The Green Climate Fund is currently the largest distributor of climate mitigation funds in the world, with funds raised until the end of 2019 that have reached USD 10.3 billion. However, as with other sources of green finance, the GCF should be seen not as a conventional source of financing, but rather an opportunity to create an innovative climate action program or project.

The GCF will finance projects that have the potential for a large positive impact on climate, paradigm changes and sustainable development, in accordance with the needs of the country concerned, have a strong sense of ownership of the country concerned, as well as effective and efficient. To be able to meet the aspects of this paradigm shift, an innovative program is needed, which is able to show the maximum potential of a shift in vision towards sustainable development that is resistant to climate change and produces low carbon.

Therefore, if a climate project is feasible to be financed through a conventional financing scheme, the project owner will usually take advantage of the financing opportunities that are already available on the banking system rather than accessing GCF funding, especially considering the process to be taken will require learning.

In general, banks are often less interested in financing green projects or climate change action projects. Some of the reasons are because first, the bank’s unpreparedness in financing new and high-risk projects and do not have loan guarantees. Second, the value of the project is considered too small by financial institution standards or is known as ‘unbankable’. The project value that is too small (under USD 100 million for example) also makes the project considered as less commercially viable. This is because local and international financial institutions consider the cost of due diligence is high and not comparable with the value of the proposed project.

In addition, financial institutions are interested in financing if there is a certainty of government policies, for example in the renewable energy sector through special tariff schemes for the purchase of electricity. In conditions where the project owners cannot access bank financing due to risk factors and policy uncertainty, the GCF can be the right source of innovative financing solution.

The main challenges for climate change mitigation and adaptation action programs are the absence of long-term funding sources (more than 5 years), low rates of return, lack of implementation capacity and knowledge of players in this sector and various other risks. A number of scientific literature and studies by various research centers in the world, financial institutions and surveys show that in general there is no universal financing instrument that is suitable for all these projects. Meanwhile, financing options for climate projects in general are determined by many factors such as project size, type of investment chosen, availability of financial instruments, the role of the country concerned and financial institutions support.

To reduce the high risk of climate change projects so that a project becomes feasible to be financed by banks, or known as ‘de-risking’, there are several tools that can be use by project applicants to access banking funding, including:

1. Strengthening the equity portion of the project so that the financing that needs to be taken from debt decreases and banks are more willing to distribute loans;
2. Providing quasi-equity through the Mezzanine Financing scheme that bridges between senior debt from banks and equity from project shareholders;
3. Sharing the risk of debt portion through syndication or inserting other lenders into the financing structure;
4. Providing collateral through credit guarantees or insurance; and
5. Providing hedging facilities for foreign currency if loans for project comes from foreign sources.

The de-risking tools above along with other risk reduction methods can be done by utilizing the GCF funds. For instance, in geothermal renewable energy exploration projects that have little chance of success, the GCF can assist the government in taking over these risks. One example is the Geothermal Risk Mitigation (GREM) project funded by the Government of Indonesian, the GCF and the World Bank, which is managed by PT Sarana Multi Infrastruktur (Persero) to explore geothermal potential in potential areas in Indonesia. Exploration of geothermal energy sources in addition to requiring large costs also has a high risk of failure. However, if the GREM project is later able to find potential geothermal sources, the exploitation stage can be financed by commercial banks as it has a higher level of certainty.

With the availability of these de-risking tools, commercial banks will be more willing to be involved in financing various climate projects because their risks they will face become smaller. This commercial credit from banks needs to continue to be utilized as a source of project financing after the risky phase of a project is funded by the GCF de-risking instrument.

The combination of the GCF and banking financing can be used in several project phases depending on the risk profile of the project phase. If the initial phase of the project can run smoothly with the GCF financing, then the banking will be more open or brave enough to be involved in lending to climate projects, or at least introducing these climate projects to appropriate financial institutions. For climate project owners who have previously received GCF de-risking facility, the GCF NDA recommends that project owners use commercial financing from banks to develop climate projects and replicate the projects.