A New Wave of Private Investment for Climate Solutions — Part II: Climate Finance in Action
With the U.S. Agency for International Development’s (USAID) portfolio of climate change programs, partnerships, and expertise around the globe, the Agency is well-positioned to answer the global call to action surrounding our climate crisis. USAID will work across the intersection of climate and development to reduce emissions, sustainably develop economies, increase resilience, and promote adaptation. With climate protection programs in place, we can limit warming and preserve ecosystems, create jobs, tackle historical inequity, and build stronger communities.
This is the second part in a series of blogs from USAID, focusing on the Agency’s efforts on climate finance. Click here to read Part I.
By Sashi Jayatileke, USAID Senior Climate Finance Advisor
Climate finance refers to local, national or transnational financing — drawn from public, private and alternative sources — that seeks to support mitigation and adaptation actions that will address climate change. Climate finance can be used in two complementary ways — to reduce greenhouse gases and to build resilience and adaptation.
A historic view of funding trends shows that the vast majority of climate financing has focused on mitigation efforts. However, adaptation is an additional growing and urgent investment priority, specifically for the countries in which USAID works that are the most vulnerable to climate disasters.
With rising temperatures assured for the next several decades, adaptation efforts will help communities to adjust to the impacts of climate change, avoid economic hardship, and bolster resilience. Public resources alone cannot comprehensively address adaptation needs, but they can help mobilize the full power of the private sector. Blended finance — which uses public funding to attract additional, private investment — can help to de-risk investment opportunities and develop adaptive capacities.
Shaping USAID’s Approach
Leveraging the learning generated from USAID’s portfolio of climate change and blended and innovative finance programs, and drawing lessons from other leaders in the space, USAID aims to facilitate additional investment into meaningful development projects that contribute significantly to climate change targets. Part of USAID’s climate finance strategy was informed by a series of listening sessions with various private sector actors, civil society organizations, and within USAID.
In June 2021, utilizing support from implementing partner Dalberg and USAID INVEST — an initiative to mobilize private investment for development results — the Agency brought together 20 participants from investment funds, multilateral development banks, independent blended finance institutions, and think tanks to gain better insight into how USAID and its partners can continue to catalyze climate finance in the regions in which they operate. Participants discussed the key barriers facing climate finance, how USAID supports additionality and impact in climate action, and what opportunities the Agency can seize upon. As products on the listening sessions and additional research, INVEST and Dalberg released the Catalyzing Private Finance for Climate Action: Learning Brief and series of Case Studies that draw from both USAID’s experience, as well as the experience of other donors, on how to effectively intervene and scale impact on climate finance.
Climate Finance in Action: Financing Sustainable Landscape and Equitable Societies
What does climate finance look like at work? Let us take a look at an example.
Nearly half of Mexico is covered by forest, and over 60 percent of those forests are managed by local communities through collective land tenure arrangements. Over the past three years, the country has lost 0.3% — about 280 thousand hectares — of its forest due to agricultural expansion, cattle ranching, illegal logging, and urbanization. This land loss depletes naturally occurring carbon sinks, like tropic forests, and impairs the productive capacity of local communities who rely on land-use and management for their livelihoods.
As a result of increased deforestation, USAID Mexico issued eight sustainable landscape and climate finance activities, many of which have a focus on assistance to local landholders and small-scale producers.
In 2020, USAID Mexico used a co-creation process through a Broad Agency Announcement to identify viable solutions to increase access to finance and catalyze investments in reducing deforestation and forest degradation by improving land management practices and reducing drivers of land-use change.
Stemming from the co-creation, USAID Mexico made an agreement with a consortium of partners — Conservation International, MéxicoCO2, Root Capital, SVX MX, Accenture, and the International Center for Tropical Agriculture — to help local producers transition from parcel-by-parcel subsidy cooperatives, rural production societies, and unions with diversified production systems into collective business entities.
With support from USAID and the consortium, these business entities will learn to sustainably manage their land, access buyers, and independently secure financing after the activity concludes.
This agreement between USAID and the consortium is also creating a blended finance engine to launch two investment funds. One fund will target pension funds and will be registered under the Mexican Stock Exchange. The other, the Sustainable Landscape Mutual Fund (SLMF), will provide loans to small- and medium-sized enterprises (SMEs), helping conservation-focused businesses become investment-ready, and overcoming the challenges of raising risk-tolerant capital.
In 2021, USAID Mexico developed a new program to decrease greenhouse gas emissions and increase smallholder producer incomes by catalyzing innovative solutions and fostering collaboration among stakeholders along zero-deforestation value chains. Utilizing a team of consultants, USAID conducted a consultation process with key value chain stakeholders to inform USAID’s program design and identify channels and strategies to attract private sector partners. Ongoing work includes conducting an extensive mapping of the sustainable landscape sector in Mexico to understand where USAID can best support local and Indigenous stakeholders as it looks to a net-zero future.
By utilizing its resources to mobilize private capital that aligns with development goals, USAID can collaboratively and substantially increase its impact. USAID can work to improve the ecological and financial systems that underpin the climate crisis. By working together with the private sector, USAID can advocate for a low-carbon transition, demonstrate action, and convene a diverse team of players who all seek the same goal. Nature-based solutions can be applied to build higher quality infrastructure, while conserving precious forests and oceans, and seeking innovative low-carbon solutions, leading to sustainable economic growth that benefits all members of society. Together, in partnership with the whole of USG and partner nations, USAID is ready to take a lead in ending our climate crisis and ensuring a more sustainable, equitable, and safe future for all.