top of page

Climate Finance for Early-Stage Innovations in Low-Income Countries

According to the Intergovernmental Panel on Climate Change (IPCC’s) Sixth Assessment Report (AR6), climate finance and technological innovation are critical enablers for accelerated climate action and can contribute significantly to catalyse much needed solutions for mitigation of greenhouse gas (GHG) emissions and adaptation to the impacts of climate change impacts.


Photograph: Shutterstock


While climate finance is a nebulous concept with many definitions, one of the most widely held definitions is that of the United Nations Framework Convention on Climate Change (UNFCCC), according to which climate finance is the local, national or transnational financing -drawn from public, private and alternative sources of financing- that seeks to support mitigation and adaptation actions that will address climate change.


Climate finance is not always clearly demarcated[1] as many institutions support adaptation and resilience related innovation, without considering themselves to be providers of climate finance. Early-stage innovators and startups have three main sources of climate finance available, including public climate finance, foundations and philanthropic organisations, and private sector investments. Although access to climate finance for early-stage innovators has been increasing, from both public and private sector, the global climate finance gap remains very high. It is important to highlight the significant shortage of climate finance for adaptation, compared to mitigation, innovations which are often more likely to generate revenue through sales or user fees of a particular service or hardware. A drastic increase in private sector investment is required for early-stage innovation for both mitigation and adaptation.


This landscape review is designed to help clarify the relevant aspects of the climate finance landscape and the options available to early-stage innovations that are supported by the Frontier Technologies (FT) Hub, funded by the Foreign, Commonwealth & Development Office (FCDO). This includes the role of public sector grant funding as a tool to scale up private sector climate finance investment in early-stage innovation. The study has been informed by comprehensive desk-based research, semi-structured interviews with key stakeholders, whereas findings have also been validated by three workshops.

Our review has found that the following broad categories of climate finance – based on their funding approaches – are relevant, to varying degrees, for early-stage innovation:


  • Pure grant funding: Grant funding is effective in supporting early-stage innovation to prove a concept or method relating to mitigation or adaptation, prior to attracting private sector investment. It is also necessary for innovations that have no potential for revenue generation and thus no prospect of private sector investment.

  • Catalytic capital from public sector and philanthropic sources: Public sector and philanthropic sources of catalytic capital can be applied as climate finance, helping to leverage much more substantial volumes of private sector investment. This could include technical assistance for business support, training and mentorships for startup teams, grants or concessional debt finance to help cover initial costs, building networks, partnerships and a support community for innovators, and de-risking private sector investment into early-stage entities via blended finance instruments such as first loss guarantees.

  • Catalytic capital from private sector risk capital: Private sector entities can play a crucial role to provide catalytic capital, helping to open up a pipeline of greater investment opportunities.

  • Carbon markets: For innovations that enable significant emissions reductions or carbon sequestration, there are often opportunities to gain revenue from carbon credits, via the voluntary carbon market.

It is important to note that early-stage pilots and start-ups require different types and volumes of finance at different stages of their journey to scale. To conceptualise this, the study draws on the UK government-funded Climate Finance Accelerator’s (CFA)climate finance investment chain’ framework. According to the framework, most projects, pilots or startups go through a four-stage cycle: i) project initiation, ii) project development, iii) primary project funding, and iv) secondary markets and refinancing. During this cycle, the inherent risks in projects and businesses typically decline over time, while their capital needs typically increase. Typically, pure grant finance is applied during the earlier initiation and development of a concept or initiative, as seed funding or to enable the development of a concept, feasibility and/or business model. Whereas public sector, philanthropic and private sector capital can be applied as catalytic capital during the middle stages of the investment chain, to help leverage private sector investment, as part of the preparation for primary project funding. Carbon markets can be accessed by startups or pilots later in the investment chain, once they have become more established and have generated sufficient evidence of their mitigation impact.


While the insights from this study are applicable to early-stage innovation in all sectors, sector-specific insights have also been presented for agriculture, forestry and energy, given their relevance to the majority of the pilots within the Frontier Technologies programme portfolio. The study also explores the role of geographic differences in accessing climate finance, and it was found that the availability of climate finance from the public sector and philanthropic sources varies only slightly, as many development finance institutions (DFI’s) and donor organisations, including FCDO, have the mandate to provide additionality and catalyse climate action in lagging markets. On the other hand, access to private climate finance varies considerably based on the enabling environment, such as internet access, maturity of the technology landscape, ease of doing business, and political instability, which all pose higher risks for investors.


Summary of recommendations


Our study includes learnings and recommendations to funding agencies, such as the FCDO, as well as programme implementers, on supporting early-stage innovation to better access climate finance, considering their position in the investment chain. For startups and pilots at the project initiation stage, project development and primary project funding stage (Stages 1, 2 & 3) of the investment chain:

  • Provide support to early-stage innovation with a more long-term and integrated approach.

  • Build a community of private sector investors that early-stage innovators could tap into.

  • Improve coordination with other donors as well as national and sub-national governments.

  • Support early-stage pilots to measure and demonstrate evidence of mitigation and adaptation impact.

For startups and pilots at the secondary markets and refinancing stage (4) of the investment chain:

  • Promote and support the role of blended finance.

  • Support startups and pilots to access the voluntary carbon market.


The full report is available online: Here


[1] Interviews for this study showed a wide range of perspectives on what counts as climate finance.

 

Authors:

Andreas Beavor, UrbanEmerge

Fizza Fatima, UrbanEmerge

Natalia Pshenichnaya, The AgTech Network

70 views0 comments

Recent Posts

See All

Comments


bottom of page