Climate Investment Funds Monitor 11


6 May 2015

Credit: Armin Kübelbeck

Read a pdf version of CIFs Monitor 11

CIF sunset clause

The November 2014 joint CTF-SCF committee meeting considered the document Models for the future operations of the CIF (see CIFs Monitor 10). The document follows discussions about the CIF’s ‘sunset clause’ which obliges them to fold once a new climate finance architecture is effective under the United Nations Framework Convention on Climate Change (UNFCCC) through a mechanism such as the Green Climate Fund (GCF).

A decision on which of the four proposed models for the CIFs should be further explored was postponed to “a later meeting”, but it was agreed that the paper “detailing the necessary steps and the indicative timeline for implementing the model(s) and the proposed strategy” should be considered “no later than the first meeting in 2016.” Meanwhile the meeting agreed on a “guiding framework for the discussion of the future operations of the CIF … to reduce uncertainty for the endorsed investment plans and programmes” with the following principles:

  1. “Supporting the continuity of climate finance flows and actions on the ground and reducing funding gaps in the CIF operations in the near term;
  2. Progressively taking measures to strengthen complementarity, coordination and cooperation within the climate finance architecture;
  3. Focusing on knowledge management and sharing of lessons learned;
  4. Enhancing the programmatic approach and leverage of funds; and
  5. Continuing to deliver strong value for money in terms of economy, efficiency and effectiveness of CIF operations and investments on the ground.”

The meeting also noted that “any investment plans and programmes under the CIF could be designed in such a way that recipient countries, if they so desire, could use them to access funding from other sources or mechanisms in the climate finance architecture”. It asked the CIF administrative unit to “further explore ways to enhance the sharing of knowledge and lessons learned with the other entities and mechanisms in the climate finance architecture.”

Furthermore, it agreed “to continue monitoring the developments in the international climate finance architecture over the next two years to make a decision to if and when the trustee should stop receiving new contributions”, considering the following issues:

  1. “The developments relating to the international climate finance architecture;
  2. The need to reduce fragmentation but maintain diversity of financing options; and
  3. The role and value of the CIF in the design and implementation of pilot approaches and lessons learned for delivering climate finance at scale.”


Graph 1: Total CIF funding pledged by fund (millions)

Graph 1b

Source: Climate Investment Funds 2014 Annual Report


Stakeholder engagement

New civil society and indigenous peoples observers have been selected to serve for two years, including the first set of indigenous peoples observers for the CTF (see Annex page 28).

A long delayed paper on Proposed measures to strengthen national-level stakeholder engagement in the Climate Investment Funds, released in late April, will be discussed at the joint May CTF-SCF committee meeting. The paper, which was originally due to be discussed during the June 2014 meetings, describes stakeholder engagement as “an asset required to meet its objective of creating sustainable development through its programmes and projects.” It references the CIF evaluation (see CIFs Monitor 10), which concludes that the CIFs draw legitimacy from “governance principles of equal representation, consensus decision making, transparency, and the inclusion of observers”.

The paper further argues that stakeholder engagement “creates trust between different actors and serves as a mechanism over outcomes, and strengthens sustainability”, and that CIF projects and programmes “may stand a greater chance of being sustained if they are inclusive and enjoy broad public understanding and support.” It notes, however, that “while the principles of stakeholder engagement are embedded in the CIF governance system and specified in the CIFs’ design documents, practice varies”, as does the level of detail. It identifies the FIP to be the most explicit in requiring stakeholder engagement, while the CTF is less prescriptive. While the paper notes that the CIF’s approach to stakeholder engagement must be “cost effective”, it also emphasises that “it is a false economy to underfund stakeholder engagement as it could jeopardise quality or lead to expensive delays, redesign and other disruptions.”

The paper notes that while the MDBs have policies and guidelines “the potential for stakeholder engagement is not always realised”, noting variability in “quantity, quality, relevance, and timeliness of information shared”. Furthermore: “The degree to which the MDB encourages stakeholder engagement in terms of staff resources and procedures also plays a role.” The paper also emphasises the importance of stakeholder mapping identifying “legitimate” stakeholders, noting that in particular local stakeholders are not always immediately obvious. It adds that stakeholders should “have a clear understanding of how their contributions will be used and the degree of influence their input will have in the development and implementation of the investment plan.” However, the paper also opens up for “a more simplified strategy” where there is “less widespread or more specialised stakeholder interest, particularly where investment plans do not entail major local impacts”.

