Accelerating and scaling up climate innovation: the Green Climate Fund

GCF (2021) Accelerating and scaling up climate innovation: How the Green Climate Fund’s approach can deliver new climate solutions for developing countries November 2021, # 36 p

This Working Paper first identifies the main barriers to climate innovation in developing countries, focusing on each stage of the innovation chain, from the emergence of innovation to its deployment and eventual widespread adoption. Many of these barriers are related to the policy and regulatory environment as well as to technical and macro-economic constraints. They result in high risk perception amongst investors and limited access to long-term affordable financing for climate innovators and entrepreneurs, especially in developing countries.

The paper then outlines the Green Climate Fund’s four-pronged approach to overcome these barriers and to accelerate and scale up climate innovation in developing countries. 

1. The first prong is to establish a conducive policy and institutional environment for novel climate solutions. 
2. The second prong is to catalyse climate innovation by piloting new technologies, business models, financing instruments and practices to establish proof of concept. 
3. The third prong is to use scarce public resources to de-risk early investments that will establish a commercial track record for new climate solutions and crowd-in private finance. 
4. The final prong of GCF’s approach is to accelerate the widespread adoption of commercially proven climate solutions by enhancing the capacity of domestic financial institutions to originate and access capital markets to finance climate investments.

Extracts:

Nearly 96 per cent of all venture dollars in climate start-ups went to ventures in Northern America, Northeast Asia, and the European Union. (page 2)

More than 100 Parties to the United Nations Framework on Convention on Climate Change (UNFCCC)  emphasised the need for international support for technology development and transfer for the implementation of their Intended Nationally Determined Contributions (INDC). But a range of barriers have prevented this need for technological support and capacity building from materialising. (page 4) 

Sub-Saharan Africa accounted for only five per cent of climate finance flows in non-OECD countries, at USD 19 billion (CPI, 2019). The bulk of  climate finance in Sub-Saharan Africa originates from the public sector (multilateral development banks,  national development banks, multilateral climate funds).  (page 4)

Country-specific barriers can be broadly clustered into four categories: (i) limited awareness of climate physical/transition/liability risks and new venture opportunities; (ii) limited capacity to ideate or tailor novel approaches; (iii) weak climate innovation and entrepreneurial ecosystems; and (iv) limited access to seed funding and early-stage capital.   (page 5)

There are estimated to be around 2,000 technology incubators and more than 150 accelerators worldwide. However, less than 70 are estimated to be climate technology incubators and accelerators. Due to fiscal constraints, just 25 of these are in developing countries (...) There is a multitude of ecosystem gaps to climate tech entrepreneurship that lies outside of the purview of what entrepreneurs alone can possibly tackle and that cannot be offset by simply helping an entrepreneur tweak the start-up business model in an accelerator or incubator programme. These include limited consumer awareness of new product categories, shortage of skilled labour, weak infrastructure and logistics, poor IP enforcement capabilities, and sectoral policies that favour incumbent technologies.  (page 5)

The so-called ‘valley of death’ (the gap between initial seed funding and more mature, long-term finance) for climate start-ups in in developing countries starts earlier and ends later - becoming a forbidding obstacle. This calls for new financing models to support climate technology ventures and accelerate climate innovation in developing countries. (page 6)

Barriers to the deployment of climate innovation can be broadly placed into the following four clusters: (i) higher perceived policy and regulatory risks in comparison to incumbent technologies and practices; (ii) higher perceived technical and operational risks in comparison to incumbent technologies and practices; (iii) higher perceived markets and socio-economic risks in comparison to incumbent technologies and practices; and (iv) lack of access to affordable, long-term project finance. (page 6)

Blended finance mechanisms are complex to design and can use a wide range of public instruments to increase the risk-reward profile of green investments through the ‘three Ts’: treating risk (e.g., grants for technical assistance to create a conducive policy environment to seat and operate an asset); transferring risk (e.g., loan guarantees to fully or partially transfer the risk of default to a third party); and taxing risk (page 7).

New forms of blended finance must be experimented to better work for scaling up new climate solutions, serve LDCs and Small Island Developing States (SIDS), achieve higher leveraging ratio, and de-risk a broader range of climate priorities such as climate-resilient infrastructure and nature-based climate solutions. (page 8).

There is a limited capacity of domestic financial institutions and firms to originate, develop, finance and implement climate friendly investments. (page 11)

Facilitating the emergence of climate innovation 

By acting as a market incubator, GCF supports technology need assessments and strengthens entrepreneurial and innovation ecosystems. Recognising that the traditional model of incubators and accelerators developed for digital start-ups in high-income countries have limitations for climate technologies in low-income countries, GCF explores new incubation and acceleration models to enlarge the pool of climate innovators and entrepreneurs in developing markets. GCF also provides early-stage equity capital and growth-stage capital.  

To illustrate this approach, GCF has granted project development funds to the Korean Development Bank (KDB) and the Global Green Growth Institute (GGGI) to develop an integrated approach to overcome the numerous barriers that climate start-ups face in emerging and early-stage markets in East Asia. This initiative includes a set of technical support and financing solutions tailored to climate start-ups and small and medium-sized enterprises (SMEs). (page 11)

GCF is also developing different types of growth-stage debt to provide climate enterprises with the required lower-cost operating and expansion capital as they transition from product development and early sales into growth stage. For example, GCF is providing USD 20 million in equity and USD 5 million in grants to Acumen’s USD 110 million KawiSafi Ventures Fund to leverage private equity for SMEs involved in off-grid renewable energy in East Africa. The KawiSafi Fund makes investments of USD 2-10 million in 10 to 15 clean energy small  and medium-sized enterprises in Kenya and Rwanda. (page 16)