Draft SOW - Invest for Climate (IN4C) Synopsis 07172023.pdf

SECTION C – STATEMENT OF WORK

INVEST FOR CLIMATE ACTIVITY

C.1 PURPOSE

The Invest for Climate Activity (IN4C) will leverage and mobilize public and private finance to support Colombia’s climate adaptation and mitigation targets.1 The Activity will take a systems approach aimed at transforming markets and financial systems to better value natural systems, incorporate climate risks and emissions‐reduction targets in economic and financial decisions, and prioritize resilient and low emissions investments. This Activity will aim to reach impact at scale in its local interventions by expanding USAID’s work to mobilize finance for businesses and projects that reduce Greenhouse Gas (GHG) emissions from agriculture, forestry, and other land use (AFOLU); promote clean energy; and enhance climate resilience and reduce vulnerability, while promoting local economic and social development.2

C.2 BACKGROUND

Climate change is defined as long‐term shifts in global temperatures and weather patterns.3 Human‐driven climate change is a global crisis that is disrupting ecological systems, impeding economic growth, and increasing poverty, conflict, and instability. In Colombia, increased intensity and duration of extreme weather events have negatively impacted communities, the economy, and the environment. For example, the 2010 La Niña resulted in economic losses equal to two percent of Colombia’s Gross Domestic Product (GDP).4 It is important to address and mitigate the effects of climate change to ensure development efforts are successful and sustainable.

Climate finance refers to the use of public and private funding sources, such as directed (“earmarked”) government funds, concessional loans, green bonds or insurance services to support climate mitigation and adaptation actions.5 USAID can leverage climate financing to increase funding in projects and businesses that address climate change and help limit global warming to 1.5 degrees Celsius, as called for under the Paris Agreement.6 Increasing different actors’ access to climate finance also helps countries advance their climate action plans to cut emissions and adapt to climate impacts, otherwise known as Nationally Determined Contributions (NDCs).7

1 Climate mitigation refers to anthropogenic intervention to reduce the sources or enhance the sinks of greenhouse gasses. Climate adaptation refers to adjustment in natural or human systems in response to actual or expected climatic stimuli or their effects, which moderates harm or exploits beneficial opportunities.

2 For a more detailed definition of the type of activities that can be categorized as AFOLU or sustainable landscapes, clean energy and adaptation please refer to section C.5.

3 https://www.un.org/en/climatechange/what‐is‐climate‐change 4 BID, CEPAL. 2011. Valoración de Daños y Pérdidas. Ola Invernal en Colombia 2010‐2011.

5 https://unfccc.int/topics/climate‐finance/the‐big‐picture/introduction‐to‐climate‐finance 6 https://unfccc.int/process‐and‐meetings/the‐paris‐agreement/the‐paris‐agreement 7 https://www.un.org/en/climatechange/all‐about‐ndcs

Colombia has an ambitious NDC to reduce GHG emissions by 51 percent by 2030 and reduce the risks and impacts of climate‐related events, like extreme flooding.8 According to the Colombian National Planning Department (DNP), Colombia´s NDC requires an annual investment of at least USD $2.3 billion to achieve a reduction in its carbon emissions by 51 percent, with most of this investment coming from the private sector.9 The DNP also estimates that an additional USD $1.6 billion is needed to help key sectors and regions prepare for future climate events, under a conservative scenario.10 While the total value of climate finance required for Colombia’s NDC is only an estimate, current public and private investment flows, even if they are increasing11, are still clearly insufficient. In 2020, the Colombian government’s regional and national climate‐ related expenditures were USD $369 million.12 However, the actual emissions reduction and adaptation impact of these expenditures was not established.

USAID/Colombia’s experience has demonstrated that climate finance helps entrepreneurs, communities, and private sector actors reduce GHG emissions while enhancing licit livelihoods and local development. Through eight Reducing Emissions from Deforestation and Forest Degradation (REDD+) projects developed under the BioREDD and Paramos and Forests activities, USAID helped Colombia’s carbon market mobilize USD $26 million in climate finance for nineteen ethnic communities. USAID/Colombia’s Agribusiness Fund13 has also used climate financing to invest in climate‐smart projects and businesses14 that protect forests by harvesting non‐timber forest products, and by providing solar energy to rural families. The Energy for Peace Activity uses blended finance to unlock private capital to plan, build, and operate renewable energy generation projects in conflict‐ affected sites in rural Colombia prioritized in the peace accords.

Annexes in Section J.X provide additional information related to the state of the art of climate finance in Colombia, as well as existing Colombian government strategies and multiple‐actors initiatives that are mobilizing funds for climate adaptation and mitigation in Colombia.

8https://www.minambiente.gov.co/cambio‐climatico‐y‐gestion‐del‐riesgo/documentos‐oficiales‐contribuciones‐ nacionalmente‐determinadas/ 9 UK Pact Colombia, CCADI, Transforma. 2023. Productos Financieros Verdes en Colombia.

