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BUSINESS CASE FOR PROJECT EXTENSIONS

SUMMARY INFORMATION

Title: Global Innovation Lab (previously known as CMCI)

Country/ Region: UK/ Global

Senior Responsible Owner: Kate Hughes

Start Date: August 2011

(Original) End Date: October 2014 New Project End Date: September 2021

Original Project Budget: $350,000 (2012), £220,000 (2014), £1mil (2015)

Cost Extension Value: up to £1mil

% Increase from Original Budget:

Project Extension Business Case

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Summary

This business case covers the extension of the Global Innovation Lab (“the Lab”) Secretariat funding. The Lab follows from Capital Markets Climate Initiative (CMCI) a programme that was aimed at understanding barriers to investment and helping us direct our ICF interventions more effectively to attract private investments. The extension would provide funding for another three rounds of the Lab: round 5 (2018-19), 6 (2019-20) and 7 (2020-2021). Our funding goes to the Secretariat and covers convening and analysis. This funding does not cover funding for specific proposals. The Lab provides a forum for public and private stakeholders to come together and generate innovative proposals to attract private investments in climate change activities, which are then short-listed by the Lab members. The Lab Secretariat is provided by Climate Policy Initiative (CPI). Our contribution, as with previous rounds, will provide administrative support to the Lab, which will shortlist, appraise and analyse proposals. With our contribution to the Lab we buy the development of innovative climate financing ideas, which can then inform our International Climate Finance pipeline of projects. We also help the Lab to continue raising financing for climate related projects. The investment needed across all sectors to meet the 2oC target set in the Paris Agreement cannot come from the public sector alone. At the same time private investors are not investing at the pace needed to meet those targets and Governments are limited in their ability to catalyse private finance. The Lab helps us understand the barriers to investment through discussions with various actors. It is a global forum of experts and donors that discuss proposals to move them quickly from talk to action, for climate finance projects. The G7 endorsed the Global Innovation Lab in 2015. It brings together key actors from the public and private sectors from both developed and developing countries to design, stress test and pilot instruments and approaches targeted at catalysing private investment into climate friendly, low carbon projects and infrastructure in developing countries and help meet the global goal agreed in the Paris

Agreement to keep global temperature increase well below 2C. The UK, along with the US and Germany, has played a leading role in developing the Lab and funding the Lab Secretariat. Since its inception it has evolved further and has been funded by other donors such as the Netherlands and private sector organisations such as the Rockefeller Foundation and Bloomberg Philanthropies. By sharing knowledge between Governments and private investors the Lab contributes to the scaling up of private capital flows as better informed governments are more willing to put in place appropriate enabling environments and use scarce public climate finance to help address identified barriers and market failures. The Lab has scored an ‘A’ in all Annual Reviews to date. It has been replicated in India and Brazil and, so far, it has catalysed $1.28 billion of investment 1for Lab endorsed instruments across the three Labs in just three rounds. More importantly 1/3 of the funds mobilised comes from the private sector, including institutional investors. This is an excellent achievement and directly aligned with the ICF’s strategy to mobilise private markets to invest in climate related projects. Since the last business case, Annual Reviews have found that The Lab has brought a new approach to catalysing private investment to contribute to filling the current gap in climate finance. It has run four successful rounds and has continued to source and stress test climate finance proposals with private sector and development experts. It continues to fulfil its original mandate and has been extended to cover more countries (Brazil and India Labs) and presenting and promoting Lab ideas in high profile climate events.

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The success of the Lab is not limited to running successful Lab rounds; it is also evident in its regional and thematic expansion. Following the establishment of the Brasil and India Labs a Southern Africa Lab is being established to cover Africa specific proposals. The Lab continues to look for proposals in critical areas for tackling climate change. A thematic expansion is being designed for the 5th round of the Lab covering cities, forests and sustainable energy access. The success of the Lab as a proposal incubator is evident in the need and demand for further analytical support by the Lab from endorsed proponents to develop ideas further between endorsement and full implementation. Finally, the Lab is still a live programme that exists not only to expand the current model based on proven and commercially viable technologies but also to identify innovative ways of financing instruments in harder areas of climate work such as land use and adaptation where private sector leverage is harder. This provides an excellent innovation opportunity and platform for such proposals to be incubated.

