Stephan Peters is a busy man. On the bus back from Cop26 in Glasgow, he is already turning his attention to the next two years, when he and his team at Luxembourg’s International Climate Finance Accelerator will support five new fund managers to invest in three key areas: climate mitigation finance, climate adaptation finance and REDD (reducing emissions from deforestation and forest degradation) as part of a Luxembourg government initiative to create a climate-friendly financing environment in Luxembourg.
The 2021 cohort of fund managers--raising capital for everything from renewable energy projects in Sub-Saharan Africa to climate tech in Europe--is the latest in a line of annual cohorts dating back to a first selection in 2018. Since inception, ICFA has supported 23 fund managers targeting $1.4bn of assets under management.
“With our support, these fund managers build funds and attract more significant capital to put into the funds,” explains Peters.
Building a climate financing ecosystem
The first step is to provide the four or five funds in the cohort with a €80,000 envelope to be used with ICFA’s Luxembourg private partners to carry out the legal structuring, risk management and impact strategy of their funds. A Luxembourg bank also provides a €200,000 working capital loan, guaranteed by the Luxembourg state, to allow for fundraising, marketing, team development and pipeline building.
Luxembourg’s world leading position in the world of financial services makes it the ideal location for this type of support.
“We wanted Luxembourg to build itself as a centre of excellence for financial services in the climate investment sector,” says Peters. “Some of the financial services companies are therefore doing the work at discounted rates because they see the advantage to them of learning how to support this new sector.”
So-called ‘soft’ support from the ICFA also includes training and coaching with Luxembourg’s private partners, which, together with the financing, provides funds in the cohort with the credibility, visibility and financial leverage to attract bigger investments than could previously have been possible.
Shortening the fund-launch timeframe
It is this ‘soft’ support that Peters, who joined ICFA as its managing director in September 2021, wants to increase in the future.
“We want to give our cohorts extra support--more events, more introductions, greater relationship building across the entire impact ecosystem so that together we can shorten the timeframe it takes to launch their fund.”
A cohort in any given year will aim to have its fund launched within the two-year span of the support programme. However, this has not always happened, so the ICFA is continuing its support to cohorts beyond the two years. While Peters believes that continuing to build the community in climate finance is important, he is also aware that timely fund launches are crucial against the ticking clock of climate change.
“That extra ‘soft’ support we are planning is part of this,” he adds.
How private sector financing in climate funds is changing
Private sector financing has long been a crucial part of achieving climate goals. In fact, Luxembourg acknowledged the importance of private sector funding in its International Climate Change Strategy 2021-2025.
In a typical blended vehicle of an ICFA cohort member, up to 20% of the capital will come from foundations, multilateral institutions and local markets. The rest will be private capital, depending on investment strategy and geography, says Peters.
“Private sector financing forms the majority of these funds’ investment capital,” he explains. “In this sense, it’s very much private finance working in partnership with the public sector to achieve climate change goals.”
However, after attending Cop26 in Glasgow, Peters believes that the nature of private sector financing in climate change goals is changing. Historically, a lot of private money flowed into solar and wind projects, where the business model is tried and tested and government subsidy is significant. As these projects are capital and labour intensive, it takes as long time to see results.
At Cop26, there was fresh interest from the private sector in climate adaptation projects. These can involve providing a farmer with capital to change the crop as growing conditions change, or, as Peters puts it, “to grow Bordeaux wines in the UK.”
This type of investment has in the past been less proven and therefore riskier for the private sector, but the participation of governments and multilateral organisations in taking the first loss helps has helped to create investible projects in this area.
“I saw a lot more interest at Cop26 from the private sector in climate adaptation projects,” says Peters. “This is very much thanks to multiple sources of capital working together and taking a higher risk.”
Shrinking down from the bigger picture, Peters remains committed to building support for the funds that won a place in the 2021 cohort--and those that didn’t. “Around 25 funds made expressions of interest for the 2021 cohort, out of which only five were awarded. We provide detailed feedback even to the funds that weren’t selected, because that education, that sharing, is how investment ecosystems are built.”
The ICFA provides a two-year acceleration programme for start-up climate finance fund management. It was set up in 2018 as a public-private partnership between 10 private entities in the Luxembourg financial sector as well as the Luxembourg Ministry of Finance and the Ministry of the Environment, Climate and Sustainable Development with the support of the European Investment Bank.
Updated to correct the percentage of capital that will come from foundations and other organisations