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countries use grants and concessional loans to finance investments in climate resilience. National financial institutions like private banks and micro-finance institutions are also using capital instruments like debt and equity finance to unlock private capital.
Photo: Jonathan Ernst / World Bank
Photo: Nonie Reyes / World Bank
POLICY BRIEF
Planning systems
Instruments
Second, countries are using a range of economic and financial instruments to target different investors and the specific investment needs of climate resilience and a green economy. For instance, Ethiopia and Kenya are using economic instruments such as power purchase agreements and feed-in tariffs that aim to secure and enhance the financial returns from high-risk investments in renewable energy. Bangladesh and Ethiopia are using financial instruments such as insurance and guarantees to reduce the risk to investors. Public sector entities in all seven
climate resilience and green economy goals into planning and budgetary systems in order to ensure the long-term sustainability of climate finance, and to manage funds more effectively. Nepal’s climate change budget code and Rwanda’s on-budget approach to finance disbursement provide interesting examples of how such systems can achieve this. These evolving trends in the design of intermediaries, economic and financial instruments and financial planning systems show how many developing nations are taking important steps to ensure they are ready to receive, manage and disburse climate finance from both public and private sources as they make the transition to climate-resilient, green economies. They are not just sitting waiting for money to flow. They are setting up the systems and institutions that will create new money from old. Photo: Sudipto Das
short to medium term, the Ministry of Natural Resources manages the fund to mobilize and disburse public sources of finance, while the Development Bank of Rwanda manages a credit facility to incentivize private sector investment. If investments into low-carbon, climate resilient development become commercially viable, the Fund has the scope to evolve and be managed as a venture capital fund over the long term. Rwanda is unique in that it has adopted a pioneering approach, because it foresees big shifts in the financial landscape and a future in which purely private investments will dominate. It is using financial intermediaries to create a phased approach to managing climate finance.
Third, policymakers are focusing significantly on financial planning systems – especially institutional arrangements and budget and planning systems. Every dollar needs to generate several more. They are keen to ensure that institutions with existing capacity – especially absorptive and financial management capacity – take the lead in managing climate finance, to achieve investment outcomes that are greater than the sum of their parts. Examples of such institutions include: ● Ethiopia’s Ministry of Finance and Economic Development which is responsible for the financial management of the country’s Climate Resilient Green Economy Facility ● India has accredited its National Bank for Agricultural and Rural Development as its implementing entity under the UNFCCC Adaptation Fund – making it responsible for accessing and managing multilateral sources of climate finance. Policymakers are also keen to ensure that institutions such as national planning commissions should lead efforts to coordinate action on climate change, especially funding decisions, as their ‘bird’s-eye view’ of investment priorities across sectors is advantageous. This enables them to allocate finance to a cohesive investment portfolio that ensures the supported projects do not duplicate existing activities within development plans. In Rwanda, a team from the Ministry of Finance supports the national climate change fund’s technical team to do this. Policymakers are keen to integrate
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