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2 CPI, Global Innovation Lab Impact Report 2017

INFORMATION

What is the project’s purpose?

The problem Our own experience from other ICF projects shows that it takes a long time and significant staff resource to develop private sector ideas into robust ICF business cases (two years or longer in some cases), often requiring paying for external consultancy work (for example for the GIB and CP3 programmes). At the same time the overall objective for the UK International Climate Finance (ICF) is to scale up private sector, low carbon and climate-friendly investments in developing countries to help contribute to the 2 degree goal. Since the last business case we have seen that absence of capital is not the main issue and the attention now should be paid to directing capital towards climate projects. Finance is flowing, with an average of $410bil towards climate change mitigation and adaptation in 2015 and 20162. But a lot more is needed to achieve the Paris Agreement goals and Sustainable Development Goals. To fill in the gaps there is a need for innovative solutions that address barriers to investment and mobilise both public and private actors and go to market quickly. In this context, increased and sustained dialogue between governments and private actors is crucial to enable effective action and investments, as governments do not always understand well what motivates private sector players, and vice versa. This dialogue is needed both at global level to share information widely and at individual Government level to develop smart pipelines of effective projects. The investment from both private and public organisations into Lab instruments to date demonstrates that this dialogue works and private investors are interested in instruments endorsed by the Lab. The Solution The Lab brings together actors from public and private sector to share information and help bridge the gap in information. As a global platform it reaches out to a large number of organisations to invite climate mitigation and adaptation proposals, develop projects, pilot them and initiate investment from both public and private sectors. It meets the criteria of an instrument that helps unlock private investment in that:

➢ It is a global forum of experts from both private and public sectors ➢ By bringing experts together it moves quickly from talk to action ➢ Through the Lab donor Governments share knowledge and understanding of what inhibits

the private sector ➢ The Lab produces innovative ideas of financing climate friendly projects through tackling

critical barriers to investment in ideas that address climate change mitigation and adaptation needs

➢ The Lab only promotes ideas that are “catalytic”. The main criteria for successful proposals are that ideas demonstrate that they are (1) actionable (identify a pathway to implementation, (2) innovative, (3) catalytic (can mobilise private climate capital within a sizeable market and (4) are financially sustainable.

➢ The Lab invites proposals with a thematic focus. As a donor to the Lab, the UK can influence that focus to cover areas we need to invest ICF funds into, such as energy efficiency, which is underinvested. As the Lab expands and is looking to cover more innovative proposals and other critical areas of climate change it will now also include a theme on cities, forests, and sustainable energy access and blue carbon for marine ecosystems.

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3 Originally FiRe Awards (Finance for Resilience), funded by Bloomberg Philanthropies, https://www.climatefinancelab.org/the-labs/fire-awards/ 4 The Centre for High Impact Philanthropy, Bold Ideas pdf: https://www.macfound.org/programs/100change/strategy/ 5 The four programme are the Global Lab, Brasil Lab, India Lab and the FiRe Awards 6 The UK does not fund regional Labs.

