Editing IPCC:AR6/WGIII/Chapter-15 (section)

=== 15.6.8 Facilitating theDevelopment of New Business Models and Financing Approaches ===

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New and innovative business models and financing approaches have emerged to help overcome barriers related to transactions costs by aggregating and/or transferring financing needs and establishing supply of finance for stakeholder groups lacking financial inclusion ( ''hi'' ''gh confidence'' ).

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==== 15.6.8.1 Service-based Business Models in the Energy and Transport Sectors ====

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'''Energy as a service (EaaS)''' is a business model whereby customers pay for an energy service without having to make any upfront capital investment ( [[#PwC--2014|PwC 2014]] ; [[#Hamwi--2017|Hamwi and Lizarralde 2017]] ; [[#Cleary--2019|Cleary and Palmer 2019]] ). EaaS performance-based contracts can also be a form of ‘creative financing; for capital improvement that makes it possible to fund energy upgrades from cost reductions and deployment of decentralised renewable energy ( [[#KPMG--2015|KPMG 2015]] ; [[#Moles-Grueso--2021|Moles-Grueso et al. 2021]] ). Innovation in EaaS has started at the household level, where smart meters using real-time data are used to predict peak demand levels and optimise electricity dispatch ( [[#Chasin--2020|Chasin et al. 2020]] ; [[#Government%20of%20UK--2016|Government of UK 2016]] ; [[#Smart%20Energy%20International--2018|Smart Energy International 2018]] ).

'''Aggregators.''' An aggregator is a grouping of agents in a power system to act as a single entity when engaging in power system markets ( [[#MIT--2016|MIT 2016]] ). Aggregators can use operation optimisation platforms to provide real-time operating reserve capacity and a range of balancing services to integrate higher shares of variable renewable energy ( [[#Zancanella--2016|Zancanella et al. 2016]] ; [[#Ma--2017|Ma et al. 2017]] ; [[#Enbala--2018|Enbala 2018]] ; [[#Research%20and%20Markets--2017|Research and Markets 2017]] ; [[#IRENA--2019b|IRENA 2019b]] ). This makes a business case for deferred investments in grid infrastructure ( ''medium confidence'' ). Aggregating and managing demand-response of heat systems (micro CHP and heat pumps) has shown reduction in peak demand ( [[#TNO--2016|TNO 2016]] ).

'''Peer-to-peer (P2P) electricity trading''' . Producers and consumers can directly trade electricity with other consumers in an online marketplace to avoid the relatively high tariffs and the relatively low buy-back rates of traditional utilities ( [[#Liu--2019|Liu et al. 2019]] ; [[#IRENA--2020f|IRENA 2020f]] ). P2P models trading with distributed energy resources reduce transmission losses and congestion ( [[#Mengelkamp--2018|Mengelkamp et al. 2018]] ; [[#SEDA--2020|SEDA 2020]] ; [[#Lumenaza--2020|Lumenaza 2020]] ; [[#Sonnen--2020|Sonnen 2020]] ; [[#UNFCCC--2020|UNFCCC 2020]] ).

'''Community ownership models''' . Community ownership models refer to the collective ownership and management of energy-related assets with lower levels of investment, usually distributed renewable energy resources but also recently in heating systems and energy services (e.g., storage and charging) ( [[#Gall--2018|Gall 2018]] ; [[#IRENA--2018|IRENA 2018]] ; [[#Kelly--2019|Kelly and Hanna 2019]] ; [[#Singh--2019|Singh et al. 2019]] ; [[#Bisello--2021|Bisello et al. 2021]] ; Maclurcan and Hinton 2021). Community ownership projects may need significant upfront investments, and the ability of communities to raise the required financing might prove insufficient, which can be supported by microcredits in the initial stages of the projects ( [[#Aitken--2013|Aitken 2013]] ; [[#Federici--2014|Federici 2014]] ; [[#REN21--2016|REN21 2016]] ; Rescoop 2020).

'''Payment method: Pay-as-you-go (PayGo).''' PayGo business models emerged to address the energy access challenge and provide chiefly solar energy at affordable prices, using mobile telecommunication to facilitate payment through instalments; [[#Yadav--2019|Yadav et al. 2019]] ). However, PayGo has the technology and product risk, requires a financially viable and large customer base, and the system supplier must provide a significant portion of the finance and requires substantial equity and working capital ( [[#C40%20Cities%20Climate%20Leadership%20Group--2018|C40 Cities Climate Leadership Group 2018]] ).