10 Idem.

11 According to the Social Private Investment Index the environment‐related investments are increasing. In 2020, the largest companies operating in Colombia invested USD $ 400 million while in 2021 their investments were USD $ 667 million.

12 Departamento Nacional de Planeación, 2021. MRV de Financiamiento Climático. Financiamiento Público Doméstico en 2020.

13 SEAF Agribusiness Fund Colombia 14 For this document, “climate‐smart projects” refer to sustainable interventions that are to be implemented in a short time frame, with specific climate benefits and transversal development objectives (i.e. REDD+ projects).

“climate‐smart businesses” refer to indefinite term interventions that are profit driven and result in positive climate results (i.e. a renewable energy company).

C.3 COUNTRY DEVELOPMENT COOPERATION STRATEGY (CDCS) AND USAID´S CLIMATE

STRATEGY ALIGNMENT

The Invest for Climate Activity will advance USAID/Colombia’s CDCS Development Objective 3, promote equitable and environmentally sustainable economic growth. It will do this by engaging with community, public, and private sector actors, including financial institutions, to develop, finance, and implement initiatives that help Colombia achieve its climate mitigation and adaptation objectives. The Activity will also contribute to CDCS Intermediate Result (IR) 3.1, expanded licit livelihood opportunities, and CDCS IR 3.2, more competitive licit economies.

Additionally, the Activity will contribute to IR 3.1 by: 1) providing business development assistance; 2) improving financial access for climate‐smart projects and businesses; and 3) increasing climate‐smart investment to expand markets. Finally, the Activity will contribute to IR

3.2 by: 1) improving public and private actors’ access to information on climate‐smart opportunities; 2) reducing the risks and costs associated with climate‐smart investment; and 3) supporting the development of sustainable value chains with climate benefits. The Activity is also aligned with the CDCS’ cross‐cutting topics: private sector engagement, environmental sustainability, gender and inclusive development, technology and connectivity, marginalized population focus and local development systems (See sections C.5.3, C.5.4, C.5.7, and C.5.11).

This Activity also aligns with the USAID Climate Strategy’s objective of advancing equitable and ambitious actions to confront the climate crisis. It will do this by mobilizing funds for Colombia’s mitigation and adaptation goals. In particular, the Activity will contribute to the Strategy’s Objective 1 Target Direct Action, IR 1.1 Reduce Emissions ‐ Catalyze urgent mitigation (emissions reduction and sequestration), IR 1.2 Build Resilience ‐ Strengthen resilience of populations vulnerable to climate impacts (adaptation); and Objective 2 Systems Change, IR 2.1 Transform Key Systems ‐ Advance the transformation of key systems and essential services to reduce emissions and enhance climate resilience, and IR 2.2 Shift Market Signals ‐ Support a transition to resilient, net‐zero economies and financial systems.

C.4 RESULTS FRAMEWORK AND TASKS

Mobilizing climate finance towards Colombia’s mitigation and adaptation targets requires commitment from financial institutions, private and community organizations, and government actors to engage in transforming markets and financial systems to incorporate climate risks and emissions‐reduction targets in economic and financial decisions, and prioritize resilient and low emissions investments. For example, financial institutions need to improve conditions and increase access to capital for climate initiatives, and community and private sector actors must develop portfolios of climate‐smart projects and businesses that are eligible to receive climate finance. The Colombian government also needs to develop public policies that steer public finance toward priority climate objectives, and that move the productive sector towards implementing climate projects. Recognizing these needs, the Activity has three components, six intermediate results (IR), and three targets as follows:

Component 1:

Financial institutions invest in climate‐smart projects and businesses.

Component 2:

There is a robust and inclusive pipeline of viable climate‐smart projects and businesses.

Component 3:

There is an improved enabling environment for climate‐smart investment.

Target 1: USD $75 million investment mobilized in climate‐smart projects and businesses.

Target 2: 20 million tons of GHGs emissions reduced, sequestered, or avoided through climate‐smart projects and businesses.

Target 3: Twenty laws, policies, regulations, or standards that enable climate finance, adopted formally, proposed, or implemented.

IR 1.1:

Financial institutions are using climate finance instruments.

IR 2.1:

Climate‐smart businesses are accelerated.

IR 3.1:

Public policies enable public and private climate finance.

IR 1.2:

Financial institutions and climate investments have a reduced cost of accessing capital.

IR 2.2:

Viable climate‐smart projects are structured.

IR 3.2:

Public and private institutions report climate metrics.

The Invest for Climate Activity’s theory of change links the Activity’s components with the intended outcome: IF the supply of climate finance by financial and government institutions increases in conjunction with increased demand for this finance by climate‐smart projects and businesses, and Colombia’s enabling environment encourages more climate‐smart investment, THEN Colombia will leverage the funds needed to advance its climate adaptation and mitigation targets.

Component 1: Financial institutions invest in climate‐smart projects and businesses.

