Lux allocates €200m to international climate finance

The revised ICF strategy responds to recent regulatory developments and reflects both Luxembourg’s own climate finance experience as well as good international practice.  (c) 2017 petrmalinak/Shutterstock.

The revised ICF strategy responds to recent regulatory developments and reflects both Luxembourg’s own climate finance experience as well as good international practice.  (c) 2017 petrmalinak/Shutterstock.

The grand duchy maintained its position as one of the largest per capita donors to public international climate finance globally, with €200m allocated to ICF funding over the 2021-2025 period. That represents an increase of €80m compared to 2014-2020. 

Environment minister Carole Dieschbourg (Déi Gréng) on Monday presented the strategy for the allocation of Luxembourg's International Climate Finance (ICF) funds for the period 2021-2025. The revised strategy builds on the funding plans already adopted in 2017.

The grand duchy has committed €200m to ICF and will pursue a dual approach focused on multilateral funds and bilateral projects. €40m is earmarked for the Green Climate Fund and €25m for climate projects implemented by Luxembourg NGOs and other not-for-profit environmental organisations. The funds will be managed with local partners in ten  so-called Climate Dialogue Partner countries--Burkina Faso, Cabo Verde, El Salvador, Laos, Mali, Nicaragua, Niger, Senegal, Vietnam and Rwanda--and more generally poor and vulnerable regions such as least developed countries (LDCs), low-income small island developing states (SIDS) and other vulnerable countries. 

The  revised ICF strategy also considers recent developments in the climate change negotiations such as the Paris Rulebook and aligns with the amended Luxembourg climate law of 15 December 2020, the Integrated National Energy and Climate Plan (NECP) 2021-2030, the Luxembourg Climate Adaptation Strategy and Action Plan for 2018-2023, and the Luxembourg Sustainable Finance Roadmap (2018) and strategy (2021).

Priority themes for future projects 

Based on the revised strategy, financing will be directed at interventions geared towards mitigation and adaptation measures in developing and more vulnerable countries--although all countries are eligible. Funding priorities will span across, but not be limited to, seven major themes: 

1) Natural capital, biodiversity, forestry and land-use

2) Clean air and water resources

3) Resource efficiency and waste management

4) Community-based adaptation and resilience

5) Support for the transparency requirements of the Paris Agreement

6) Leveraging and mainstreaming climate and sustainable finance

7) Climate change induced migration

Encouraging private sector participation

The revised Luxembourg ICF strategy will also prioritise activities that mobilise private sector financing. The public funding  is expected to de-risk investments in climate for private entities and encourage private sector participation. 

Various funding instruments ranging from grants to first loss equity, guarantees and loans are incorporated in the allocation of funds . In the 2014-2020 period, most funds were disbursed in the form of grants partially placed into intermediaries or financial vehicles to provide equity, guarantees or loans, and  in return generating reflows to intermediaries.  Direct and indirect first loss and junior equity investments were also provided via the funds. The revised strategy envisages the use of different “blended” instruments beyond direct subsidies.

The report cites Luxembourg’s intention is to contribute toward the “creation of its own Development Finance Institution in the form of a fund of fund, fully or partially capitalised with public funds, which would invest in equity and debt funds for diversified climate action in developing countries and emerging economies.”

The six main selection criteria for funding will be based on strong climate impacts, sustainable development benefits, mobilisation of private sector funding,  efficiency, gender equality contribution, and transformation innovation and lasting outcomes.

Click to view the full report in English.