Pragya Sherchan
September, 2022
Innovative financing with regard to climate adaptation is an emerging concept globally. Innovative financial instruments for adaptation are defined as innovative approaches and mechanisms to acquire, structure, govern, and allocate financial resources. These instruments can include three alterations to traditional finance:
Acquisition of new financial resources and blending with traditional resources to finance adaptation actions.
Enhanced efficiency in raising and distributing financial resources.
Enhanced effectiveness of investments.
These innovative instruments are rarely used in developing countries like Nepal. Prakriti Resources Centre (PRC) in partnership with International Institute for Sustainable Development (IISD) analysed the project ‘Public and private sector collaboration to enhance food security through promoting climate resilient agriculture’ to draw learning on innovative financial mechanisms that can be used to scale up finance for climate adaptation in developing countries. The project was initiated by International Financial Corporation (IFC) and was implemented from 2013 to 2019. It provides examples of different financing instruments used to increase farmers’ adaptive capacity by minimizing the risk of crop losses from climate hazards.
The project received USD 2 million as a grant and USD 3.6 million in concessional lending through Climate Investment Fund – Pilot Programme on Climate Resilience (CIF-PPCR). Canada Climate Change Programme and International Financial Corporation (IFC) invested an additional USD 0.49 million in the project. Three agribusiness firms, namely Golchha Group, Sharda Group and Probiotech – Nimbus Group collectively invested around USD 0.3 million in cash and kind. The grant amount was utilized in building capacity of three firms and farmers, and piloting climate resilient practices and technologies. Business Oxygen (BO2) Private Limited, a private equity fund, received USD 3.6 million concessional loan to finance small and medium enterprises to invest in climate smart businesses.
Gandaki Urja Pvt. Ltd. is one of the clienteles of BO2 Pvt. Ltd. that produce biogas and organic fertilizers from cow/buffalo dung, pig manure, poultry litter and vegetable/agricultural wastes. BO2 Pvt. Ltd. invested USD 0.5 million. Besides equity finance, IFC provided a grant of USD 25,000 to the firm for technical assistance, which was utilized in marketing, building accounting capacity and enhancing the knowledge gap on understanding the fertilizer value chain and markets. According to Mr. Kushal Gurung, a proprietor of Gandaki Urja, equity financing has three clear advantages over bank lending. First, equity financing does not require collateral, unlike a bank loan that demands it. Bank loan also incurs service charges, property valuation, insurance and other costs. Second, risks and benefits in the business are shared equally between the SME and BO2. Third, IFC and BO2-led equity financing also provides technical assistance support to SMEs to increase technical capacity and address knowledge gaps in operating the business.
The case study generated learning on appropriateness of innovative financing instruments on scaling up adaptation financing. Adaptation projects generally have a low return on investment and may not be of interest for private investment. Innovative financing instruments like equity financing requires project with good return on investment and are more suitable for mitigation projects with adaptation co-benefits. Climate finance offers opportunities to private sector firms to start up new businesses/enterprises by developing unique products, identifying local customers’ demand, capitalizing the benefit of going green, and finding innovative ways to reduce costs while going green and natural