The financial sector plays an important role in mobilizing climate finance by ensuring that capital flows away from carbon‐intensive activities and increasingly toward investments in climate adaptation and mitigation, such as forest conservation and renewable energy. The banking sector, a section of Colombia´s financial institutions, has already taken initial steps to increase climate finance in alignment with the country’s environmental goals. For example, 65 percent of Colombian banks have a decarbonization strategy, and 53 percent of banks have reporting aligned with the Financial Stability Board's Task Force on Climate‐related Financial Disclosures (TCFD).15 Even so, financial institutions in Colombia still require additional capacity building and

15 IFC. 2022. Colombia Country Progress Report.

technical guidance to understand the physical and transition risks of climate change and its financial impact.

A preliminary survey of financial institutions in Colombia found that, with the exception of large banks like Bancolombia, few institutions have a robust green lending arm, or in‐house capacity for carbon accounting.16 An analysis of Green Financial Products in Colombia found that only 36 percent of commercial banks and 16 percent of trust funds offer green financial products, mostly in the areas of green loans and agricultural insurance.17 Moreover, financial institutions are often hesitant to provide climate finance due to a combination of real and perceived project risk and low return on climate‐related investment.

The Invest for Climate Activity will work with financial institutions, including commercial, investment and development banks; insurance companies and other institutional investors;

micro‐financial institutions; guarantee funds, trust funds, and impact and philanthropic funds, to catalyze transformational and systemic change in the financial systems in order to accelerate and scale climate investments.18 In particular, the Contractor will strengthen financial institutions' understanding of, and capacity for, green lending, climate risk and carbon accounting in their lending practices and financial services. In addition, the Contractor will provide capacity building support and technical assistance to expand existing or develop new risk‐mitigation and concessional capital instruments.19 To facilitate engagement with the financial sector, the Contractor will collaborate with financial institutions associations such as Asobancaria. When working with financial institutions, the Contractor must demonstrate a clear case for additionality, and will not provide capital for financial institutions or financial vehicles.

IR 1.1: Financial institutions have the capacity to use climate finance instruments.

Invest for Climate will co‐fund and build financial institutions’ capacity to mainstream climate into their investment and business decision‐making. This includes providing capacity building to financial institutions in green finance and inclusive banking fundamentals20 and products, in developing the tools to incorporate climate risk management and carbon accounting into their lending practices; and to measure and report on the carbon intensity and climate resilience of lending portfolios. The Contractor will assist financial institutions with expanding their capacity to use international reporting standards such as those established by the International Financial Reporting Standard (IFRS), the Financial Stability Board's Task Force on Climate‐related Financial Disclosures (TCFD) and the Taskforce on Nature‐related Financial Disclosures (TFND).21

16 This preliminary study was conducted in conjunction with ASOBANCARIA in the spring of 2022.

17 UK Pact Colombia. CCADI. Transforma. 2023. Productos Financieros Verdes en Colombia.

18 Climate investments refers to public or finance investments in initiatives, projects or businesses that produce mitigation and/or adaptation benefits.

19 Concessional capital instruments are financial instruments that provide finance at a lower rate than is typical in a given market.

20 Sustainable banking refers to an area of the financial markets that aims to promote a positive environmental impact from its operations, including mitigating climate change.

21 IFRS Climate Related Disclosures. TFCD. TFND.

Furthermore, the Contractor will support financial institutions in developing a green lending arm to expand and scale the supply of financial products, including insurance products to cover climate‐related losses, and financial products that mobilize funding for inclusive climate mitigation and adaptation projects and businesses at scale. As part of this, the Contractor will develop open, secure, and interoperable digital tools to assess the profitability and inclusivity of climate‐smart projects/businesses, develop alternative scoring systems and forms of collateral.

The Contractor will work with financial institutions to improve their understanding of green bonds, carbon markets, and the adoption of tools, such as net‐zero target setting, using methodologies like those established under the Science Based Target Initiative (SBTi).22 Through this IR, the Contractor will hold financial institutions to high performance standards upon reception of the technical assistance and support provided by the Activity. Finally, to achieve this IR, the Contractor will learn from and collaborate with existing initiatives such as the International Finance Corporation (IFC)’s Green Banking Academy.

IR 1.2: Financial institutions and climate investments have a reduced cost of accessing capital.

One barrier to accessing and scaling finance for climate‐smart investments is the high cost of capital due to factors such as lower expected financial returns, and high risk profiles of these investments. Under this IR, Invest for Climate seeks to design and facilitate the implementation of financial mechanisms that lower the cost of capital for climate investments and catalyze investments at scale, through collaboration with Development Financial Institutions (DFI) including the U.S. Development Finance Corporation (DFC), the IFC, or the Inter‐American Development Bank (IADB). Although this is a priority, the Contractor will not use USG funds to provide capital for financial institutions or financial vehicles.

The Contractor will work with DFIs and other actors to structure innovative financial instruments offered to financial institutions to help de‐risk climate investments. This in turn will increase the financial sector’s investment appetite for climate initiatives. In addition, the Contractor will assist in the creation of financial products that leverage first‐loss tranches for climate projects, and that decrease investment risks for senior tranches funded by private investors.23 The Contractor will also support the design of green bonds or impact bonds with payment for climate results, and other capital market transactions.

