In order to overcome the financial gap/ challenges of funding local climate action, some municipal governments have developed local climate funds. Local climate funds share one core mission _ use of limited public funds to leverage additional private resources, with the goal of financing the climate transition at local level.
Local climate funds are, however, not standard private sector funds that serve as an investment opportunity for those involved and generate return. Instead, municipalities and, where applicable, companies and citizens pay into the fund to enable local or regional climate protection measures. The return in this case is the distribution of the funds in climate protection measures.
Local climate funds – though funds can be diverse in structure and ways of operating – are commonly defined by the following shared attributes: They are
- … owned, controlled, or supported by local governments;
- … execute a public, development-oriented mandate;
- … are off balance sheet special purpose investment vehicles;
- … act as financial intermediaries to catalyse and aggregate public and private financing.
(Alliance 2022, p2)
Revolving funds
Climate funds and revolving funds are “close relatives”. Both are financial mechanisms aimed at supporting sustainable development, particularly in the context of mitigating climate change. However, they have different structures, functions and operating models.
As seen in the previous chapter, climate funds are pools of financial resources specifically dedicated to supporting projects and initiatives. In revolving funds, the capital is also used to finance projects, with the returns from these being reinvested in new projects, creating a sustainable financing cycle.
A revolving fund is a pool of capital that is used to provide loans or grants for projects, with the expectation that the funds will be repaid or replenished. The repayments are then used to finance additional projects, creating a sustainable funding cycle.
Revolving funds typically start with an initial investment or seed funding, which can come from government sources, international organizations, private investors, or grants. The fund provides financial support to projects in the form of loans or sometimes grants. Loans are often provided at low or zero interest rates to encourage uptake. The projects repay the funds over a specified period, often from the cost savings or revenue generated by the projects. Repaid funds are reinvested into new projects, allowing the fund to continue financing initiatives without needing additional external funding.
By continuously recycling capital, revolving funds provide a sustainable source of financing for long-term projects. Initial investments can be leveraged multiple times, enhancing the impact of the original capital. Projects financed through revolving funds have a built-in incentive to be financially viable and efficient to ensure that they can repay the loans. Revolving funds can attract additional private investment by demonstrating the viability and success of funded projects. These funds can be tailored to support a wide range of projects, including energy efficiency, renewable energy, water conservation, and other sustainability initiatives.
In brief:
- Climate funds and revolving funds are similar in many aspects. However, the two differ fundamentally in the projects funded.
- In principle, a local climate fund supports selected projects that, in addition to ongoing measures by the local authority, reduce emissions locally. The fund’s priorities are as needed to make a targeted contribution to municipal climate goals (e.g. stimulating innovation, integrating climate protection and adaptation or promoting technical measures). Financial viability of the fund itself is not necessarily a priority.
- In the revolving fund, the focus is on projects that lead to cost savings and thus generate income for repayment particularly in the areas of climate action, energy efficiency, and water conservation. The project selection is based on financial viability and repayment ability.
