The Global Innovation Lab for Climate Finance (The Lab) identifies, develops, stress tests, and helps launch innovative financial instruments that address investment barriers and drive private finance for energy efficiency, renewable energy, sustainable transport, climate smart agriculture, nature-based solutions, adaptation & resilience, and other sectors key to a sustainable economy. In six years, the Lab has supported the launch of 49 instruments, which have collectively mobilized over USD 2.3 billion, including USD 800 million from the private sector.
As the timeline for addressing climate change shortens rapidly, the ability for Lab ideas to scale quickly becomes increasingly important. Many Lab instruments are themselves focused on creating scale in climate finance – for example, by introducing commercially viable investment models or aggregating many individual projects into a broader investment portfolio. Yet each time a new fund or approach is introduced, a lengthy process of design, fundraising, and partnership negotiation is required, frequently extending to 3-4 years.
Because the Lab focuses on innovative ideas, most Lab instruments are in early stages of development. However, some instruments launched earlier are starting to scale up – mobilizing increasing amounts of investment. Three of these instruments – Climate Investor One, Energy Savings Insurance, and Long Term Foreign Exchange Risk Management – demonstrate that, while challenging, scaling up is possible, and is greatly facilitated by four success factors that can be influenced by the entrepreneurs developing these initiatives and their stakeholders. These four success factors, which we identified after reviewing literature on scaling up, conducting interviews, and developing case studies on these three Lab instruments, are:
- Establishing a track record, defined as the instrument meeting its milestones in fundraising and on-the-ground impact. In practice, what milestones an instrument must demonstrate varies by the type of instrument. However, all instruments must define what success means upfront, demonstrate success in raising investment, and in deploying that investment on the ground. They must also establish iterative processes early on in their development, to understand and improve their progress.
- Building economies of scale, defined as implementing a viable strategy for continuously increasing “impact profit” (impact per dollar invested). To scale, instruments must increase their impact at lower cost. Some achieve this through diversification, others by standardizing their processes and making them available to additional implementers, and others by clarifying an instrument’s essential elements so it can be more easily tailored by others to their own contexts.
- Putting together a robust team and governance structure, defined as 1) a team having experience in the sector and in working collaboratively; 2) champions who will stay with the project long-term; and 3) organizational, governance, and incentive structures that follow peer best practices. The instrument examples highlighted in this brief show a start-up team with both development and institutional investment experience; another with an established team taking on a new challenge; and a third with an established institution leveraging its existing national relationships. All have stayed with and championed these instruments throughout their journeys.
- Identifying the right long-term partners, defined as having in place strategic partners for pipeline, fundraising, and marketing. The case studies in particular identified the importance of having long term relationships with funders, and channel partners to generate pipeline at low transaction costs.
Having identified these four success factors, the Lab, and other stakeholders in innovative climate finance, can now better target their support to help achieve scale. Investors and other stakeholders should:
- help teams better understand what they need to demonstrate to attract follow-on funding;
- help entrepreneurs navigate the different needs of public and private investors;
- be ready to support entrepreneurs at the earliest stages with small amounts of seed funding;
- use their geographic and sectoral reach and influence to provide access to key partners, implementers, and knowledge sharing platforms;
- bring in consultative expertise, such as financial, management, regulatory, or legal, to help address barriers or identify efficiencies; and
- help source qualified candidates to fill expertise missing from project teams
Finally, investors and advisors can help project teams bring on partners that can grow with the idea as it scales, especially anchor investors and delivery partners. By leveraging our collective expertise and networks to address these four factors, we increase the chances of innovative ideas reaching scale in less time.