The Contractor will also develop or enhance financial instruments that lower the cost of capital for climate investments. To this end, the Contractor will establish partnerships between industry leaders, international and national investors, and development banks. For example, the Contractor may develop new market‐based financial instruments, such as blended finance

22 SBTi 23 Tranches are a collection of securities that are separated and grouped based on various characteristics such as maturities, credit ratings, and yields–or interest rates. First loss tranches are meant to absorb the first losses that impact the portfolio thereby reducing risk for other investors. Only if losses are bigger than what can be absorbed by the first tranche are other tranches impacted.

and/or credit enhancement mechanisms, for investments with lower expected financial returns and higher risk profile. In addition, the Contractor will collaborate in the creation or strengthening of funds that provide impact investment at scale for climate‐smart projects or businesses. Clear criteria for additionality and development and climate impact must be used.

The Contractor will co‐fund technical assistance to financial institutions so that they can more easily access capital from the DFI like the DFC and pre‐existing climate funding pools, like the Green Climate Fund (GCF).

To lower the cost of capital by reaching investments of larger scale, Invest for Climate will partner with corporations and financial actors that have committed to net‐zero targets to pilot innovative value chain finance mechanisms that enable micro, small and medium suppliers to transform the production cycle, reduce emissions, and improve climate resilience. In addition, the Contractor will promote investments in climate aggregators,24 and the development of portfolio guarantees to backstop local lenders, each of which can be supported by the development of a high‐quality pipeline of projects. To tackle the foreign exchange risk for larger climate‐smart investments, the Contractor may support the design of creative standby liquidity facilities to help investors hedge against foreign exchange risk.

To achieve this IR, the Contractor will learn from and collaborate with existing initiatives working in Colombia to accelerate private climate flows in Colombia, such as the Climate Finance Leadership Initiative (CFLI).25

To facilitate and increase the appetite of the financial sector by reducing risk, costs and incentivizing the provision of climate finance at scale, the Contractor will use the Activity Fund (Section 6.7). The Contractor may give priority to performance and results‐based grants from the Activity Fund to hold financial and private sector institutions accountable for results, such as increased mobilization of funds for climate investments. Grant funds will encourage innovation, leverage new funding sources and co‐fund training and technical assistance.

Importantly, IR 1.2 will work in concert with IR 1.1 to mitigate real and perceived risks in climate finance by helping financial institutions understand the risks and opportunities found in climate investments.

Component 2: There is a robust and inclusive pipeline26 of viable climate‐smart projects and businesses.

24 Financial aggregation has the potential to unlock new sources of capital investment for the development of climate projects and businesses in developing countries by providing the opportunity to invest in a diversified portfolio and gain exposure. UNDP’s Climate Aggregation Platform offers examples.

25 Climate Finance Leadership Initiative.

26 A robust pipeline of projects refers to projects that have been structured, proved technically, financially and legally feasible and which have the option of being bankable or eligible for public funding. Bankable projects means that projects/business have financial metrics that could attract financing institutions interest.

In addition to increasing the supply of climate finance by financial institutions, there also needs to be increased demand for climate finance resources by climate‐smart projects and businesses.

However, there are very limited viable climate‐smart projects and businesses with access to climate finance in Colombia. In a 2022 report by Latimpacto, a lack of climate‐smart projects and poor understanding and measurement of climate indicators were identified as some of the main factors negatively impacting climate‐smart investment in Latin America.27

On a positive note, Colombian government institutions have identified 148 strategic actions for climate mitigation and 30 actions for climate adaptation to help meet Colombia’s NDCs, and they have been using the Colombian government’s project structuring rules and platforms to access public financing.28

Even so, climate‐smart initiatives are still too broad, specific and indicative, and do not yet constitute a robust and aggregated portfolio of bankable and eligible projects and businesses.

According to Colombia’s latest NDC status update, the country needs more technical and financial support in the areas of climate‐smart project structuring and implementation in order to successfully request and channel climate finance.29 Also, only 7% of total private equity and venture funding in emerging markets is targeted towards female‐led businesses and just 3% of philanthropic environmental funding supports girls’ and women’s environmental activism.

Although women‐led businesses often have difficulty accessing funding from climate finance providers, women‐led companies are more likely to reach climate targets.30

To increase potential investments in climate mitigation and adaptation, Colombia needs to develop a robust pipeline of market‐based and inclusive climate‐smart projects and businesses that reach mitigation and adaptation objectives at scale. Invest for Climate will support the development of this pipeline by identifying and accelerating climate‐smart businesses and projects that reduce emissions in the AFOLU sector, promote clean energy and/or enhance climate resilience and adaptation, within the contract’s target geography. The Contractor will seek to reach scale, impact, and commercial sustainability by nurturing vertical or horizontal aggregation of climate‐smart projects or businesses.31

IR 2.1: Climate‐smart businesses are accelerated.

