UN Climate Fund Measures Can Boost Capital Sevenfold, BofA Says

The United Nations Green Climate Fund will probably be able to leverage some of its capital sevenfold with private-sector cash under measures aimed at reducing risks for investors, according to Bank of America Corp.

The GCF board agreed to allow instruments such as loan guarantees and grants covering initial losses as a way to make emission-cutting projects attractive to the private sector, said Abyd Karmali, head of climate finance at BofA Merrill Lynch in London, who attended the fund’s board meeting last month in Songdo, South Korea. GCF’s 24 members from developing and developed nations still have to sign off on the measures.

Loan guarantees and equity stakes are instruments not usually used by the Global Environment Facility and Climate Investment Funds, government-backed development institutions part-managed by the World Bank, Karmali said. Developed nations pledged to boost climate aid to poorer countries to $100 billion a year by 2020, with an unspecified portion of the cash flowing through GCF.

The fund’s rules are “as friendly to private finance as possible,” Karmali, who observes the GCF’s board meetings as a private-sector representative, said in an interview. “Interest in mobilizing private capital is built into most of the decisions.”

Grants would help bundle small-scale emission-reduction projects into larger investment pools by providing first-loss equity stakes or subordinated debt, lowering the risk of investors’ senior positions, Karmali said. Support for instruments not currently incentivized by other multilateral finance institutions, means the GCF “will likely have more risk appetite,” he said.

Harnessing Dynamism

The GCF will publish its decisions next week, the fund said in an e-mailed statement today. Private sector funding has become essential for climate finance, and “harnessing its dynamism is very important to the Green Climate Fund,” according to the statement.

GCF’s initial capital raising, expected later this year, should be considered a success if it gets about $5 billion as the fund is a new model without a track record, Karmali said.

Experience from transactions where capital has been leveraged from development finance institutions shows GCF could encourage about seven times the level of some of its public capital from the private sector, Karmali said.

Investments of $44 trillion through 2050 are needed to decarbonize the energy sector, the Paris-based International Energy Agency said May 12, up 22 percent from the figure it gave two years earlier. The spending would ensure the average temperature rise since the industrial revolution is limited to the 2-degrees Celsius (3.6 degrees Fahrenheit) target world leaders have endorsed.

To contact the reporter on this story: Mathew Carr in London at m.carr@bloomberg.net

To contact the editors responsible for this story: Lars Paulsson at lpaulsson@bloomberg.net Andrew Reierson, Sharon Lindores

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