills include proposal writing and conducting feasibility studies and cost benefit analyses. Programme/project implementation is based on advanced management and operational know-how. Furthermore, implementing institutions must have clear processes, sound accountability mechanisms and strong integrity management systems in place. To avoid adverse impacts arising from projects/programmes, environmental and social management systems need to be set up and regularly applied. Transparent procurement guidelines must also be adhered to. Internal control mechanisms must communicate whether Brazil: Supporting Amazon Fund project developers and implementers The Amazon Fund, managed by the Brazilian Development Bank, was one of the first financial mechanisms at the national level to acquire funds from international donors in exchange for reduced deforestation in the Brazilian Amazon Basin. It quickly became one of the biggest regional and national climate funds. 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 on 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 on the development of project proposals for programmes related to, for example, sustainable production systems and rural environmental registries. Through this work, GIZ increases the absorptive capacity of project developers. The cooperation between the Fund and GIZ has had remarkable results, with the quantity and quality of project applications radically improving: by the end of 2010, the Amazon Fund was supporting 13 projects, but by the end of 2014 this number had risen to 69. GIZ/ Peter Korneffer Page 6

climate finance is being used efficiently and effectively and provide the necessary data for financial control to conduct independent external audits (see Module 2). GIZ provides support on: developing programmes and project pipelines in line with national strategies that include tailor-made training on project development and management; 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 by tapping in to new business opportunities and adjusting their risk management practices. Actors in the financial sector such as central and private banks, regulatory authorities and insurance companies also need support if they are to become more active in this field. strengthening programme/project implementation capacities, including programme/ project planning (e.g. proposal writing and costing), implementation and control; setting up and improving impact monitoring and evaluation systems for example, based on its work with the World Resources Institute, GIZ has developed a framework to monitor and evaluate the impacts of adaptation programmes that contains indicators specifically for adaptation; improving the internal integrity management systems and internal control mechanisms of implementing partners. Module 5 Promoting private sector engagement Public financial resources will not be sufficient to cover the costs of mitigating GHG emissions and adapting to climate change to the required extent. An effective response to climate change therefore requires the engagement of the private sector. Technology providers can offer innovative green products and services that help companies to 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 sectors. Both national and international financial sector institutions need to play a strong role in the transition towards a low-carbon and climateresilient economy. Climate change also gives rise to significant risks for the private sector. For instance, agricultural losses, infrastructure damage and logistics interruption caused by heavy rainfall, flooding and temperature spikes can lead to increased operating and capital costs. Low-carbon-related regulation, including carbon pricing, emissions caps or new technical standards, may increase operating costs and, at the same time, internalise external (social and environmental) costs. Both trends may put pressure on enterprises in the farming, industrial and service sectors to optimise their value-added processes in accordance with sustainability criteria. This affects the business and risk management practices of financial institutions, such as banks, insurance companies and specialised financial service providers, and, at the same time, presents these institutions with challenges and opportunities arising from such a reorientation. Private sector adaptation to climate change The vast majority of employment and income-generating opportunities in developing countries and emerging economies are offered by small and medium-sized enterprises (SMEs) in the retail and manufacturing industries. These SMEs also play a key role in supplying goods and services to the population. Climate change can have a direct impact on businesses in the form of building damage or disruption to production processes for example, machines may overheat or staff may fall ill more often. At the same time, the need to adapt to climate change may create new demand for products and services and provide new business opportunities (e.g. in the textile, building insulation or consultancy industries). For SMEs in developing countries and emerging economies, adapting to climate change is a huge challenge. These firms have few resources and limited expertise, and they are unaware of both the risks and opportunities arising from climate change. In response, GIZ is working on behalf of BMZ to sensitize and assist SMEs in selected partner countries to assess climate-related risks and opportunities more effectively and to develop adaptation strategies. We provide these firms with instruments for analysing the impacts that increases in extreme weather events and/or the gradual climate change will have on the delivery of primary products, energy and water, on production, and on sales. We also train chambers of commerce, business associations and management consultants in how to use these methods, and we advise SMEs on how to adapt their strategies to climate change. Page 7

GIZ provides support: to governments on improving the overall investment climate for private businesses, including developing and implementing environmental regulations and market-based instruments; to private enterprises and financial institutions on integrating climate and environment challenges into corporate risk management schemes and value chains. on designing, implementing and monitoring interdisciplinary policies on green finance to ensure that these general strategies for strengthening the financial sector better support the transition to a low-carbon, resource-efficient economy; by facilitating public private policy dialogues on climaterelevant issues such as sustainable business models or the role of institutional investors, project developers and policymakers, which helps to mobilise private investors in both developed countries and emerging economies; to central banks and supervisory/regulatory authorities on designing, implementing and monitoring green financial sector regulation (for instance, modified green credit policies or reporting standards), which enables financial institutions and insurance companies to offer improved financial and climate insurance products; to financial institutions on developing green financial products that promote low-carbon development and adaptation to climate change (e.g. micro-credits and loans for small and medium-sized enterprises for renewable energy or energy efficiency measures and for climate risk insurance products), and GIZ facilitates dialogue between consumers, product providers and those financing product innovations; to partners on developing products and services for private enterprises and business associations seeking to implement sustainable value chains, which includes the promotion of market analyses, technical and economic (pre-)feasibility studies, environmental and social impact assessments, stakeholder consultations, and consultation on the market for green business development; GIZ/ Britta Radike Further information about our work on climate finance and good financial governance can be accessed on GIZ s website at www. giz.de/en/ourservices/governance_and_democracy.html and www.giz.de/climate-finance Imprint Published by the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH Registered offices Bonn and Eschborn, Germany Climate Finance Readiness Programme Friedriche Ebert Allee 40 53113 Bonn T +49 228 44600 cf-ready@giz.de http://www.giz.de/climate-finance Design and layout MediaCompany Agentur für Kommunikation GmbH Produced in 3rd updated Version, November 2015 GIZ is responsible for the content of this publication. On behalf of the German Federal Ministry for Economic Cooperation and Development (BMZ) Division: Special Unit Climate Addresses of the BMZ offices BMZ Bonn BMZ Berlin Dahlmannstraße 4 Stresemannstraße 94 53113 Bonn 10963 Berlin Germany Germany T +49 228 99 535-0 T +49 30 18 535-0 F +49 228 99 535-3500 F +49 30 18 535-2501 poststelle@bmz.bund.de www.bmz.de Page 8