These criteria are closely aligned with our ICF objectives and the objectives (to inspire, innovate and invest with impact) we set for our projects. Success to date: In 2014 the UK, German, and U.S. governments launched the first Lab program, the Global Lab. Since then, the Lab has been replicated with success in India and Brazil; it has nine funders, and members from around the world. Together the three Labs and the FIRE Awards for Sustainable Investment 3have crowd-sourced 450+ ideas, with 35 endorsed instruments and winners. Following its endorsement by the Governments of G7, India and Brazil in 2017 the Lab was included in the “Top 11 Best Bets” list of the Centre for High Impact Philanthropy’s out of 1,904 submissions to the 100%Change competition4. In four years of operation the Lab has endorsed 35 ideas, and grown to 4 programs5 targeting different regions and investment stages. Following the success of the Brasil and India Labs, the Secretariat has been discussing further expansions with the Steering Group, including a Southern Africa Lab6. These expansions help identify and develop innovative proposals for specific regions easier by experts and proponents who know the needs and opportunities in specific areas. As with the Brasil and India Labs the Secretariat is planning to use the Global Lab model and structure but with different Boards and funders. This can ensure region specific proposals without putting extra strain on Global Lab resources, which are funded by the UK. The 35 Lab ideas across the three Labs launched to date have helped mobilise USD 1.28 billion in investment for sustainable development. Given investment to date from UK and other sources of circa $5 million7, this means the Lab has mobilised around $250 of investment towards Lab endorsed instruments for every $1 spent by donors to date. A third of this investment comes from private sources including institutional investors ($410m). It has also attracted over $500 million in expressions of interest for potential future investment. The main purpose of the Lab is to promote innovative proposals. In the last four years of Lab rounds we have seen a mix of proposals suggesting innovative ways to finance mitigation and adaptation projects. Some of the innovation is regional rather than structural but a few proposals especially on the adaptation side have brought forward ‘first of a kind’ instruments. For example, the Climate Resilience and Adaptation Finance and Technology Transfer Facility (CRAFT), a growth equity fund that invests in companies, which have proven technologies and solutions for climate resilience and have demonstrated market demand and revenue, is the first adaptation fund of its kind. It has also already attracted funding from public and private sources. Some sectors, for example mini-grids and land use, are still behind in terms of innovation and ways to overcome existing barriers to investments. Even though Advisors to the Lab recognise that some instruments will need a lot more work to reach implementation stage, the fact that they are being developed in the Lab is seen as a positive step towards achieving change in these critical sectors. Examples of instruments and finance mobilised include:

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Energy Savings Insurance, endorsed in 2015; provides an insurance product for projected savings from energy efficiency projectsIt has expanded in Latin America and has now been replicated in Asia and Africa. The Water Financing Facility, endorsed in 2016; It mobilises domestic investment into climate compatible water sector projects through the local bond market. Loans4 SMEs, endorsed in 2016 by the India Lab; is a platform that crowdsources finance for renewable energy projects and has enabled 60 loans to deploy 22MW of rooftop solar. Other examples include: Climate Investor One, a tiered fund for fast-tracking renewable energy projects; TCX, a foreign exchange risk hedging facility, that hedges currency risk of climate projects; Sustainable Energy Bonds, a project creating such bonds in India.; Evolution of the Lab: The Lab is a live programme that needs to keep the focus on innovation and private finance leverage but also adapt to the changing needs of markets and critical climate change sectors. Apart from regional replication in Brasil and India the Lab is working towards replication in Southern Africa with a Lab that will cover the region and will be hosted by the Development Bank for Southern Africa. In addition, the next call for proposals will include more themes to cover areas that are increasingly important in tackling climate change and where innovation is harder to achieve. These themes include cities, sustainable agriculture, sustainable energy access and blue carbon in coastal and marine ecosystems.

Investment by the private sector: Lab ideas have helped mobilise over USD 400 million in investment from the private sector. This is an achievement directly aligned with the ICF strategy and proves that private investors will invest in donor backed and Lab endorsed ideas. Private investors also co-invest in projects on the ground, which is more difficult to measure. Nearly 100% of measured private finance has come from institutional investors and commercial banks. A small amount has also come from private equity investors.

