Why access to finance in the Pacific is important

Written by Damian Kelly and Sabrina Habu

Key points

Small Island Developing States (SIDS) are highly vulnerable to the effects of climate change due to geophysical constraints and the economic effects of COVID-19.
The process of accessing finance from development partners after a disaster is lengthy and difficult.
The current Green Climate fund (GCF) model for accreditation of entities and access to finance is disadvantaging SIDS which have low capacity, experience, or confidence in directly accessing the GCF funds.
Blended finance and improvements to GCF processes are important solutions that will enable green finance to be scaled.

Introduction

Climate change, volcanic eruptions in Tonga, and the devastating economic implications of COVID-19 are just a few of the problems that Pacific Island governments are dealing with, making it more critical than ever to keep financial aid pouring into the region. As a result of the pandemic's disruption of international travel and trade, many Pacific Island countries are facing difficult times. However, disruption is part and parcel of the 21st Century in the Pacific, with the Intergovernmental Panel on Climate Change (IPCC) Sixth Assessment Report, Climate Change 2021: The Physical Science Basis, setting out that for Pacific Island countries environmental degradation has occurred on a regional basis and will intensify over the coming decades.[1] Scientific modelling and historic evidence indicates that the Pacific Islands will face ocean acidification, sea level rises, more intense but fewer tropical cyclone, and heavy rainfall events.[2] This vulnerability often leads to SIDS and Pacific Islands being described as a “special case for sustainable development”.[3]

Further compounding these challenges, the process of accessing finance from development partners after a disaster can be lengthy, difficult, and uncertain, the resulting allocation of resources across projects and sectors may not be optimal, and the overall envelope of available finance is often insufficient to return the in-country capital to its pre-disaster levels. For Pacific Island Country’s (PIC) to be able to adapt, mitigate and fulfill their obligations to combat climate change, serious consideration needs to be given to the way in which climate finance operates on a regional and national level.

Why access to finance in the Pacific is important?

Due to geographical constraints such as, their small size, geographic dispersion, susceptibility to natural disasters and remoteness, as well as a heavy reliance on imported fossil fuels, limited private sector opportunities, weak institutions, and fragile ecosystems, SIDS are highly vulnerable to the effects of climate change. As a result, SIDS are facing a slew of climate-related issues, including rising temperatures, shifting precipitation patterns, flooding, drought, decreasing freshwater availability, sea level rise, and coral reef degradation. Most SIDS expect to face food and water insecurity as water becomes scarcer, ocean and land food supplies deteriorate, people grow, and energy and food prices rise. The present COVID-19 issue has compounded these vulnerabilities, as SIDS economies are particularly vulnerable to global economic shocks. Climate aid is critical to their overall growth in the context of climate financing.

Lack of access to financial support or investors is preventing the creation of the next generation of entrepreneurs. Young entrepreneurs with innovative concepts have a particularly tough time obtaining investment capital, whether through financing or investing. According to a recent evaluation of the Enterprise Challenge Fund (EFC) by the Australian Agency for International Development, an EFC project approved a substantial grant for a biodiesel project that proposed using local copra as the key input. However, this project was unsuccessful because its partner’s bank in Australia refused to provide funds due to their perceived sovereign risk of doing business in the Solomon Islands. Along with protracted and futile attempts to find adequate land for the facility. Such challenges arise because of limited effective land titling procedures or records, seizure of moveable assets, high failure rates of smaller scale agribusiness, fishing and other projects in more remote areas and, a shortage of “management capital” to convince banks of credit worthiness.[4]

Entrepreneurs have also played a role in the Pacific in finding innovative solutions to the climate finance conundrum by utilising emerging fintech. For example, Oxfam has successfully rolled out its Unblocked Cash program across Vanuatu and parts of PNG, which uses cryptocurrency to deliver donor funds to recipients in the wake of natural disasters. Unblocked Cash is innovative because it expedites the mobilisation of capital compared to traditional forms of disaster relief. Meanwhile, in Tuvalu, the Tuvaluan government has engaged consultants on a national ledger program that will use blockchain to store official government records and provides a contingency plan to the threats faced by paper records from rising tides.

The legal obligation of climate finance?

The United Nations Framework Convention on Climate Change (UNFCCC) establishes that “developed country Parties should take the lead in combating climate change and the adverse effects.”[5] State parties have also committed to mitigate and adapt to climate change through economic, social and environmental policies and actions.[6] The UNFCCC and its protocol agreements, including Paris and Kyoto, go further and establish technical and financial assistance mechanisms that create expectations on developed countries and institutional frameworks to direct finance and technical assistance towards emerging economies. The clearest example of the UNFCCC financial mechanisms in action is the GCF.

As such, there is a legal and moral imperative for states and the international organs established by those states to provide finance to help SIDS, PICs and other emerging economies to adapt to and mitigate the effects of climate change.

How to improve financing?

There are various ways to ensure that finance is improved, including engaging a variety of financiers and lenders to ensure financial risk is shared across many stakeholders. The GFC has also identified some inefficacies in its financing modalities.

