Making climate finance work for early-stage innovations in low-income country settings
Innovative climate solutions
The Frontier Technologies programme has supported a wide range of pilots aimed at delivering solutions for positive climate impacts, ranging from retrofitting electric boat engines, to testing the potential for AI to scale access to forest carbon markets.
Challenges of accessing climate finance for early stage innovation projects
As early stage innovation projects, many FT climate adaptation and mitigation pilots have an assumption and belief that there may be opportunities to unlock scale, through tapping into existing sources of climate finance. However, given that a large proportion of climate finance is directed towards climate technologies already operating at scale, many pilots have experienced difficulties navigating the climate finance landscape, and understanding what climate funds might be available to support earlier stage innovations to actually reach scale.
As a result, the Frontier Tech Hub has produced a landscape review which aims to surface different ways climate finance can be accessed by early stage pilot innovations. This landscape review particularly focuses on understanding the role that public sector grant funding (such as FCDO grant programming) can play in unlocking private sector climate finance investment in early-stage innovation. This will inform how donors, such as the FCDO, might best select, prepare, and tailor grant programming to better support innovators to unlock climate finance as a pathway to scale.
What we’ve discovered about the role of public sector grant funding as a tool to scale up private sector climate finance investment in early-stage innovation:
There is a severe lack of conventional finance options for early-stage climate innovation. This is due to a range of barriers, including proof of concept, foreign exchange risks, and a mismatch in investment timelines for projects that may need many years to start generating revenue.
Climate finance can play a role in meeting the scaling needs of early-stage innovation. Defined as public sector funds from donors, development finance institutions, governments as well as philanthropic sources and private sector sources, there are significant and growing volumes of climate finance available. However, accessing this remains a severe challenge for early-stage innovation, for a range of reasons, including high risk of failure early in the investment chain.
Climate finance is not always clearly demarcated. Interviews for this study showed a wide range of perspectives on what counts as climate finance. Many institutions support adaptation and resilience related innovation, without considering themselves to be providers of climate finance. Similarly, private sector investors may be a source of finance to scale for climate innovation, but may not identify themselves as climate finance.
Climate finance in relation to early-stage innovation can be summarised in five main categories. These are pure grant finance, which can be important for initiatives with no ability to generate revenue; public sector catalytic finance, which can help to improve the enabling environment, build pilot capacity in business processes and ability to measure mitigation and/or adaptation impact, as well as de-risk private sector investment; private sector catalytic finance, which is deployed by investors to help develop a pipeline of investable ventures; the voluntary carbon market, which offers private sector finance via carbon credits, for solutions that help to reduce GHG emissions or sequester carbon; and adaptation specific finance.
There are a number of challenges and considerations for early-stage innovators when trying to access climate finance. These depend on the specific type of climate finance, but include limited volumes of pure grant funding available; the need to be able to prove mitigation and adaptation impact, when applying for public sector catalytic finance and high costs involved in accreditation of a solution for the voluntary carbon market.
Public sector climate finance is particularly effective when deployed to leverage greater volumes of private sector investment. There are a large number of instruments and funds dedicated to supporting early-stage climate innovation to overcome the barriers to scale. Many of these make use of public and philanthropic climate finance to build the technical and business processes of a pilot or start-up, showcase them to a range of investors and de-risk private sector investment with instruments such as first loss guarantees.
There are a number of sector differences in terms of access to climate finance. For example, the agriculture sector requires access to both adaptation and mitigation finance and is restrained by low paying capacity of smallholder farmers and availability of asset financing to support innovators at growth stage. The forestry sector requires large scale projects to access financing, which makes entry points for innovators most challenging.
There are a number of geographic differences in access to climate finance. For start-up type pilots, these include strong correlation between the enabling environment and tech landscape of LMICs, including the mobile money environment, and the likelihood of securing private or public sector climate finance to scale.
A range of partnerships can be considered, to enable greater access to climate finance.
Outstanding questions for future pilot applicants to consider if looking to scale their innovation through accessing climate finance:
How can this pilot identify promising routes to scale and potential sources of climate finance, including long-term climate finance at scale?
How can this pilot support the innovator(s) to build their investment case for climate finance, including a strong proof of concept and business model?
How can this pilot support the innovator(s) to engage with and market their technology to potential sources of climate finance?
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Links to other resources (e.g. other FT studies, pilot specific documents):
Recent climate-related FT pilots:
Enabling smallholder farmers to access the global carbon markets
Safeguarding land-based climate investments in Ghana with blockchain
Using climate change scenarios to inform community-based adaptation and planning in Nepal
“ELEK TEY”, Electrifying Water Transport for Better Livelihoods
Harnessing sensor technologies to improve beekeeping productivity in South Africa