The paper outlines six underlying principles for enhanced national-level stakeholder engagement, including to “draw on the existing body of stakeholder engagement policies and guidelines rather than create new frameworks and tools for the CIF”; “learn from and draw on the participatory practice of stakeholder engagement in the design of MDBs’ country strategies”; and “seek to employ or strengthen existing country systems and strategies as much as possible”. The principles require a “differentiated” approach for the different funds, but one that builds on “certain universal standards”, for which developed measures can be “swiftly and easily” applied.

The paper calls on the May meeting to agree on the “measures proposed in the document”, specifying in particular four measures, including to “foster the use of existing country systems for stakeholder engagement” and to “address inconsistency in the principles and requirements for stakeholder engagement.” It also proposes that the CIF administrative unit “work with the pilot countries and observers to agree on a work programme and budget for FY [financial year] 16 and FY17 to carry out the measures agreed”.


Graph 2: Total CIF funding approved per fund (millions)

Graph 2

Source: Climate Investment Funds 2014 Annual Report


Transparency and corruption risks

In the November 2014 joint committee meeting, Canada asked for a clarification on how the CIF administrative unit had responded to a February 2014 report by Transparency International (TI) on the CIFs. The CIF administrative unit responded that “it is exploring ways to respond to some of the recommendations as part of the proposal with various measures to further improve the governance of CIF”. Furthermore, a paper on measures to further improve the governance of the CIF is due to be discussed in the May meeting.

The TI report noted that the CIFs “exhibit a number of best practices regarding transparency” throughout its operations, with publication of “accurate, comprehensive, clear, coherent and timely information on its executive functions, projects and programmes, and it has begun to publish its climate finance information as part of the International Aid Transparency Initiative”. However, it also identified weaknesses, including contradictions “between policy documents of the funds and the information available on the funds’ website – making it unclear what specific access to information procedures apply.” Moreover: “information regarding the anticorruption rules and safeguards of downstream actors, in particular those at the national level, is not openly disclosed at fund level.” It also recommended web-casting of the Funds’ committee meetings.

On accountability, the TI report noted that “clear and comprehensive processes defined by World Bank policies are in place to ensure the investigation and sanctioning of the Funds’ administrative unit and trustee”, but that further rules and procedures are needed for the trust fund committee, sub-committees and individual members of the committees, to ensure “assurances that investigative, review and sanctioning processes are in place.” According to TI, the CIFs are “advanced regarding civil society participation both as observers at the trust fund committee and sub-committee meetings and as consulted stakeholders at the project level”, however, it noted that “participation can be further strengthened to enable more open, meaningful engagement and better uptake of citizens’ concerns.”

Due to the delegation of project-level accountability to the implementing agencies, the MDBs, TI could only partially assess their effectiveness. While policies applicable to them are available on the CIFs’ website, there is a lack of information on their application and effectiveness, including which specific anti-corruption rules apply and which complaints mechanisms and whistleblower protection apply: “Downstream accountability, therefore, needs to be much better demonstrated in clear and consistent ways.” TI also noted that the MDBs are not accredited under the CIFs, meaning that documentation is “largely silent in terms of the fiduciary standards or integrity requirements” for MDBs. Moreover, “sanctions for condoning or sanctioning corrupt behavior … are also absent. In this way, the funds are missing a clear commitment to anti-corruption.” It recommended the CIFs to “consider instituting a fund-wide zero-tolerance of corruption policy.” TI argued that the CIFs should also “improve access to information on key anti-corruption assurances throughout project and programme cycles [which] is essential to ensure both downstream and upstream accountability for the prevention and deterrence of corruption.”


Financial risks

A paper exploring ways to increase CIF investment income while protecting the principal of the trust funds was shared for the November 2014 joint committee meetings, with an April update due to be discussed in the May joint CTF-SCF committee meeting. The World Bank manages the CIF trust funds, with assets maintained in a commingled portfolio for all trust funds managed by the Bank. The investment objective for the CIF trust funds is “to maximise investment return, subject to (a) maintaining adequate liquidity to meet foreseeable cash flow needs and (b) capital preservation … expressed through a conservative risk tolerance limit.” The CIF investment portfolio assets include “short-term bank deposits, other eligible money-market instruments and highly-rated government, government guaranteed and corporate asset-backed securities.”

According to the November 2014 paper, the CIF’s portfolio earned “attractive investment returns” from 2009 to 2012, but “a number of factors negatively affected the 2013 results”. These included that “historically low fixed-income yields continued to suppress the coupon or interest income” and “increased volatility in interest rates during the year led to unrealised price losses that impacted the net investment income for the year.” It noted that “the current market environment poses challenges for investors in conservative fixed income portfolios”, such as the CIFs investment portfolio. The April paper noted: “Given the historically low interest rates in most developed markets, there is more room for rates to rise than there is for them to go lower”.

