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Global governance

Slow, but steady progress

by Liane Schalatek, Smita Nakhooda

In depth

Developing countries need money to adapt to global warming: flooding in Haiti due to Hurricane Sandy in later October 2012

Developing countries need money to adapt to global warming: flooding in Haiti due to Hurricane Sandy in later October 2012

The Green Climate Fund has the potential to become one of humankind’s most important institutions. Its mission is to finance mitigation of global warming as well as adaptation to the unavoidable impacts of climate change in all developing countries. Next year, the Fund’s Board must agree on its vision and define its business model. By Liane Schalatek and Smita Nakhooda

At the earliest, the Green Climate Fund can start disbursing funds to developing countries in 2014. The Board has to tackle a complex agenda with more than 50 distinct tasks first to make the Fund fully operational. Crucial issues include guaranteeing the Fund has a transformational impact and defining its business model. The greatest challenge, however, which is not on the Board’s work plan, is to secure adequate and sustained funding from developed countries. Otherwise, the GCF may fast be reduced to be a well-crafted, but largely empty shell. The Fund’s 24 member Board will meet in Berlin in March and start discussing the overall vision. It is composed of an equal number of representatives from developed and developing countries.

It is still unclear how much money will be channelled through the GCF, but it could potentially handle tens of billions of dollars per year. The amount is likely to be significantly higher than the $ 6.8 billion pledged to the World Bank’s Climate Investment Funds, the largest multilateral climate financing funds to date.

The Green Climate Fund’s underlying rules are spelled out in a document (“Governing Instrument”) that was adopted by the Conference of Parties (COP) of the UN Framework Convention on Climate Change (UNFCCC) in Durban last year (see box on page 478).

The GCF will be an operating entity of the UNFCCC. It will be accountable to the COP. For most developing countries that are represented on the Board, this relationship is not close enough. Many developed country members, however, would prefer looser ties to the UNFCCC. So far, the GCF Board has not agreed on how to define the links between COP and Fund, so it did not make any recommendations to the COP in Doha either.

So far, the Governing Instrument dictates that the Board will submit annual reports and take action responding to the guidance it gets from the COP on programmes, policies and priorities. This is how the Global Environment Facility interacts with the COP too.

Diverging interests

It became apparent early on that developed and developing countries have widely differing ideas about the functions, mandate, scope and operational capabi­lities of the future GCF. These differences have not been resolved.

Many developing countries want the developed nations to fund the GCF with new, predictable and adequate contributions from public budgets. Moreover, they insist on additional funding beyond aid money pledged in the past. This, they argue, is how privileged nations should fulfil their “common but differentiated responsibilities” under the UNFCCC. Many developed countries promote a different idea. They are not much interested in links to the UNFCCC and its principles. They want to use public finance contributions to the GCF primarily to catalyse and leverage private sector investments.

Accordingly, a Board priority for 2013 is to operationalise a private sector facility, which could be modelled after the International Finance Corporation (IFC), the World Bank affiliate that funds private-sector investments. The governments of industrialised nations face financial constraints at home, so they want their GCF contributions to mobilise private sector funding. They argue that engaging the private sector that way would make the GCF investments “transformational”.

Many developing countries, in contrast, insist that public budgets must be the main source of GCF financing. In their eyes, the private enterprise should play only a supplementary role. They worry that private sector action might not conform to their national priorities. Country ownership is a guiding GCF principle, however, so governments will have the right to review proposals and reject those they consider inconsistent with their national policies.

In 2013, the Board will have to decide which vision will prevail. It will also have to make a fundamental choice between a “wholesale” business model with the GCF channelling large amounts of funding through existing funds and agencies, versus a “retail” mode in which it manages funding with its own staff. The choice of model has major implications for the size of GCF Secretariat and its administrative budget.