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Chart 1: Public and Private Investors in Lab instruments. What the Lab has done so far:

The Lab Secretariat has run four full rounds of the Lab; the fourth round was completed in September 2018. They have organised and chaired three major meetings per round: two Advisors’ meetings and one Principals meeting. They have received and analysed between 80 and 120 proposals per round and have shortlisted the 30 best ideas for Advisors to vote on for each round. Following selection of 3-4 instruments they organise three workshops for each proposal and assign CPI analysts to each to help them develop into commercially viable instruments. All Lab submissions must demonstrate innovation in addressing key risks and barriers to investment. Two-thirds of Lab submissions identify inadequate access to capital and high risk as the main barriers to investment. Non-financial barriers such as lack of technical capacity or lack of adequate policy frameworks make up another 25% of barriers to investment, these are identified through Lab discussions which can then feed into action public sector donors should take to address the issue. A third of Lab ideas focus on Asia, another third on Latin America, and a quarter on Africa. The remaining 15% focus on all developing country regions (Global). The Lab process identifies opportunities to use public finance most effectively to mobilise private investment for sustainable development. All ideas must demonstrate a pathway to phasing out public finance over time. Although phasing out public support over time is important, there are more difficult but yet critical climate changes sectors where this can be much slower than renewable energy generation; for example land use, land degradation and rehabilitation. The proposed thematic focus of the Lab for the next round and future round also includes forests and land use. The length of time needed to phase out public support for land related proposals should not be a barrier to the Lab engaging with innovative land use ideas. The Secretariat proposes hiring specialists to work on related proposals going forward.

Local, regional, or

national

Government

1%

Government

bilateral

agency…

National or

International

Development

Finance Institution

48%

Institutional

Investor …

Commercial

Bank or other

Corporate

7%

Public and Private Investors in Lab

Instruments

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8 The GCF funding consists of a $1.7m grant and a $20m loan

Secondary benefits The Lab has grown into a high-profile innovation forum attended by Government representatives as well as CEOs and leaders from the private sector. As a founder and key member of the Lab the UK is seen as pivotal in the Lab’s progression and success so far. The UK has a key role in the Steering Group and is able to influence the strategic direction of the Lab to match the UK ICF strategy and aims. The UK Government logo features as a key donor to the Lab in all communications and publicity prior to Lab events or conferences and UK investment to the Lab is well regarded by other donors and members. This is an excellent way to show what the UK is doing not just to combat climate change but also on innovation on climate finance. Moreover, the Secretariat has a detailed communications plan that showcases the Lab in various events throughout the year and together with this UK’s involvement and contribution. Events in the last year have included:

- Global Renewable Energy Invest- Delhi - BNEF Energy Summit – New York - SE4All Forum, Lisbon - Clean Energy Ministerial- Copenhagen - Innovate for Climate- Frankfurt - Global Climate Action Summit- San Francisco

The Secretariat also organises COP side events for the Lab where the work of the Lab is presented. The last Lab side event was hosted in the COP 23 UK pavilion in Bonn. CPI also tweet on the achievements of the Lab. CPI’s tweets can be re-tweeted by BEIS to communicate better and more effectively the success of this UK funded forum of innovation. Lab online communications and activities include:

o Over 23,000 website visits during the last 12-month cycle o At least 9 mentions of the Lab in major media outlets such as the Economist, Wall Street

Journal, Reuters and others during the last 12-month cycle o Over 8,000 users visited the Call for Ideas during the last Call for Ideas from 130 countries o The Lab has over 1900 Twitter followers

Commercial banks, institutional investors and other private companies now participate in funding Lab instruments. Funding Lab instruments and participating in their development is a clear opportunity for more London City based investors. The Secretariat provides yearly data that help us monitor the participation of UK private institutions in opportunities for investment presented by Lab instruments. In addition, we have the opportunity to include requirements for such data that can help us identify opportunities for UK businesses in our agreement with CPI. BEIS funded Lab instruments The Lab helps create viable private sector-facing initiatives through which the UK can deploy ICF investment. The UK is now funding the Energy Savings Insurance instrument from the Lab via the Green Climate Fund. This instrument started with pilots in Mexico and Colombia and expanded in other Latin American countries with GCF investment. GCF investment is $21.7 m8. Commercial banks and companies co-invest in specific projects and the French Development Agency is replicating the instrument in Africa and Asia.