Blended Finance

According to the OECD, “blended finance is the strategic use of development finance for the mobilisation of additional finance towards sustainable development in developing countries.” Under the Paris Agreement framework blended finance has international institutional financiers such as the GCF engage with private institutional and private commercial lenders in order to scale the size of available capital to a project.

Blended finance also reduces risk posed by investment in a project to any single financier, by ensuring the capital is sourced from various sectors and economies and the risk burden is shared across several entities. This also protects borrowers from over-reliance on a single entity to bankroll an entire project or projects, which could end in disaster if the financier collapsed.

Green Climate Fund Financing Modalities

The GCF conducted an independent evaluation of the relevance and effectiveness of its investments in SIDS. The current GCF model for accreditation and accessing finance is disadvantaging SIDS which have low capacity, experience, or confidence in directly accessing the GCF. This is because of a lack of capacity to prepare funding proposals. The Readiness and Preparatory Support Programme (RPSP) is not efficiently bridging the gap between the needs of SIDS, and their ability to apply and successfully implement GCF funded adaptation and mitigation programs.[7]

SIDS have limited access to national direct access entities (DAEs), and SIDS-nominated national entities have struggled to receive accreditation due to a lack of human resource capacity. Meaning, applications for climate finance is usually controlled by entities external to the Pacific Island governments. This has created a barrier to SIDS accessing finance due to a lack of capacity to create GCF-compliant concept notes and grant submissions. The RPSP and Project Preparation Facility have been established by the GCF to alleviate these issues, however further time is needed to assess how successful these changes have been.

Expanding the GCF's accessibility to the most vulnerable will require a concerted approach to improve SIDS' ability to apply and access funds. It will also necessitate simpler, more flexible GCF processes that facilitate access for SIDS with limited fiduciary and administrative capability while maintaining a balance of accountability and risk.

According to a recommendation made by the Independent Evaluation of the Relevance and Effectiveness of the Green Climate Fund’s Investments in SIDS report states that, these processes can only work once the GCF Board finalizes key outstanding policies with urgency. For instance, the GCF might propose supporting an individual SIDS' adaptation pathway in tranches tied to trigger points or thresholds; this would allow for plenty of managed flexibility, robust metrics, and bounded innovation in project development and implementation.[8]

Conclusion

Given the vulnerability of the Pacific Islands as a result of climate change and COVID 19, access to finance is more crucial than ever. SIDS require immediate assistance to address the effects of climate change. The GCF's modalities and processes are ineffective in addressing the unique difficulties of climate change in SIDS and the urgency of climate action. Other ways are needed to significantly accelerate climate finance in SIDS, evermore so proving the point why access to finance in the Pacific is very important.

[1] Working Group I, Intergovernmental Panel on Climate Change, The Physical Science Basis – Regional Fact Sheet – Small Islands, (Sixth Assessment Report, 6 August 2021) [Accessed https://www.ipcc.ch/report/ar6/wg1/downloads/factsheets/IPCC_AR6_WGI_Regional_Fact_Sheet_Small_Islands.pdf]. [2] Working Group I, Intergovernmental Panel on Climate Change, The Physical Science Basis – Regional Fact Sheet – Small Islands, (Sixth Assessment Report, 6 August 2021) [Accessed https://www.ipcc.ch/report/ar6/wg1/downloads/factsheets/IPCC_AR6_WGI_Regional_Fact_Sheet_Small_Islands.pdf], 1-2. [3] GA Dec 70/472, UN Docs A/70/472/Add. 1 (14 December 2015). [Accessed https://documents-dds-ny.un.org/doc/UNDOC/GEN/N15/424/97/PDF/N1542497.pdf?OpenElement]; Montreal Protocol on Substances that Deplete the Ozone Layer, Meeting of Parties Decision XXV/9 (21 October 2013). [Accessed https://ozone.unep.org/treaties/montreal-protocol/meetings/twenty-fifth-meeting-parties/decisions/decision-xxv9-implementation-montreal-protocol-regard-small-island-developing-states]; Climate Change Secretariat, United Nations Framework Convention on Climate Change, Climate Change, Small Island Developing States, (Report, January 2005), 2. [Accessed https://unfccc.int/resource/docs/publications/cc_sids.pdf]. [4] Learning from the Enterprise Challenge Fund: Accessing Finance in the Pacific Islands. http://www.enterprisechallengefund.org/images/publicationsandreports/learning%20from%20the%20ecf%20accessing%20finance%20in%20the%20pacific%20islands.pdf [5] United Nations Framework Convention on Climate Change, opened for signature 4 June 1992, 1771 UNTS 107 (entered into force 21 March 1994), art. 3(1). [6] Ibid, 4(f). [7] Independent Evaluation of the Relevance and Effectiveness of the Green Climate Fund’s Investments in SIDS. https://www.greenclimate.fund/sites/default/files/document/gcf-b30-14.pdf [8] Ibid, pg. 31.