'''Transport sector business models''' . Analog to EaaS, mobility as a service (MaaS) offers a business model whereby customers pay for a mobility service without making any upfront capital investment (e.g., buying a car). MaaS tends to deliver significant urban benefits (e.g., cleaner air) and brings in efficiency gains in the use of resources ( ''high confidence'' ). However, the switch to MaaS hardly improves the carbon footprint and further tempted on-demand mobility is likely to nurture carbon emissions ( [[#Suatmadi--2019|Suatmadi et al. 2019]] ). Therefore, to support climate change mitigation, MaaS must be integrated with the deployment of smart charging of electric (autonomous) vehicles coupled to renewable energy sources ( [[#IRENA--2019d|IRENA 2019d]] ; [[#Jones--2019|Jones and Leibowicz 2019]] ).

'''Financial technology applications to climate change.''' Financial technology, abbreviated as ‘fintech’, applies to data-driven technological solutions that aim to improve financial services ( [[#Dorfleitner--2017|Dorfleitner et al. 2017]] ; [[#Lee--2018|Lee and Shin 2018]] ; [[#Schueffel--2018|Schueffel 2018]] ). Fintech can enhance climate investment in innovative financial products and build trust through data, but also presents some challenges including potentially significant emissions from increased energy use with distributed transactions ( [[#Lei--2021|Lei et al. 2021]] ). Blockchain is a key fintech that secures individual transactions in a distributed system, which can have many applications with high impact potential but is also associated with uncertainty ( [[#OECD--2019c|OECD 2019c]] ; [[#World%20Energy%20Council--2019|World Energy Council 2019]] ). Fintech applications with climate change mitigation potential have been growing recently, including tracking payment or asset history for credit scoring in AFOLU activities ( [[#Nassiry--2018|Nassiry 2018]] ; [[#Davidovic--2019|Davidovic et al. 2019]] ), blockchain supported grid transactions ( [[#Livingston--2018|Livingston et al. 2018]] ), carbon accounting throughout value chains ( [[#World%20Bank--2018b|World Bank 2018b]] ), or transparency and verification mechanisms for green financial instrument investors ( [[#Kyriakou--2017|Kyriakou et al. 2017]] ; [[#Stockholm%20Green%20Digital%20Finance--2017|Stockholm Green Digital Finance 2017]] ). Generally, blockchain and digital currency applications are not well covered by governance systems ( [[#Tapscott--2016|Tapscott and Kirkland 2016]] ; [[#Nassiry--2018|Nassiry 2018]] ), which could lead to problems with security ( [[#Davidovic--2019|Davidovic et al. 2019]] ), and some licensing and prudential supervision frameworks are in flux.

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==== 15.6.8.2 Nature-Based Solutions Including REDD+ ====

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Nature-based solutions are ‘actions to protect, sustainably manage and restore natural or modified ecosystems that address societal challenges effectively and adaptively, simultaneously providing human well-being and biodiversity benefits’ ( [[#Cohen-Shacham--2016|Cohen-Shacham et al. 2016]] ). Nature-based solutions consist of a wide range of measures including ecosystem-based mitigation and adaptation.

The studies on investment and finance for nature-based solutions is still limited. However, frameworks and schemes to incentivise the implementation of nature-based solutions, such as reducing emissions from deforestation and forest degradation and the role of conservation, sustainable management of forests and enhancement of forest carbon stocks in developing countries (REDD+), which contributes to climate change mitigation, has been actively discussed under the UNFCCC, with lessons from finance for REDD+ being available.

If effectively implemented, nature-based solutions can be cost-effective measures and able to provide multiple benefits, such as enhanced climate resilience, enhanced climate change mitigation, biodiversity habitat, water filtration, soil health, and amenity values ( ''high confidence'' ) ( [[#Griscom--2017|Griscom et al. 2017]] ; [[#Keesstra--2018|Keesstra et al. 2018]] ; [[#OECD--2019d|OECD 2019d]] ; Griscom et al. 2020; [[#Dasgupta--2021|Dasgupta 2021]] ).

Nature-based solutions have large potential to address climate change and other sustainable development issues ( ''high confidence'' ). Nature-based solutions are undercapitalised and the limited investment and finance, especially limited private capital, is widely recognised as one of the main barriers to the implementation and monitoring of the nature-based solutions ( [[#Seddon--2020|Seddon et al. 2020]] ; [[#Toxopeus--2021|Toxopeus and Polzin 2021]] ; [[#UNEP--2021|UNEP et al. 2021]] ) Finance and investment models that generate their own revenues or consistently save costs are necessary to reduce dependency on grants ( [[#Schäfer--2019|Schäfer et al. 2019]] ; [[#Wamsler--2020|Wamsler et al. 2020]] ).

