As a simple and efficient planning tool for helping businesses mitigate and adapt to climate change, Climate Canvas can effectively facilitate blended climate finance for SMEs.
The international development community is committed to increasing access to finance for SMEs and promoting a more diversified and sustainable pool of funding for climate action, including commercial sources. This is especially critical in developing countries, which are more likely to face the effects of climate change yet lack the resources needed to adapt to them. Increasing access to climate finance and investment in these countries is essential to tackling climate change and achieving net zero targets at the national and sector levels.
Up to this point, current approaches to mobilizing climate finance have yet to keep pace with the challenge. Therefore, innovative mechanisms like debt for emissions, green bonds, public-private partnerships, and impact investing are emerging. These mechanisms are speeding up progress toward sustainable development goals.
Blended finance is one mechanism that offers tremendous potential in the developing world for unlocking commercial climate finance needed to enable SMEs to grow their businesses and address climate change risks. Blended finance involves a combination of public capital, private equity investment, and commercial financing, which can be deployed alongside traditional public and private sources to unlock new funding sources and boost the impact and efficiency of global development efforts.
The global landscape of the blended finance market is changing rapidly, and the public and private sectors are investing heavily in developing new solutions to mobilize private capital for climate and sustainability goals. The global shift to a low-carbon economy requires public and private investment in energy efficiency and green infrastructure. Innovative financing models are needed to unlock private sector investment in critical sectors such as transport, energy, waste, and water and help countries transition to a low-carbon economy.
The biggest players in blended finance in Europe are the public-funded Development Finance Institutions (EU, EIB, AfD, KfW, and EBRD). The World Bank Group's International Finance Corporation (IFC) has a full blending policy and a team dedicated to agricultural lending, SME loans, and clean energy lending. For example, through IFC's Small Loan Guarantee Program, in Malawi, the Global Agriculture and Food Security Program (GAFSP) Private Sector Window and IFC are helping farmers tap into the global demand for macadamia nuts. The World Bank has also launched a Green Climate Fund to facilitate the flow of capital from developed to developing countries to support climate-smart development activities.
To fulfill its COP26 commitment to mobilize $150 billion in climate finance by 2030, USAID is expanding access to climate finance and increasing the number of financial institutions making climate investments. In addition, USAID and Millennium Challenge Corporation announced a new partnership to support green finance mechanisms worldwide.
The Climate Canvas Initiative is currently developing a Climate Canvas Financial Facilitation (CCFF) program to facilitate blended climate finance for SMEs. The primary target beneficiaries are start-ups and growing businesses in priority sectors such as agriculture, water, waste, and energy. These sectors are often highly vulnerable to climate and weather changes and simultaneously offer opportunities for adaptation through innovation. The CCFF works together with providers of grants, commercial loans, loan guarantees, and technical assistance to bring together investors with projects that have social as well as financial benefits and help bridge the funding gap for projects that might otherwise not be viable. CCFF aims to attract private capital into development projects that address climate change challenges while at the same time generating a financial return for investors.
The CCFF approach uses the Climate Canvas tool to enable business owners to understand climate change threats and opportunities more clearly and efficiently develop a climate change mitigation and adaptation plan. Climate Canvas serves as an important underwriting tool for climate finance providers as it captures the climate threats the business faces; related supply chain, market, and operational risks; specific mitigation and adaptation measures needed to protect assets and income streams from climate change; opportunities for developing new revenue streams based on climate-friendly products and services; carbon footprint reduction commitments; and the required financial outlays and expected financial benefits from implementing the plan.
On the financing supply side, we also propose setting up a climate finance vehicle: Climate Change Innovation Entrepreneurship Scheme (CCIES). Covering market gaps, CCIES will help overcome risk barriers by supporting financially viable projects that are not necessarily commercially bankable (i.e., they face difficulties in attracting finance from the market).
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