World’s largest climate finance fund explains investment approach

An investment fund set up under a United Nations convention for driving transformative climate action in developing countries is keen to participate in projects that promise high impact, its CIO told AsianInvestor.

“Our investments need to have a paradigm shift potential and a climate impact potential.  We are able to have a high-risk appetite, as long we can believe there is also high impact,” said Henry Gonzalez, deputy executive director and chief investment officer of the Green Climate Fund.

The Green Climate Fund (GCF), the world's largest dedicated fund helping developing countries respond to climate change, was established within the framework of the United Nations Framework Convention on Climate Change (UNFCCC).

GCF, which is based in Incheon, South Korea, was established in 2010 by 194 sovereign governments party to the UNFCCC. Its board is independent and guided by the Conference of the Parties (COP) to the convention.

Asia is the fund’s second-largest region of exposure, after Africa.

“About 34% of our portfolio of committed capital has gone to Asia, which includes low- and middle-income countries, Central Asia and the Pacific islands,” said Gonzalez, who is also based in Incheon.

INVESTMENT SUPPORT

Thirty-three countries have pledged to support GCF with $12.8 billion over the next four years.

The GCF board has so far approved about $11.2 billion in investments, while $4.2 billion has been disbursed for various projects.

The climate-focused asset owner’s mandate is to maintain a balance between mitigation and adaptation investments.

"We’ve made some big investments in the whole value chain of energy – renewable energy, energy efficiency, access to energy,” said Gonzalez.

“We also work in transport, mobility, electric vehicles as well as hard-to-abate industries. We are also involved in agriculture and food security and resilient infrastructure.”

INVESTMENT TYPES

The fund’s investments take on all forms – from grants to concessional lending to venture capital and private equity. However, it has not made direct investments as of yet.

“We have 128 accredited entities [ through which we make our investments] ranging from governments, NGOs, multi-lateral development banks to commercial banks, private equity funds, impact investment funds etc.,” said Gonzalez.

One example of an accredited entity is Acumen fund, a New York-based impact investment fund.

The Acumen Fund is an impact investment fund with extensive experience in small and medium-sized enterprises (SMEs) in developing countries, primarily in sub-Saharan Africa and South Asia.

Acumen has a track record of investing in clean energy, agriculture and healthcare.

Another example is Avaana Sustainability Fund, a venture capital fund that invests in early-stage climate technology companies in India.

Gonzalez said that when the fund started operations, the projects GCF invested in came in via accredited entities.The climate finance entity would conduct its own due diligence to see if the investment opportunity passed muster.

“Now we are doing a bit of deal co-origination when we see opportunities,” said Gonzalez.

“We are trying to bring different players together in order for us to facilitate transactions that are at the frontiers of innovation and technology.”

Gonzalez said the fund believes in the possibility of bringing together different capital stacks to catalyse investments.

“We want to bring together philanthropic, public and private capital. These three capital providers are able to de-risk opportunities to crowd in other investors,” he said.

GCF believes in the possibility of bringing together different capital stacks to catalyse investments. Image credit: Shutterstock

BLENDED FINANCING 

Gonzalez also noted the growing demand for blended finance opportunities among investors in the region, although growth has been hampered by various issues.

One of the big obstacles to blended financing, and impact investing more broadly, is that  both of these are considered very niche, and outside of mainstream finance.

“The Green Climate Fund is a great example of blended finance, because we are impact driven, are flexible on the financial instrument we use, and we are long-term oriented,” said Gonzalez.

“We test proofs of principle and test project models that can later be scaled up by mainstream finance,” he said, adding that the fund focuses mainly on helping countries meet their Paris agreement targets.

The Paris Agreement seeks to strengthen the global response to climate change.

One of the key objectives is that countries commit to substantially reducing global greenhouse gas emissions to hold global temperature increase to well below 2°C above pre-industrial levels and pursue efforts to limit it to 1.5°C above pre-industrial levels.

“We also have to be careful not to distort financial markets because if we bring free or concessionary capital to an area where there is already enough commercial capital, we distort that market.

"So we work in markets and areas that are not yet attracting capital flows, and where blended finance can play that de-risking and crowding-in role,” he added.