'''REDD+.''' REDD+ can significantly contribute to climate change mitigation and also produce other co-benefits like climate change adaptation, biodiversity conservation, and poverty reduction, if well-implemented ( ''high confidence'' ) ( [[#Milbank--2018|Milbank et al. 2018]] ; [[#Morita--2018|Morita and Matsumoto 2018]] ). We use the term REDD+ broadly, not limited to REDD+ implemented under the UNFCCC decisions, including Warsaw Framework for REDD+ (Chapter 14), but include voluntary REDD+ projects, such as projects which utilise voluntary carbon markets. Finance is a core element that incentivises and implements REDD+ activities. Various financial sources are financing REDD+ activities, including bilateral and multilateral, public and private, and international and domestic sources, with linking with several finance approaches/mechanisms including results-based finance and voluntary carbon markets ( [[#FAO--2018|FAO 2018]] ). However, there is lack of sufficient finance for REDD+ ( [[#Lujan--2018|Lujan and Silva-Chávez 2018]] ; [[#Maguire--2021|Maguire et al. 2021]] ). REDD+ under the UNFCCC is implemented in three phases: readiness, implementation, and results-based payment phases. The Ecosystem Marketplace identified that at least USD5.4 billion in REDD+ in three phases funding has been committed through multiple development finance institutions so far ( [[#Maguire--2021|Maguire et al. 2021]] ), and public funds are main sources that are supporting three phases, and most of the REDD+ finance was spent on the readiness phase ( [[#Atmadja--2018|Atmadja et al. 2018]] ; [[#Lujan--2018|Lujan and Silva-Chávez 2018]] ; [[#Watson--2021|Watson and Schalatek 2021]] ). There is a significant gap between the existing finance and finance needs of REDD+ in each phase ( [[#Lujan--2018|Lujan and Silva-Chávez 2018]] ). Furthermore, private sector contributions to REDD+ are currently limited mostly to the project-scale payments for carbon offsets/units through voluntary carbon markets ( [[#McFarland--2015|McFarland 2015]] ; [[#Lujan--2018|Lujan and Silva-Chávez 2018]] ).

Current main challenges of REDD+ finance include the uncertainty of compliance carbon markets (which allow regulated entities to obtain and surrender emissions allowances or offsets to meet regulatory emissions reduction targets) ( [[#Maguire--2021|Maguire et al. 2021]] ), as well as limited engagement of the private sector in REDD+ finance ( ''high confidence'' ). With regard to the compliance carbon markets, at the international level, integrating climate cooperation through carbon markets into Article 6 of the Paris Agreement and including REDD+ has potential to enable emission reduction in more cost-effective ways, while the links between carbon markets and REDD+ under Article 6 is under discussion at the UNFCCC ( [[#Environmental%20Defense%20Fund--2019|Environmental Defense Fund 2019]] ; [[#Maguire--2021|Maguire et al. 2021]] ) (Chapter 14). At the national and subnational levels, although compliance carbon markets such as in New Zealand, Australia and Colombia allow forest carbon units, how REDD+ will be dealt in the national and subnational government-led compliance carbon markets is uncertain ( [[#Streck--2020|Streck 2020]] ; [[#Maguire--2021|Maguire et al. 2021]] ). As for limited engagement of the private sector in REDD+ finance, there are various reasons why mobilising more private finance in REDD+ is difficult ( [[#Dixon--2015|Dixon and Challies 2015]] ; [[#Laing--2016|Laing et al. 2016]] ; [[#Golub--2018|Golub et al. 2018]] ; [[#Ehara--2019|Ehara et al. 2019]] ; [[#Streck--2020|Streck 2020]] ). The challenges include the needs of a clear understanding of carbon rights and transparent regulation on who can benefit from national REDD+ ( [[#Streck--2020|Streck 2020]] ); a clear regulatory framework and market certainty ( [[#Dixon--2015|Dixon and Challies 2015]] ; [[#Laing--2016|Laing et al. 2016]] ; [[#Golub--2018|Golub et al. 2018]] ; [[#Ehara--2019|Ehara et al. 2019]] ); strong forest governance ( [[#Streck--2020|Streck 2020]] ), and implementation of REDD+ activities at national and subnational levels. Other challenges are associated with the nature of forest-based mitigation activities, the costs and complexity of monitoring, reporting and verification of REDD+ activities, because of the need to consider the risks of permanence, carbon leakage, and precisely determine and monitor the forest carbon sinks ( [[#van%20der%20Gaast--2018|van der Gaast et al. 2018]] ; [[#Yanai--2020|Yanai et al. 2020]] ). Although REDD+ has many challenges to mobilise more private finance, there is discussion on exploring other finance opportunities for the forest sector, such as building new blended finance models combining different funding sources like public and private finance ( [[#Streck--2016|Streck 2016]] ; [[#Rode--2019|Rode et al. 2019]] ), and developing enhanced bonds for forest-based mitigation activities ( [[#World%20Bank--2017|World Bank 2017]] ).

