Winfried Weigl is a One Young World Ambassador from Germany who is passionate about finding sustainable solutions to the world's most pressing issues. He is a Finance professional who is working to drive business to a better place.
This blog was originally published on the Huffington Post.
"The current trajectory of greenhouse gas emission rates will cause global temperatures to increase by 4 degrees Celsius by the end of this century" according to the Intergovernmental Panel on Climate Change (IPCC). The 21st century is crucial for humanity to choose what route to take and to determine its future existence on Earth.
To combat climate change, the Green Climate Fund (GCF) was created by the UN Framework Convention on Climate Change (UNFCCC) in 2010 to support low-emission and climate-resilient investments in developing countries. Its purpose is to make a significant and ambitious contribution to combat climate change. The goal is to become the main global financial mechanism for climate change finance and both public and private sectors can receive financing; and it is on its best way to achieve that. As of August 2015, a total of 36 governments have made a pledge to the GCF, including 8 representing developing countries, totaling $10.2 billion USD - by 2020, a total of $100 billion USD is planned.
The GCF differs from other supranational funds
What makes the GCF different from many other international funds is the fact that it cannot only finance projects itself but can also use instruments such as loan guarantees and grants. Thereby, it is able to cover initial losses as a way to make emission-cutting projects attractive to the private sector. Through this feature, experts from Bank of America Merrill Lynch estimate that the GCF could encourage about seven times the level of its public capital from the private sector to tackle climate change. Assuming the $100 billion USD from UN countries is reached this would imply about $700 billion USD in total.
Financial institutions such as banks, asset managers and insurance companies need to participate in this process by filling the global funding gap and by creating a more secure environment for projects. And there clearly are benefits for the private sector to engage. Participation offers a perfect combination of taking on corporate responsibility while exploring new business opportunities at the same time.
For example, banks can apply to become an accredited institution to facilitate affordable channeling of financing for projects accepted by the GCF, a low risk business. Asset management firms can co-finance accepted projects by the GCF (e.g. alternative investments such as infrastructure and renewable energy projects), benefitting from an increased legal protection through UN involvement and an improved reputation within society. Last but not least, insurance companies can help to make risky and challenging projects possible by providing a more secure business environment through insurance, thereby helping to convince developing countries to engage in these new projects and benefit from a reduced risk of natural catastrophes in the long-run.
The first projects are already in sight
As of August 2015, 20 private and supranational institutions have been accredited to channel financing to projects that will be selected by the GCF board. Moreover, the GCF has so far considered project pledges worth approximately USD 6bn by July 2015 and has short-listed projects eligible for funding with a value of around USD 500mn. The Fund is aiming to get the first projects cleared before this December's climate summit in Paris, a very promising first step.
The world clearly needs to address climate change and the set-up of the GCF seems like a win-win situation for every stakeholder involved. Therefore, insurance companies and financial institutions should engage at a larger scale to take on more responsibility and play a greater part to combat climate change.