Innovative climate finance instruments – market readiness in Uganda and the East African context
Approaching COP28 in December in Dubai with climate finance on the agenda big time yet again, we would like to provide further insights into the matter. This is a follow up to our previous blog article on climate finance MRV at the national level, looking at deploying innovative financial instruments in Uganda and the East African context this time. What are success factors, which innovative climate finance instruments can be identified, and what needs to happen for the successful deployment of such instruments, here in the case of Uganda? Are there lessons learned or what can be applied to the East African region?
The question that needs to be answered is how can innovative climate finance complement and increasingly replace traditional climate finance for projects by bilateral and multilateral organisations and DFIs in developing countries like Uganda and in East Africa, i.e., grants and loans, mainly? Over 85% of climate finance in Africa comes from grant and debt finance, including 86 % from public sources (CPI 2022). The climate finance shortfall in East Africa is close to 90 %. The gap cannot be filled solely by traditional sources such as grants and public debt, whilst traditional grant funding and public debt are not always able to adequately address adaptation and mitigation needs of countries.
Success factors and conducive conditions for innovative climate finance instruments include:
Ability to raise large sums of finance;
Ability to bring finance to streams of consistent and comparable small projects;
De-risking capabilities;
Results-based financing;
Instruments targeted at SMEs;
Use of carbon finance;
Other environmental finance tools such as for adaptation and biodiversity;
Smart blended finance; and
Use of new technologies, communication and digital tools.
The following overview presents the toolbox of innovative financial instruments by broader categories and more specific instruments for each of these categories in the Ugandan context:
Categories | Specific instruments |
Ability to raise large sums of finance | Green bonds, debt-for-nature (/-climate) swaps, securitization (green assets securities), debt restructuring |
De-risking | Impact investment, impact bonds, results-based financial incentives, results-based policies |
Results-based financing | Services to SMEs (incubators), initial finance mechanisms (seed capital), SME development finance (private equity, mezzanine finance, etc.), MFI(s) dedicated to climate action, crowdfunding |
Carbon finance | Voluntary carbon market and Art 6. of the Paris Agreement |
Adaptation credits | Fungible adaptation units |
Biodiversity credits | Fungible biodiversity units |
Finance for streams of consistent and comparable small projects | Specific financial tools to lend to a portfolio of small projects, dissemination network of project technologies |
Overview of finance mechanisms and their applicability in relation to
technology development stages (Source: adapted from UNEP-SEFI)
The deployment of these instruments requires to take the enabling environment into account, including the regulatory framework and the related tax system and incentive mechanisms for climate action, the status of the local financial market and the existing means to leverage finance and scaling up investments. Further factors include: local capacities and related capacity building measures, communication and digitalization, such as mobile financial services and mobile-based meteorological information for disseminating weather information and related services as well as new technologies like artificial intelligence.
When ranking the financial instruments by applying six key criteria, a prioritization can be achieved. These criteria are:
Appropriateness of the instrument to fulfil expected needs;
Acceptable complexity of instruments for implementation;
Enabling environment in place specific to the instrument;
Fully tested and maturity of instrument;
Cost of implementation of the instrument; and
Rollout potential (upscaling, replicating) of the instrument.
The further analysis of our market readiness assessment of innovative financing instruments for Uganda’s climate adaptation and mitigation measures contributed to a policy brief on “The Potential of Innovative Instruments to Finance Climate Action in Uganda”. This brief has been prepared by the Ministry of Finance, Planning and Economic Development and the Support for Innovative Financing Instruments for Climate Action Component under the GIZ Global Carbon Market Project. Four key messages derive from this work:
As Uganda explores innovative climate financing, green bonds and results-based funding should be prioritized.
Leveraging innovative climate financing will require recognition and amplifying the role of the private sector.
There is need to fast track the development of fiscal guidelines for advancing climate financing instruments.
The Central Bank is critical in unlocking innovative climate finance.
Olufunso Somorin, Regional Principal Officer at African Development Bank Group, speaking at the East Africa Climate Finance Directors meeting held on 20 September 2023, alluded to this work by saying: “I wish we could do this for all countries. The quality of financing we need will not come from the funds but better to look at which instrument can work for us as a country. How do we use traditional finance, private capital and innovative financing together?’’
Climatekos gGmbH is an independent social enterprise in the field of environment and development focusing on international climate protection.
