Climate change is a priority issue that is key in the strategic global relations, particularly within the framework of the United Nations Framework Convention on Climate Change (UNFCCC). While the International Community is increasingly sensitized due to the effects of climate change, there is more attention on the financial resources that are necessary to support the developing countries to mitigate them and adapt to those changes. Within the framework of the international fianancial architecture [1], such resources are categorized as climate finances and their governance and distribution have direct implications on the environmental quality of the planet, and overall on human rights.

What is the relation between financial architecture and climate finance?  Within the framework of the negotiations on climate change, financial structures have been developed that aim at generating a governance and distribution of resources that the Governments have committed to prioritize and place for climate action. At the same time, the Governments should generate internal structures that allow them to connect and interact with that external architecture.

There is no global agreement on the term “climate finance”, but it would emerge as financial resources that are mobilized, through a financial architecture, to help developing countries mitigate and adapt to the impacts of climate change and that build upon the finance commitments of developed countries under the UNFCCC. For example, in support of such governance and distribution of resources, the Green Climate Fund (GCF) was structured. Without being the only financial mechanism, this institution was created in 2010, in order to support efforts to limit or reduce emissions and help developing countries in their adaptation actions (GCF, 2015).

In the 2009 Copenhagen Agreement (the Cancun Decision and the Durban Platform), developed countries pledged to contribute nearly $30 billion between 2010 and 2012. In the 2016 Paris Agreement, it was stressed that developed countries must mobilize resources to finance climate action “from a wide variety of sources,  instruments and channels” in “a progression from previous efforts”, with the consequent decision at the Conference of the Parties to set a collective target of a minimum of USD 100 billion by 2025 (Nakhooda et. al., 2016).

 

Photo: Giovanny Cevallos – Communication Unit
Description: Forest restoration activities in Archidona, Province of Napo.

 

It is worth noting that access to such climate finance is complex, as it requires a strengthening of national and subnational capacities and the structuring of a specialized architecture and a clear definition of priorities and needs at the national level. The challenge for Ecuador is to have institutional structures that include local and global financial dynamics, are aware of climate change, and properly manage the financial resources available to combat the adverse effects of climate.

Our country is opening the way towards the development of an approved and clear financial architecture. This last seeks the inclusion of sustainable criteria in different financial segments, such as the structuring of financial instruments and trusts; among which stand out the Water Funds, Sustainable Environmental Investment Fund (FIAS in Spanish), the actions carried out by commercial and public banks for the adoption of environmental and social risk management systems in their lines of business, development of sustainable credit products and issuance of green bonds (BVQ, 2019), among others

In order to outline this architecture, the Ministry of the Environment, Water and Ecological Transition is preparing Ecuador to improve its potential in accesing to Climate Finance and through PROAmazonía, a program of the National Government with UNDP support, conducted studies to identify, from a series of public financial institutions, the one that provided the best conditions to be accredited by the GCF. The National Finance Corporation (CFN in Spanish) was the best  scored. Moreover, the gaps of its respective action plan were also perceived, i.e., completing/overcoming them and, thus, being able to achieve the aforementioned accreditation without any issues. The process is under way, and institutional arrangements are being made to achieve this short-term objective.

 

Photo: Giovanny Cevallos – Communication Unit
Description: Forest restoration activities in Archidona, Province of Napo.

 

Why is it important for Ecuador to be provided with a GFC accredited financial intitution?

The GFC is related with the countries that receive finance through the Appointed National Authorites, and, in other cases, through the Focal Points appointed by each Government. At the same time, the Fund accredits national, regional and international institutions for them to direct or channel the economic resources  through the presentation and/or the execution of proposals for climate actions. These are called Accredited Entities.

Being provided with an Accredited National Entity (ENA in Spanish) is of great importance for Ecuador. The reasons are: the strengthening of public financial institutions to access specific or more specialized sources of finance; the ENA would be better prepared to access other sources of finance available for climate action (international banking, multilateral banking, funds, etc.);  development of proposals and products of an ENA would be better adapted to the national reality and the climate dynamics of the locality. On the other hand, dependence on International or Regional Accredited Entities would be substantially reduced; transaction costs could be significantly reduced, avoiding the reduction of liquidity and allowing improvements in investments to be made; having an ENA expands the range of local recipients of resources for climate action and their institutional strengthening; the ENA could be structured as a second-tier bank, thus allowing other public financial institutions or those of the popular and solidarity economy to benefit from resources for climate action and, finally, ENA could administer and manage the resources, through a National Fund, directed to the REDD+ Action Plan [2] (MAATE,  2016).

Bibliography

• BVQ. (November, 2019). Quito Stock Market. Retrieved from https://www.bolsadequito.com/index.php/noticias-2/479-ecuador-se-estrena-con-bonos-verdes-por-200-millones
• GCF. (2015). GCF. Retrieved from  Green Climate Fund: https://www.greenclimate.fund/
• IMF. (September 30, 2016). International Monetary Fund, Press Release No. 16/440. Retrieved from  IMF launches a new SDR basket that includes the Chinese Renminbi  and determines new quantities for each currency: https://www.imf.org/es/News/Articles/2016/09/30/AM16-PR16440-IMF-Launches-New-SDR-Basket-Including-Chinese-Renminbi
• MAATE. (November 23, 2016). Ministry of the Environment, Water and Ecological Transition. Retrieved from the REDD+ Action Plan: https://www.ambiente.gob.ec/el-ministerio-del-ambiente-presento-plan-de-accion-redd-bosques-para-el-buen-vivir-la-estrategia-nacional-para-la-conservacion-de-los-bosques/

 

Author: Jorge O. Vargas, Technical Specialist in Climate Finance and Green Credits for REDD+ REDD+ Finance Unit, PROAmazonía.

 

[1] The institutions and regulations that rule monetary and financial relations at international level (Warren, 2019).

[2] The overall goal of the REDD+ Action Plan is to contribute with the national efforts for the reduction of deforesation and forest degradation through conservation, sustainable forest management, and the optimization of other land uses to reduce the pressure on the forests, thus contributing to the reduction of Greenhouse Gas-GHG- emissions (MAATE, 2016).