27 Latimpacto. 2022. Informe Anual.

28 Departamento Nacional de Planeación. 2021. MRV de Financiamiento Climático. Financiamiento Público Doméstico en 2020.

29https://www4.unfccc.int/sites/ndcstaging/PublishedDocuments/Colombia%20First/NDC%20actualizada%20de% 20Colombia.pdf 30 PNUD. Gender, climate and finance: How financing female‐led businesses can lead the way to a net‐zero future for people and the planet. 2022. https://www.unepfi.org/themes/climate‐change/gender‐climate‐and‐finance‐ how‐financing‐female‐led‐businesses‐can‐lead‐the‐way‐to‐a‐net‐zero‐future‐for‐people‐and‐the‐planet/ 31 Horizontal aggregation involves identifying projects and businesses in the same geographic area, that share common climate vulnerabilities, or that operate in the same sector, like agriculture. In contrast, vertical aggregation involves integrating different actors within the same supply chain.

Invest for Climate will accelerate an inclusive group of climate‐smart businesses and strengthen their commercial viability by making them financially viable, legally established, and sustainable;

and, by supporting their engagement with capital suppliers. The Contractor will design sustainable methodologies to reach businesses at scale, in lieu of providing business development services and support to single business units.

To achieve this result, the Contractor will identify climate‐smart businesses at different stages of maturity and with different risk/return profiles, and provide development support services, including technical assistance and training to develop business plans, financial data, improve management performance, and technical support to overcome other types of barriers, to help them become self‐sufficient with access to the financial sector. Target businesses will also include fintech and technology solutions that enhance climate resilience and reduce vulnerability and accelerate mitigation in the AFOLU and clean energy sectors.

To scale the impact and profitability of climate‐smart businesses, the Contractor will help businesses to identify and accelerate opportunities for innovation and technological advancements, by supporting research and development work, and by assisting businesses in accessing existing policy incentives, like green or innovation tax incentives.

Businesses will also receive assistance to quantify their impact in reducing, capturing or removing GHG emissions, including their impact in reducing climate vulnerability and increasing climate resilience in the regions where they operate, so that businesses can report their climate impacts to their investors and other stakeholders. Climate indicators reported by businesses must be aligned and should contribute to the Contract´s main indicators.

The Contractor must identify opportunities to support aggregated businesses, for example, by supporting business associations and cooperatives in the agricultural sector, aggregated community projects, portfolios of solar mini‐grids, electrification of mass transport systems or commercial fleets, in lieu of single business units, so that greater impact and scale is achieved through the contract. The Contractor must also utilize an inclusive approach to address the massive gap in gender and marginalized groups equitable climate finance.32

In addition, Invest for Climate will select, foster and accelerate innovative, technology‐based, well designed, early‐stage solutions and business ideas to tackle mitigation and adaptation challenges. Moreover, the Contractor will provide business mentoring to smaller but high‐growth entrepreneurs to help them scale and bring their business ideas to fruition.

Under this IR, Invest for Climate will link climate‐smart businesses with financial institutions including those supported under IR 1.1 and 1.2, by providing transaction advisory services, so that businesses can understand capital requirements, and effectively close finance deals.

32 USAID and Medium. 2023. https://medium.com/usaid‐2030/the‐multiplier‐effect‐how‐investing‐in‐women‐led‐ climate‐solutions‐drives‐sustainable‐impact‐ae4d9b188a52

The Contractor will prioritize engaging marginalized communities, including youth, women, ethnic communities, migrants and members of the lesbian, gay, bisexual, transgender, queer and intersex (LGBTQI+) community throughout the approaches described under IR 2.1 and 2.2, so that they are able to implement climate‐smart projects and businesses according to their needs and interests. Prioritizing marginalized communities under this component will generate greater social and economic benefits, advance climate goals, and increase the potential of attracting finance from social impact investors. Engagement with ethnic communities requires a process of meaningful informed consultation process and should aim at conceiving communities as partners in development.

The Contractor must use the Activity Fund (Section 6.7) and find innovative, market‐driven results and performance‐based strategies to provide business development services, to help climate‐ smart businesses strengthen their ability to attract future private sector investment through improved business planning, financial management and reporting, marketing, technology transfer, and regulatory compliance. Business development will be provided upon identification of market inefficiencies throughout the supply chain, and by helping businesses improve their financial and operational performance. For more mature businesses, grant funds will be used to partially off‐set the cost to the businesses, through direct transfer or payment vouchers or other innovative approaches.

The Contractor is encouraged to learn from and collaborate with existing climate businesses incubators and accelerators working in Colombia and other parts of the world, such as the UK Government Climate Finance Accelerator33, the Norwegian Global Green Growth Institute Facilidad de Asistencia Técnica para la Estructuración de Proyectos34, and the Global Innovation Lab for Climate Finance.35

IR 2.2: Viable climate‐smart projects are structured.