In response to the concerns over the portfolio’s financial performance the April paper suggested a slightly more risky investment approach for the CTF. Based on CTF cash flow projections, the April paper proposes that CTF assets should be moved to a new tranche (or model portfolio) within the World Bank’s trust fund portfolio, which would allow the investment horizon to increase from three to five years and include a limited allocation to equities of no more than five per cent of a fund’s total assets. According to the paper the move could “improve the risk/return profile and could potentially increase investment income.” Based on analysis of interest rates scenarios, the paper concludes that “at a five-year horizon, a portfolio with a 3.1 per cent allocation to equities is expected to outperform a purely fixed income portfolio”. It cautions, however, that “the higher expected returns generated by expanding the asset mix into equities require … a higher tolerance to short term return volatility.”

No changes are proposed for the SCF investment portfolio, with the paper concluding that the SCF’s “liquidity projections indicate that the current three-year investment horizon and the accompanying investment strategy remains appropriate for the fund.”


Graph 3: Total number of projects or programmes approved per fund

Graph 3

Source: CTF, PPCR, FIP and SREP semi-annual reports, April 2014


New private sector facility

Following an October 2014 paper reviewing the SCF private sector set-asides (see CIFs Monitor 10), the May SCF committee meeting will discuss a proposal for a new SCF private sector facility, “that addresses challenges faced under previous set-asides mechanism and that allow for greater scale, flexibility and market response.” It would be a stand-alone sub-programme of the SCF “dedicated to serve the mandate of the private sector under the FIP, PPCR and SREP”.

The paper identifies steps required to set up the new facility. In the first instance “MDBs will review the endorsed private sector set-aside programmes under the PPCR and FIP and identify projects that would be recommended for removal from the existing pipelines”, to be endorsed by the sub-committee. The trustee will thereafter calculate available resources based on the pipeline of projects to be transferred to the new facility. After this the SCF trust fund committee “will approve the establishment of the new facility as a new SCF programme, including its scope, objectives and eligibility criteria governing the use of the resources under the facility.” It is also proposed that the SCF trust fund committee will serve as the sub-committee for the facility.

The paper proposes that the facility should start with an initial capitalisation of about $100 million, with $29 million from the existing FIP and PPCR private sector set-asides pipelines, and an additional $50-80 million from the third round of the PPCR’s set-aside, however, these set-asides will continue to co-exist. Moreover, it is hoped that contributor countries will pledge further funds to the new facility. In terms of country eligibility, it is proposed that low-income SCF countries can apply as long as the proposals are “aligned with the objectives of any of the SCF programmes.” Furthermore, middle-income countries “can apply for funding aligned with the programmes they are already part of”. It is also proposed that CTF countries could apply “for funding for climate resilience and adaptation type investments.” Middle-income countries will only be able to access non-grant resources.

It proposes that any future resources made available by the removal of projects from the PPCR, FIP and SREP set-aside pipelines or cancellation of set-aside projects should be transferred to the facility. As more immediate actions, it proposes that the Cambodia PPCR private sector set-aside project Integrated climate-resilient rice value chain community should be removed from the project pipeline and that the $5 million made available ($3.2 million grant, $1.8 million loan) be transferred to the new facility. On FIP it proposed that $15 million ($10.8 million grant, $4.2 million loan) from the Brazil set-aside concept Commercial reforestation of modified lands in Cerrado should be transferred.


Study of decision making in PPCR and SREP

An April working paper by UK-based NGO International Institute for Environment and Development (IIED) analysed the political economy of international climate finance, with a focus on decision making in PPCR and SREP. Using case studies from Bangladesh, Ethiopia and Nepal the paper explored “how countries can build their own ‘climate finance readiness’ by understanding their internal political economy and use that understanding to steer consensus-based decisions on climate finance investments.”

The paper found that stakeholders involved in planning the PPCR and SREP investment with a shared vision on ‘transformational change’ and ‘development benefits’ had formed coalitions with the power to direct investment decisions. For example, in Bangladesh “government implementing entities and MDBs shared the narrative that PPCR would bring ‘transformation’ by investing in capacities for climate resilient infrastructure, and that ‘development benefits’ would be achieved through economic growth. This coalition steered decisions to invest PPCR finance into large-scale coastal engineering projects.”

Furthermore, the paper found that incentives, such as policy, economic and knowledge-based factors, “can strengthen coalitions and shape national decisions on climate finance.” In Bangladesh, it identified “clear resources and economic incentives to support large-scale infrastructure investments” and noted that “the contrasting investment decisions made in Ethiopia and Nepal (under SREP) were guided by the different economic incentives they faced, as well as the policy goals and knowledge available to each.” In Ethiopia a “grid based approach aligned well with available co-finance for renewable energy and its national development plans that promote a fast-growing grid and extra energy for export”. In Nepal “government stakeholders saw the economic benefits in funding proven, commercially viable technologies and providing power for the rural economy.”