'''Private finance opportunities for nature-based solutions.''' The development of nature-based solutions faces barriers that relate to the value proposition, value delivery and value capture of nature-based solutions business models and sustainable sources of public/private finance to tap into ( ''high confidence'' ) (Toxopeus and [[#Polzin--2017|Polzin 2017]] ; [[#Mok--2021|Mok et al. 2021]] ) ''.'' However, the demand for establishing new finance and business models to attract both public and private finance to nature-based solutions is increasing in a wide range of topics such as urban areas, forestry and agriculture sectors, and blue natural capital including mangroves and coral reefs (Toxopeus and [[#Polzin--2017|Polzin 2017]] ; [[#EIB--2019|EIB 2019]] ; [[#Cziesielski--2021|Cziesielski et al. 2021]] ; [[#Mok--2021|Mok et al. 2021]] ; [[#Thiele--2021|Thiele et al. 2021]] ; [[#UNEP--2021|UNEP et al. 2021]] ). Furthermore, the recognition of the needs of financial institutions to identify the physical, transition and reputational risks resulting from not only climate change but also loss of biodiversity is gradually increasing (De Nederlandsche Bank and PBL Netherlands Environmental Assessment Agency 2020; [[#Dasgupta--2021|Dasgupta 2021]] ; [[#TNFD--2021|TNFD 2021]] ). Development of finance and business models for nature-based solutions needs to be explored, for example through utilising a wide range of financial instruments (e.g., equity, loans, bonds, and insurance), and creating standard metrics, baselines and common characteristics for nature-based solutions to promote the creation of a new asset class ( [[#Thiele--2021|Thiele et al. 2021]] ; [[#UNEP--2021|UNEP et al. 2021]] ).

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==== 15.6.8.3 Exploring Gender-responsive Climate Finance ====

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Global and national recognition of the lack of finance for women has led to increasing emphasis on financial inclusion for women ( ''high confidence'' ). Currently, it is estimated that 980 million women are excluded from formal financial system ( [[#Miles--2018|Miles and Wiedmaier-Pfister 2018]] ); and there is a 9% gender gap in financial access across developing countries ( [[#Demirguc-Kunt--2018|Demirguc-Kunt et al. 2018]] ). This gender gap is the percentage difference between men and women with bank accounts as measured and reported in the Global Financial Inclusion (Global Findex) database. Policies and frameworks to expand and enhance financial inclusion also extend to the area of climate finance ( ''high confidence'' ). Since AR5, there remain many questions and not enough evidence on the gender, distribution and allocative effectiveness of climate finance in the context of gender equality and women’s empowerment (Williams M., 2015; [[#Chan--2018|Chan et al. 2018]] ; [[#Wong--2019|Wong et al. 2019]] ). Nonetheless, the existing global policy framework (entry points, policy priorities, etc.) of climate funds is gradually improving in order to support women’s financial inclusion in both the public and the private dimensions of climate finance/investment ( [[#Schalatek--2015|Schalatek 2015]] ; [[#Chan--2018|Chan et al. 2018]] ; [[#Schalatek--2020|Schalatek 2020]] ). At the level of public multilateral climate funds, there have been significant improvements in integrating gender equality and women’s empowerment issues in the governance structures, policies, project approval and implementation processes of existing multilateral climate funds such as the UNFCCC’s funds managed by the Global Environment Facility, the Green Climate Fund and the World Bank’s CIFs ( ''high confidence'' ) ( [[#Schalatek--2015|Schalatek 2015]] ; Williams M., 2015; [[#Sellers--2016|Sellers 2016]] ; [[#GCF--2017|GCF 2017]] ). But according to a recent evaluation report, the integration of gender into operational policies and programmes is fragmented and there is lack of an ‘adequate, systematic and comprehensive gender equality approach for the allocation and distribution of funds for projects and programmes on the ground’ ( [[#GEF%20Independent%20Evaluation%20Office--2017|GEF Independent Evaluation Office 2017]] ; [[#Schalatek--2018|Schalatek 2018]] ). The review found that ‘almost half of the analysed sample of 70 climate projects were judged to be largely gender-blind, and only 5% considered to have successfully mainstreamed gender, including in two Least Developed Countries Fund adaptation projects’ ( [[#GEF%20Independent%20Evaluation%20Office--2017|GEF Independent Evaluation Office 2017]] ; [[#Schalatek--2018|Schalatek 2018]] ). While the GCF requires funding proposals to consider gender impact as part of their investment framework, [[#footnote-001|16]] the fund does not have its own funding stream targeted to women’s project on the ground, nor is there as yet an evaluation as to how entities are actually implementing gender action plan in the projects. In the case of the CIFs, as noted by [[#Schalatek--2018|Schalatek (2018)]] , ‘gender is not included in the operational principles of the Pilot Program on Climate Resilience (PPCR), which funds programmatic adaptation portfolios in a few developing countries, although most pilot countries have included some gender dimensions’. And, ‘gender is not integrated into the operations of the Clean Technology Fund (CTF), which finances large-scale mitigation in large economies and accounts for 70% of the CIFs’ pledged funding portfolio of 8.2 billion USD’ ( [[#Schalatek--2018|Schalatek 2018]] ). However, both the Forest Investment Program (FIP) and the Scaling-Up Renewable Energy in Low-Income Countries Program (SREP) have integrated gender equality as either a co-benefit or core criteria of these programmes ( [[#Schalatek--2018|Schalatek 2018]] ).