The Contractor will take a systems approach and work with local communities, non‐government organizations (NGO), public, international and private actors, including businesses supported under IR 2.1 to support the design and preparation of climate‐smart projects with the potential to reach climate impacts at scale, generate revenue, and that have positive social and economic impacts. Projects that provide public goods without the capacity to generate revenues, for example, a project to improve flood protection in a vulnerable community, will also receive support for their design and preparation.

The Contractor is encouraged to work with national development banks such as the Financiera Nacional de Desarrollo (FDN), Fondo para el Financiamiento del Sector Agropecuario (FINAGRO), and with public institutions such as the Ministry of Environment and Sustainable Development (MADS), Ministry of Agriculture and Rural Development (MADR), the Ministry of Mines and Energy (MME), the Department of National Planning (DNP), the Agency for Territorial

33 UK Climate Finance Accelerator in Colombia 34 Norway‐ GGGI PPTAF 35 CPI Global Innovation Lab for Climate Finance

Development (ART), the Agency for Rural Development (ADR), and Fondo de Energías no Convencionales (FENOGE) to identify feasible climate‐smart projects that could receive technical assistance in their preparation, and that have high possibilities of receiving funding from those institutions, according to the requirements determined in Section C.6.7 (Activity Fund).

The Contractor will also work with the GCF’s Direct Access Entities and with Multilateral Development Banks to contribute with their pipeline development. For GCF´s National Accredited Entities (or Direct Access Entities), the emphasis will be to support their access to GCF funds through loans, equity and guarantees.

In the case that government institutions lack a pipeline of climate projects, the Contractor may work with these actors to establish a project preparation facility, for example for priority climate adaptation projects that will reduce climate risks to target populations, regions, and/or business sectors. The Contractor may work with MADS to identify potential support to strengthen the capacity of Fondo para la Sustentabilidad y la Resiliencia Climática (FONSUREC) to structure climate projects.36

The Contractor will prioritize the support to projects at scale, or to implement aggregated approaches for climate adaptation and mitigation.

For carbon projects, the Contractor will work with communities and local actors to design portfolios of carbon projects that reach scale in the AFOLU and clean energy sectors. For REDD+, the Contractor will prioritize support to jurisdictional approaches, and will assist the Colombian Government to access international climate finance through initiatives such as the Lowering Emissions by Accelerating Project Finance (LEAF) Coalition.37

The Contractor will also provide technical assistance to local actors, prioritizing members of marginalized communities including youth and women and ethnic communities, to structure projects according to the technical requirements of each finance source. The type of technical assistance for project preparation includes conducting pre‐feasibility and feasibility studies, addressing legal, technical, and financial components of a project.

The Contractor will use the Activity Fund (Section C.6.7) to achieve this IR, and is encouraged to identify innovative, market‐driven results and performance‐based strategies to provide technical assistance through grants and or subcontracts, for the preparation of prioritized climate projects.

The Contractor will engage with international funds, DFIs, and other sources of financial resources, including those supported under IR 1.1 and 1.2 to direct capital towards projects supported under this IR.

36 National Fund created by Law 2277/2022 to receive the revenues from the national carbon tax and implement environment and climate resilience projects. The 2022‐2026 National Development Plan Law, changed its name to Fondo para la vida y la biodiversidad.

37 LEAF Coalition.

Component 3: There is an improved enabling environment for climate‐smart investment.

Colombia has climate finance investment potential but attracting this investment requires a robust domestic enabling environment, with reduced risks, strong competition, and enhanced capital flows.38

To this end, the Colombian government has a National Climate Finance Strategy39 and has started to implement policies that help create an enabling environment for climate‐smart investment.

For instance, Colombia’s introduction of a carbon tax in 2016 incentivized GHG emissions reductions and has generated over USD $640 million in revenues for environment protection.40 Colombia’s domestic voluntary carbon market41 has mobilized USD $293 million for projects that reduce GHG emissions from deforestation and energy production.42 In 2021, Colombia issued $458.4 million in green sovereign bonds allowing the government to acquire debt in the domestic and international markets to finance environmental projects.43

Despite this progress, Colombia still needs to deepen the implementation of its Climate Finance Strategy. In particular, Colombia needs to continue developing regulations that improve the investment environment and access opportunities for private investments in climate businesses and projects; to expand the adoption of economic and financial instruments for climate finance;

and to improve information about the flows of funding for climate‐related activities.

Invest for Climate will support the Colombian government develop and improve policies that catalyze transformational and systemic change in the market and financial systems, to enhance the enabling environment for private and public finance, and that support the expansion and use of economic instruments for climate change like carbon markets, green bonds, and tax incentives.

It will also support governmental and financial institutions, implement climate reporting standards and regulations, and modernize climate finance reporting systems.

IR 3.1: Public policies enable public and private climate finance.

Through this IR, the Contractor will work with the Colombian government to develop and improve regulations, policies and mechanisms that foster transformational change and facilitate public and private climate finance by shifting market incentives towards climate‐smart investments and increasing public funding allocated to climate goals.