The Governing Instrument recognises the need for GCF actions to promote “environmental, social, economic and development co-benefits and taking a gender-sensitive approach”. This reference calls to strive towards gender-balance in the GCF Board and Secretariat staff make the GCF the first dedicated climate fund to include gender considerations from the outset.

However, only six of 24 Board members are women. The Board must prove it is serious about gender issues. It should make gender expertise a criterion for selecting the staff for its Secretariat.

Operational modalities

The Board must work on operational modalities moreover. The GCF will start out with only adaptation and mitigation funding windows, but the Board can add more. Windows for forest protection or tech­nology transfer have been mooted, for instance.

The GCF will use grants, concessional loans and other financial instruments. Funding decisions will need Board ap­proval. Like the Kyoto Protocol’s Bonn-based Adaptation Fund, the GCF will allow recipient countries direct access (see D+C/E+Z 2012/7–8, p. 287 ff.). Countries will be able to apply through accredited national implementing entities (NIEs), as well as through sub-national entities. All of them will need to meet strong fidu­ciary standards.

Accordingly, questions arise concerning what kind of capacity building is
needed to help developing countries make full use of the GCF, and how such capacity building will be funded. Some countries want the GCF Board to push capacity building and support “readiness activities” fast. They hope money for related purposes will be disbursed by early 2014 at the latest.

The GCF, however, will also be accessed through accredited multilateral agencies, including the multilateral development banks and UN agencies. This is the dominant practice of existing multilateral climate finance facilities. Unless the GCF Board opts for the retail model, this will be the dominant approach at the new Fund too. Some developing countries, however, express a preference for the retail model since it would grant them more scope for independent action.

Accountability and transparency are crucial issues. The GCF should set new standards, but there is a risk of it only following or even falling behind established practices. The GCF Board will have to monitor the impact, effectiveness and efficiency of its funding, so it needs a framework for measuring results. Moreover, it has already been decided that there will be an independent GCF evaluation unit, which will report directly to the Board and share its insights with the COP.

Rules for public disclosure are needed too. Specifics have not been agreed yet. The GCF should follow established best practice according to which key documents are posted on a website in all relevant UN languages, and Board proceedings are webcast. So far, the GCF has not lived up to those standards.

The GCF will have several other accountability mechanisms, including an independent fraud unit and an independent redress mechanism, which will allow people in recipient countries to bring complaints forward. To prevent harmful funding decisions, the Board must adopt meaningful environmental and social safeguards.

Engaging stakeholders

To ensure the legitimacy and long-term success, relevant stakeholders must be involved in the GCF. According to the Governing Instrument, they include “private sector-actors, civil society organisations, vulnerable groups, women and indigenous peoples”. In principle, these stakeholders are meant to participate in the design and implementation of GCF activities and funding, so appropriate modalities must be defined.

More specifically, civil society and the private sector are both to be represented by two “active observers” on the GCF Board. At other multilateral funds, active observers make interventions as issues arise, they suggest agenda items for Board meetings or request expert opinions. They do not vote however. The GCF Board would do well to ensure that its active observers will indeed have scope for meaningful action.

The resolve of the GCF Board to act as an efficient decision-making body will be tested soon. It must not become yet another forum for slow-paced multilateral negotiations. For 2013, however, it has only scheduled nine days of Board meetings. Accordingly, it will have to find innovative ways to boost its work and decision-making capa­city. For instance, it could use up-to-date information and communication technology including tele-conferences.

A crucial task is to mobilise resources for the Fund. Some developed countries have indicated they could pledge money by late 2013 if they find agreeable the decisions on the GCF vision and business model­ the Board will have reached by then. So far, the GCF has only received pledges for $ 6 million for administrative purposes by countries like South Korea, Denmark, ­Norway, Australia, Finland, Netherlands and Germany.

The Fund obviously needs much more substantial pledges from advanced nations. This will be the true test of whether the rich world is serious about making the GCF the key multilateral instrument for fulfilling the funding promise of $ 100 billion per year in climate finance by 2020.