An Innovative Approach to Investing in Climate Resilient Economic Growth
There is a need to encourage private sector investment into sectors that are most affected by climate change, including agriculture, water and infrastructure, natural environment, such as disaster risk management, and solutions based on nature. Climate finance in these areas is essential to achieve goals of the Sustainable Development Goals, including combating poverty and helping the most vulnerable populations. The question is, what can we do to increase investment in products and services that increase resilience to the impact of climate change?
We are aware that investing in companies that offer goods and services that increase resilience can be highly risky. Not only is it investment in the most vulnerable climate zones however, it is also in areas that are notoriously difficult to invest in and that typically require the use of public resources. But, the magnitude of the challenge is not solved by public resources alone. It is urgently requiring innovative capabilities, technologies, and resources from the private sector. However, solving the problem of underinvestment problem requires the removal of a variety of hurdles that private sector actors face.
Recognizing the significant gap in funding for adaptation to climate change, The Dutch Fund for Climate and Development (DFCD) was created. The DFCD is a unique collaboration with FMO and the Entrepreneurial Development Bank, SNV – the Netherlands Development Organisation, Climate Fund Managers, and WWF Netherlands, primarily aimed towards investing in companies offering goods and services that assist countries in adjusting to the impacts of climate change. One of the founders of the fund is Richard McNally: ”We realized in the beginning that a creative structure was required to attract investment to help adapt to climate change. so we designed the fund around three pillars of the project: graduation prioritised investment themes, and a landscape-based approach to the landscape approach. The key components that comprise the DFCD Facility are described below.
“The DFCD is a unique vehicle which can demonstrate a fresh method of providing climate finance and help to further its global goals and efforts to improve global response climate change”.
– Aart Mulder (FMO Manager of DFCD)
The project graduation mechanism enables the fund to effectively produce a part in its portfolio of project ideas. The lack of project that is bankable, or pipelines of projects was seen as a major barrier often cited by both private and public investors, when it comes to investing in climate-friendly, low-carbon projects. The DFCD also provided an Origination facility operated through SNV and WWF to help identify and partner with companies. The DFCD offers life-cycle financing starting with identification and support for structuring the prospect to financing, and even refinancing. The mix of local knowledge from SNV and WWF-NL, together with the knowledge of financial solutions offered by an internationally-based development bank, has enabled the creation and development of high-impact, climate-resistant bankable solutions.
It’s the DFCD Impact in action. “The DFCD’s emphasis on adaptation to climate change enables the fund to invest into innovative solutions and technologies that are essential to boosting resilience as well as impact on a high scale .”
– Alex Downs, Regional Investment Officer, Asia
The fund has a theme emphasis that determines its investment strategies. The top investment themes were selected according to the location of the greatest demand for investment in climate resilient development, as highlighted within the UNFCCC 1.5C report as well as showing high prospects to earn financial returns. The main investment themes were (i) sanitation and water, (ii) climate-smart agriculture, (iii) forestry; and (iv) general environmental protection. The activities of the fund have attracted an interest from both the public as well as private sector actors who want to learn how the programs and their benefits can be duplicated.