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9 These results are not attributed to the UK given the UK funds the Secretariat of the Lab and for the purposes of this business case is not a direct investor in projects. Attribution and additionality will be taken into account in the business cases and KPIs of respective projects.

Subject to usual ICF governance processes, we can therefore now say with a level of confidence that the UK is likely to fund proposals from the Global and Brasil Lab and that the Lab in general has started informing our pipeline of projects. There is a case for considering further the full range of Lab outputs in relation to our strategy and our ability to support them financially, and to learn from them. We can do this by continuing to influence the development of calls for ideas, workstreams and strategy of the Lab. In addition, we can encourage lessons learned workshops tailored on the barriers to the markets through the experience on existing Lab instruments. Why the Lab is worth UK investment: Within four cycles of operation the Lab has achieved an excellent reputation that has led to over $1billion of finance leveraged for its instruments9. Given the time it usually takes for projects to move to implementation and achieve results for people in developing countries, this has been a great demonstration of how the Lab helps to move quickly from talk to action. It has become a high-profile initiative and members including Advisors and Principals have praised the Lab for the work it has done so far for international climate finance. The Lab has achieved global recognition and has secured senior representatives from the African Development Bank, the Moroccan Solar Agency and the Inter-American Development Bank as Principals on the Lab and CEOs from banking and insurance organisations. This representation around the table has meant that all global meetings so far have been excellent opportunities for donor and beneficiary Governments to gather feedback on private sector investment barriers and see in practice how instruments can change to take those into account. The fora have thus been opportunities to share information openly and honestly around with the aim of improving and accelerating the proposals discussed. The meetings have provided opportunities for donor Governments to push for the development objectives they are trying to cover such as access to energy, poverty reduction and gender equality. The Lab has been described as ‘the Dragon’s Den of climate finance’, designed to deliver the next generation of innovative climate finance instruments that achieve development objectives. In this context, the Lab continues to provide a unique opportunity for project developers to gain access to expertise on private sector projects and commercial structures. This expertise is essential for ICF to develop a programme of business cases that meet our objectives. Given the ICF budget and the amount of private sector investment we need to leverage to meet our targets we need to see even more innovative financing instruments arising from this process to inform our portfolio, as well as continued innovation to respond to the harder challenges relating to climate mitigation and response. The Lab is an efficient complement to our in-house efforts to reach out and find the best international ideas. As well as filling this gap, the Lab also promotes the UK’s role as an international donor and key climate change player. Continuing and enhancing the Lab would reinforce the UK ICF portfolio because:

• It expands the range of ideas available for the ICF team to consider for funding;

• It provides a forum to find innovative ideas faster;

• It improves our understanding of the barriers to investment, which can help us improve the design of our overall portfolio;

• It creates a network of stakeholders that we could tap into when we need external expertise and views on specific ideas and projects,

• As an anchor donor to the Lab, BEIS is able to influence the Lab’s strategy and direction to complement the objectives of the ICF. Working together with multiple donors also means we do not duplicate efforts and we share knowledge more effectively;

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• It provides a visible and internationally recognised avenue for the UK to maintain its leading role in a global forum to promote and take credit for the work we do globally on climate change.