The paper also found that alternative narratives and resources have little influence on decision making, but can undermine implementation. For example, in Bangladesh “a wide range of actors were sceptical about whether the PPCR investments would bring about transformational change … [but they] had little effect on decision making.” In Nepal, “stakeholders on the fringe who called for more attention to infrastructure development, growth and employment remained there.” The paper noted that “in both Bangladesh and Nepal, delays arose when the views of the agricultural ministries and the International Finance Corporation (IFC) differed over the appropriate role of the private sector… In Ethiopia divergent views [on the private sector investment component] and incentives have also delayed implementation of investment decisions, at times threatening effective project delivery.”


Update on the Green Climate Fund (GCF)

As of end 2014 almost $10.2 billion had been pledged to the GCF, however, as of March only about one per cent ($104 million) of the pledges had been legally committed to the GCF. As a requirement for the GCF to be considered effective, a deadline of 30 April has been set for 50 per cent of funds pledged as of the official pledging session in November 2014 ($9.3 billion was pledged at the time) to be legally committed via the signing of contribution agreements.

The ninth GCF board meeting took place at the fund’s headquarters in Songdo, South Korea, in March. The meeting was considered an important step towards the goal of having the GCF begin funding projects in time for the December Paris UNFCCC Conference of Parties. The board adopted decisions on the initial investment framework; a policy on ethics and conflicts of interest; terms of reference for the independent technical advisory panel and the appointment committee; initial term of board membership; an interim gender policy and action plan; financial terms and conditions of the fund’s instruments; and legal and formal arrangements with accredited entities.

The meeting overran, with some decisions reportedly rushed through towards the end and some postponed, such as on the terms of reference for an enhanced direct access pilot phase. Some decisions proved more contentious than others, such as the investment framework, where countries could not agree on how to assess project proposals. In the discussion over legal and formal arrangements of accredited entities the US proposed that any information from an accredited entity that the entity deems to be commercially sensitive should be exempt from disclosure, with China backing the proposal and adding any information the entity deems sensitive. Saudi Arabia tried to block the gender policy, but ultimately relented.

CSOs have continued to raise concerns about the lack of an explicit ban on fossil fuels in the GCF coupled with a lack of clear rules on what constitutes climate finance. According to media reports Japan has designated $1bn in loans for coal plants in Indonesia as climate finance, as well as $630 million for coal in India and Bangladesh, claiming that the projects are less polluting than older coal-fired plants and so qualify as clean energy.For the first time, the board accredited entities that can develop and submit project and programme proposals for the October meeting. Seven entities were accredited: Centre de suivi écologique (Senegal); Fondo de Promoción de las Áreas Naturales Protegidas del Péru; the Secretariat of the Pacific Regional Environment Programme (Samoa); Acumen Fund; Asian Development Bank; Kreditanstalt für Wiederaufbau (Germany); and the United Nations Development Programme. Further applications will be accepted on an ongoing basis “to build a country‐driven and diverse set of partner institutions across the world, through public, private and civil society organisations.”

The next meeting will be held 6-9 July in South Korea.

Climate Investment Funds (CIFs) explained

The World Bank-housed Climate Investment Funds (CIFs) are financing instruments designed to pilot low-carbon and climate-resilient development through the multilateral development banks (MDBs). They are comprised of two trust funds – the Clean Technology Fund (CTF) and the Strategic Climate Fund (SCF). The SCF is an overarching fund aimed at piloting new development approaches. It consists of three targeted programmes: Pilot Program for Climate Resilience (PPCR), Forest Investment Program (FIP) and Scaling up Renewable Energy Program in Low Income Countries (SREP).

The CIFs operate in 63 countries worldwide. As of end 2014 donors had pledged a total of $8.1 billion to the CIFs: $5.3 billion to the CTF and nearly $2.8 billion to the SCF ($1.2 billion for PPCR, $785 million for FIP and $796 million for SREP). Projects are executed by multilateral development banks (MDBs): the African Development Bank (AfDB), the Asian Development Bank (ADB), the European Bank for Reconstruction and Development (EBRD), the Inter-American Development Bank (IDB), the World Bank’s middle income arm, the International Bank for Reconstruction and Development (IBRD), and the World Bank’s private sector arm, the International Finance Corporation (IFC).

Under the ‘sunset clause’ the CIFs are due to end once a new climate finance architecture is effective under the United Nations Framework Convention on Climate Change (UNFCCC) through a mechanism such as the Green Climate Fund (GCF).