This blog is the second part of Bridging the Gap: Why Climate Finance Has Become a Core Part of USAID’s Development DNA. Check out part one here.
Policymakers at COP28 posed the question: how will we mobilize trillions of dollars to reach our goals of reducing emissions and limiting temperature increases? USAID uses several approaches to increase climate finance, demonstrating the role of climate finance activities in international development.
What approaches can we take to increase climate finance?
COP28 marked the conclusion of the first-ever Global Stocktake, a process in which countries and stakeholders assessed where they’re collectively making progress towards meeting the goals of the Paris Agreement and where they’re not. The subsequent report issued by the United Nations Framework Convention on Climate Change highlighted three key areas where climate finance is critical to reducing greenhouse gas emissions and limiting global temperature rise:
- Technology innovation
- Transitioning away from fossil fuels
- Incentives to catalyze private investment into public goods
USAID is working in these areas by strategically partnering with trailblazers who understand the significance of the risk/reward balance in helping the countries hardest hit by climate change meet their Nationally Determined Contributions and National Adaptation Plans.
To facilitate flow of more capital from providers who sit in the “Low Risk/High Return” and “High Risk/High Return” quadrants towards climate finance, USAID utilizes blended finance. Blended finance refers to the use of catalytic capital from public or philanthropic sources to increase private sector investment in sustainable development. Indeed, blended finance enhances the business case for investors; the Green Guarantee Company and Adaptation Finance Window (AFW) under the USAID Climate Finance Development Accelerator are just two examples of USAID’s blended finance activities.
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When it comes to climate finance, adaptation presents a significant opportunity because it is severely underfunded. USAID designed the AFW in collaboration with the governments of Sweden and Denmark to de-risk investment in adaptation enterprises and investment vehicles by optimizing the process of allocating capital via grants, guarantees, and other mechanisms.
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Where does climate finance fit into international development?
USAID’s cross-cutting Climate Strategy demands the development community look for creative ways to integrate climate into their everyday work. Failure to account for climate risks in many of our traditional activities will lead to long-term failure.
Development donors, organizations, and practitioners can make this shift by taking baby steps to build the wider climate finance ecosystem and by considering climate risks in program design. For example, USAID is increasing climate knowledge through training and workshops and identifying climate co-benefits, such as increased resilience of communities or greenhouse gas emissions, in non-climate activities. In addition, an increasing number of companies understand the business case for more transparent and sustainable supply chains that limit deforestation, rely on nature-based solutions, and integrate climate resilience. USAID can help direct resources to underserved countries, sectors, and populations that align with its core development principles.
For instance, women and girls are often on the frontlines of climate adaptation, yet less than 2 percent of climate investments are made with gender in mind. The Climate Gender Equity Fund, a public-private partnership launched by USAID and Amazon, increases access to climate finance for gender-responsive, women-led, and women-benefiting organizations that address climate change. USAID, Amazon, Reckitt, Visa Foundation, and The UPS Foundation have committed a combined $20 million to the cause and announced the first organizations selected to receive grants at COP28.
Similarly, to meet the objective of transitioning away from fossil fuels, the Blended Finance for the Energy Transition initiative leverages a unique partnership between USAID, the U.S. Department of State, and the Danish Ministry of Foreign Affairs and Investment Fund for Developing Countries to mobilize $1 billion. This funding aims to accelerate emerging markets’ efforts to achieve a just and resilient energy transition. Additionally, USAID’s Comprehensive Action for Climate Change Initiative launched partnerships with BG Titan and Genesis Energy Group. These collaborations will leverage up to $10 billion each in private sector investment over the next five years, supporting renewable energy projects, green housing and infrastructure, and climate-resilient agriculture.
Most critically, we need to enhance the ability of national and local governments, local organizations, communities, and entrepreneurs to access climate and conservation finance. USAID is partnering with the Government of Egypt and the United Nations Development Programme’s Global Fund for Coral Reefs to provide $15 million to establish a financial vehicle to mobilize investment in reef-positive businesses in Egypt’s Red Sea. The Coastal Resilience, Carbon, and Conservation Finance initiative is partnering with the Ocean Risk and Resilience Action Alliance to encourage the flow of private sector capital into coastal resilience and blue carbon projects. The Caribbean Climate Investment Program is utilizing a combination of grants, technical assistance, and a project preparation facility to strengthen the capacity of and facilitate matchmaking between climate finance seekers and climate finance providers in the Caribbean. Entities like the Green Guarantee Company (launched last week at the London Stock Exchange), Blue Green Bank in partnership with the Government of Barbados, and Liquidity Sustainability Facility are taking innovative approaches to bonds, guarantees, and other mechanisms to improve developing nations’ abilities to attract financing.
A sustainable future depends on systemic action across sectors to ensure sufficient resources are available to address the climate crisis. By acting together with the private sector, governments, non-governmental organizations, and other development actors, USAID is working towards the resilient and equitable world we all hope to see.
Sashi Jayatileke
Sashi Jayatileke is a Senior Climate Finance Advisor with USAID’s Center for Climate-Positive Development leading coordination and providing technical leadership on climate finance to USAID and its partners seeking to mobilize finance for climate goals. She also oversees the Climate Finance for Development Accelerator (CFDA), a USAID initiative to mobilize $2.5 billion in public and private climate investments by 2030 to fund a range of climate change mitigation and adaptation solutions focused on scaling up the transition to an equitable and resilient net-zero economy. Sashi brings two decades of experience in the development and implementation of projects focused on private sector development, impact investing, women's economic empowerment, and financial inclusion.