The Contractor will support the Colombian government with the implementation of the National Climate Finance Strategy, by providing technical support to government entities with the

38 IFC. 2016. Climate Investment Opportunities in Emerging Markets.

39 Colombian National Climate Finance Strategy.

40 Asocarbono. 2022. Report on the state of the Colombian carbon market by September 31st, 2022. Average exchange rate from 1/1/2017‐9/30/2022.

41 A voluntary carbon market is a decentralized market where private actors voluntarily buy and sell carbon credits that represent certified GHG reductions.

42 Idem.

43 Exchange rate of 4278 COP to 1 USD.

implementation of initiatives such as the Climate Finance Corridor.44 In addition, the Contractor will work with national development banks in the implementation of the green strategy of Grupo Bicentenario, by providing technical assistance in coordination with the actions proposed under Component 1 and 2. The Contractor will work with MADS to support the design and operationalization of FONSUREC, and any other public financial mechanism to channel public funding into priority climate adaptation and mitigation projects.

The Contractor will support the Colombian government, including the financial regulator, the Ministry of Finance and the policy‐making institutions that work on adaptation, and in the AFOLU and clean energy sectors to identify, develop and present regulatory reforms to facilitate the enabling environment for private sector financing and financial instruments development to serve climate‐smart projects and businesses with an inclusive approach. Support for regulatory instruments will also consider the inclusion of climate risks, as part of the Financer Regulator requirements for financial institutions to manage social and environmental risks, and the modification of the rules under which the Comisión Nacional de Crédito Agropecuario approves funding for the agricultural and forestry sectors to promote greater integration of climate objectives.

Invest for Climate will also assist the Colombian government with the analysis and identification of additional economic instruments such as green taxes, tax incentives/subsidies or deposit‐ refund systems that shift market incentives towards greater climate‐smart investments. The Contractor will provide technical assistance to national and subnational government entities in Colombia to expand the use of public climate financial mechanisms, such as green bonds, debt for nature swaps, interest rate subsidies, climate insurance, public private partnerships, and public loan guarantees for climate investments.

In addition, the Contractor will provide technical assistance to the Colombian government to strengthen the regulatory framework for voluntary carbon markets to ensure they comply with the principles of integrity, transparency and equity. In doing so, the Contractor will work with the government to develop policy guidelines that help harmonize the use of different carbon pricing instruments in Colombia, namely, carbon taxes, voluntary carbon markets, emissions trading systems, and the cooperative approaches established under Article 6 of the Paris Agreement.45 46 Improved use of carbon pricing instruments will enhance the mobilization of public and private finance towards climate mitigation projects by increasing the economic incentives for mitigation initiatives.

Understanding that policy reforms demand public support and political will, Invest for Climate will create partnerships with the media, academia, and civil society organizations (CSOs) to

44 Corredor de Financiamiento Climático.

45 Carbon tax and carbon markets are economic instruments that pass the cost of emitting greenhouse gas emissions to emitters. By internalizing the cost of emitting carbon, private actors are expected to shift their technologies and practices towards lower emitting activities.

46 Article 6 of the Paris Agreement recognizes that parties to the Agreement may cooperate to achieve their NDCs by using carbon markets under the conditions defined by the governance of the Agreement.

advocate for the social and economic benefits of climate finance. Linked to this, the Contractor will build target NGO and CSO’s capacity to oversee public climate finance budget preparation, management, and disbursement to improve accountability, transparency and more effective government decision‐making to financing deployment.

IR 3.2: Public and private institutions report climate metrics.

When private and public financial management institutions use metrics to track the mitigation or adaptation impacts of their investments and portfolios, they increase transparency and accountability. Accessible information on climate financial flows informs the efficient allocation of public and private funding towards sectors that have the greatest mitigation and adaptation potential, and also have positive social and economic impacts.

In coordination with the interventions under IR 1.1, and with the objective of improving the generation of climate finance information, the Contractor will improve financial institutions' understanding and application of inclusive climate metric reporting47 and the use of Colombia’s Green Taxonomy48. Similarly, the Contractor will assist the Colombian government with updating regulations requiring financial institutions to report inclusive climate metrics, following international principles and standards such as the IFRS, TCFD, TNFD, SBTi explained under Component 1.

To strengthen the capacity of public financial management systems49 to analyze the climate impact of public investments, the Contractor will support government institutions such as the Ministry of Finance (MoF) and the National Planning Department (DNP) to fully implement mechanisms to track climate contributions of public investments, like climate trackers. In addition, it will support the modernization of the Climate Finance Monitoring, Reporting and Verification (MRV) System, to allow for systematic reporting from financial institutions, private sector and public entities.50 The Contractor will advocate that any financial reporting used or developed include a social inclusion lens by measuring their contribution and alignment with other socio‐economic indicators. Finally, the Contractor will enhance local and national actors’ capacities to use climate change scenarios in sectorial, regional, and public investment planning.

47 Climate metrics are used to quantify different entities’ contributions to climate change, and examples of these metrics include: 1) GHG emissions and removals; 2) revenue generated through fossil fuel related activities; and 3) revenue generated through climate‐smart business activities or low‐carbon technologies.