Overall, efforts to promote gender responsive/sensitive climate finance, at national and local levels, both in the public and private dimensions and more specifically in mitigation-oriented sectors such as clean and renewable energy, remain deficient ( ''high confidence'' ). Recent developments in the capital markets in the areas of social bond are focused around gender bonds – debt instruments targeted to activities and behaviours that are relevant to gender equality and women’s empowerment. These bonds are aligned with Sustainability-linked Bonds as well as Social Bonds Principles of the International Capital Market Association. Issuances of gender-labelled bonds are increasing in the Asia Pacific region (the most comprehensive initiative is the Impact Investment Exchange’s (IIX) multi-country USD150 million Women’s Livelihood Bond [[#footnote-000|17]] ) and in Latin America, Colombia, Mexico and Panama each have gender bond issuances). Additionally, a few developing countries, such as Pakistan (May 2021) and Morocco (March 2021) have issued gender bond guidelines for financial market participants.

'''Linkage to sectoral climate change issues and gender and climate finance.''' Subsets of actions designed to enhance women’s more formal integration into climate policies, programmes and actions by the global private sector include: investment in clean energy, redirecting funds to support women and vulnerable regions as a component of social and green bonds as well as insurance for climate risk management. In the latter context, insurance providers are arguing that ‘given the fact that women are disproportionately affected by climate change, there could be new finance innovations to address this gap’.( [[#Miles--2018|Miles and Wiedmaier-Pfister 2018]] ). AXA and IFC estimate that the global women’s insurance market has the opportunity to grow to three times its current size, to UDS1.7 trillion by 2030 (AXA Group et al. 2015; GIZ et al. 2017). However, across the board, and in particular with regard to public funds, despite improvements in the substantive gender sensitisation and operational gender responsiveness of multilateral and bilateral climate finance funds operations, current flows of public and climate finance do not seem to be going to women and local communities in significant amounts ( [[#Chan--2018|Chan et al. 2018]] ; [[#Schalatek--2020|Schalatek 2020]] ). At the same time, evaluations of the effectiveness of climate finance show that equitable flow of climate finance can play an important role in levelling the playing field and in enabling women and men to successfully respond to climate change and to enable the success and sustainability of local response in ensuring effective and sustainable climate strategies that can contribute to the global goals of the Paris Agreement ( [[#Minniti--2010|Minniti and Naudé 2010]] ; [[#Bird--2013|Bird et al. 2013]] ; [[#Barrett--2014|Barrett 2014]] ; [[#Eastin--2018|Eastin 2018]] ). This is particularly, so in the case of female-owned MSMEs, who, the literature increasingly shows, are key to promoting resilience at micro and macro scale in many developing countries ( [[#Omolo--2017|Omolo et al. 2017]] ; [[#Atela--2018|Atela et al. 2018]] ; Crick, F. et al. 2018).

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