48 A green taxonomy is a framework for defining environmentally sustainable investments. In addition to tackling “greenwashing”, a green taxonomy can help companies and investors make more informed choices. Colombia developed in 2022 a country‐adjusted green taxonomy, included in Section J.

49 Public financial management describes elements of an annual public budget cycle that include (1) budget formulation; (2) budget execution; (3) accounting and reporting; and (4) external security and audit.

50 Colombia's Climate Finance MRV

C.5 SPECIAL REQUIREMENTS

C.5.1 FUNDING: This Activity will be implemented with congressionally mandated Sustainable Landscapes (SL), Clean Energy and Adaptation funds. The following sub‐sections summarize the requirements of each type of funding:51

Sustainable Landscape Funds: This Activity will be implemented with congressionally mandated Sustainable Landscapes (SL) funds. The use of these funds must focus on slowing, halting, or avoiding GHG emissions from Agriculture, Forestry and Other Land Use (AFOLU) and land use change, or sequestering carbon to support global mitigation goals, while promoting locally important, development goals. A description of the objectives and illustrative type of interventions required with SL funds can be found in USAID’s Natural Climate Solutions Portal.

Clean Energy Funds: This Activity will also be implemented with congressionally mandated Clean Energy funds. Clean Energy programs enable reliable, efficient, sustainable, and secure energy systems by promoting and enabling the production, procurement, and use of zero‐carbon and clean energy technologies. A further description of the objectives and examples of clean energy activities can be found in USAID’s Energy Portal.

Adaptation Funds: This Activity will also be implemented with congressionally mandated Climate Change Adaptation funds. Adaptation interventions have the explicit objective of enhancing climate resilience and reducing vulnerability; will be based on an understanding of vulnerability, including the climate change vulnerability or sector risk that is being addressed; will include actions designed to reduce that vulnerability and build adaptive capacity; will be flexible to deal with uncertainty; and will add value beyond the scope of other funding sources. A further description of the objectives and a list of adaptation activities can be found in USAID’s Adaptation Portal.

The Activity will contribute to the President’s Emergency Plan for Adaptation and Resilience (PREPARE) by 203052; the Activity will support USAID’s contribution to PREPARE in the leverage of resources from the private sector for businesses and projects that support people, specially, the most vulnerable communities, to adapt and manage the impacts of climate change.

C.5.2 GEOGRAPHIC FOCUS: The Contractor will prioritize regions with the highest technical and financial potential to reduce GHG emissions and support climate adaptation actions. The criteria used to define the Activity's target geography will include variables related to climate mitigation potential like: 1) current land‐based GHG emissions; 2) existing AFOLU projects and businesses;

3) the potential to support clean energy projects or businesses in areas that include but are not limited to solar and wind energy generation, green hydrogen production; electric vehicles, low carbon mass transit and transport alternatives, end‐use electrification, energy efficiency, energy storage, methane reduction from energy and waste. Criteria will also consider variables associated with adaptation potential like: 1) vulnerability to climate change and climate

51 USAID 2022 Climate Change Standard Indicator Handbook.

52 USAID Progress on PREPARE.

variability; 2) hydrometeorological disaster risk; and 3) existing adaptation initiatives, with an emphasis on nature‐based solutions.53

Based on the criteria listed above, and to maximize social, climate, and economic impacts, the Contractor will select geographic regions/corridors for Activity implementation. The Contractor will lead technical discussions with USAID to determine the definitive geographic corridors in which the Activity will concentrate. These geographic corridors will be selected after performing a detailed analysis of where the highest potential lies in terms of achieving emissions reductions, contributing to climate adaptation, and achieving the climate finance targets within the Activity’s performance period. The final selection will be presented at the first Annual Work Plan. It is very likely that some of the municipalities within these geographic corridors will be outside USAID/Colombia’s prioritized geography, and they will likely include rural and urban areas.

Within the selected regions, the contractor will have an inclusive approach towards migrants, conflict victims, and other marginalized communities.

C.5.3 CLIMATE STRATEGY: The Activity must align to USAID Climate Strategy’s principles, contribute to its intermediate results and targets when appropriate. During implementation, the Contractor must respond to this requirement by adopting innovative approaches that aim at reaching impact scale and drive transformational and systemic change, engaging the financial sector, the private sector, government institutions and local organizations.

C.5.4 INCLUSIVE DEVELOPMENT AND MARGINALIZED POPULATION FOCUS: Development processes that are inclusive54 yield better outcomes for the communities that embark upon them.

The Contractor will work closely with marginalized populations, including youth, women, Afro‐ Colombians and Indigenous Peoples, gender and sexual minorities, migrants and conflict victims to support their businesses and ensure the Activity´s climate projects bring direct benefits for these communities.

The Contractor will place significant focus on engaging youth and women, with the recognition that the climate crisis is, and will continue to be, especially impactful to these populations, yet, they are currently excluded from most climate finance decisions.55 To support youth initiatives, Component…