It should also be noted that the 2017 Annual Review recommended that wider sharing of lessons learned from previous cycle instruments is required, including to improve the Lab process and the selection process. The Secretariat has shared an impact report with case studies from past Lab rounds. We also have a plan to address this with a lessons learnt dedicated workshop for Lab proponents, preferably led by the UK. Financing need The Lab is primarily financed by the UK, Germany and the US (The Netherlands, Bloomberg Philanthropy and the Rockefeller Foundation have also contributed). Germany will continue to fund the Lab for another three rounds (as suggested we do here) but other donor funding is expected to run out. We wish to allocate up to £1 million (or the equivalent of $350,000 in pound sterling at the point of signing the grant agreement) in support of the Secretariat’s work for round 5, 6 and 7. We will commit the amount allocated in pound sterling in line with HMG’s policy of not taking exchange rate risk. Without UK administrative support to the Lab, its future could be at risk. Should the UK not provide funding the number of proposals analysed per cycle will decrease and the case for further support into implementation for existing instruments will be undermined. One of the Secretariat’s main challenges is to secure funding for each round. In past rounds, the Lab has manged funding uncertainty by reducing the number of proposals developed each round from 4-5 to 3; and CPI has shown that it is able to manage short term shortfalls in funding. But UK funding is required for the Lab to function efficiently in the medium term. With UK support CPI will also be able to run the necessary Monitoring and Evaluation work needed to follow the progress of the Lab instruments against adaptation and mitigation targets as well as private financing targets.

How does the project address the need, what are the expected results, and how will it deliver VFM?

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Lab Funding and value for money Evidence of the Lab’s success to date mainly rests on the private finance it has catalysed. Based on information provided by CPI $410million out of the $1.28 billion catalysed has come from private funding, which includes commercial banks and institutional investors. The total value of contributions to the Lab from donor countries and CPI in round one is estimated at $4m. The UK’s support constitutes circa 17% of this. Taking into account all donor funding to date, the Lab has delivered $250 per $1 of donor funds (public and private) invested in the programme. The Lab has scored an ‘A’ in all its Annual Reviews so far, which also consider the below economy, efficiency and effectiveness considerations. Economy The UK contribution remains the same at $350,000 per round and it is equivalent to Germany’s contribution to date and similar to other donors (US and the Netherlands). Our contributions cover the Lab Secretariat work and the analysis of the financing instruments, which CPI estimates at $250,000 per instrument. CPI's overhead costs (include administrative/management fees related to office rent, utilities and maintenance, information and technology support, and personnel management). These costs are reasonable and as expected based on the original agreement and subsequent Annual Review findings. The costs also have remained broadly the same as previous rounds, which we consider this very good value for money for the knowledge we receive through the Lab network as well as the pipeline of instruments now available to us. Efficiency The most recent Annual Review showed that the Lab Secretariat provides very effective organisation of two Advisor and one Principals’ meeting during the year. It has so far delivered shortlists of ideas, analysis, and workgroups discussions and materials on time. The analysis and voting process after the call for ideas ensures that only innovative and catalytic instruments progress through the round. In addition, the Lab has a comprehensive communications plan that showcases the work of the Lab and the UK contribution to financial innovation. As previously highlighted, there are more opportunities to share lessons learned. Effectiveness We are seeing increasing evidence of the effectiveness of the Lab in incentivising others to act on climate change. A number of organisations have invested in Lab incubated instruments. In only four years of operations the Lab has catalysed over $1billion of funds for incubated instruments, one third of which comes from the private sector. This exceeds expectations on this front. Given the strength of feedback from the scheme to date, and the encouraging pipeline of future projects, it is reasonable to assume that delivery of private investment can continue at a similar rate. Under this assumption, a further investment of around £824,000 would catalyse c£65m of private investment based on previous self-reported results of catalysed private investment (assuming private investment continued to make up around one third of catalysed finance and other donors continue to contribute similar amounts). It should be noted that these results would not be attributed to the UK given it is not a direct investor in actual projects. Accepting the risky nature of projects and the likelihood of success, this represents very good potential for increased private investment even in a low investment scenario of the private sector contributing funds at half the rate seen in rounds 1-3. BEIS and DFID officials have also benefitted from joining working groups and learning from the expertise and experience of CPI analysts and the other lab members (from MDBs, DFIs and the private sector). This learning is valuable for the ongoing efforts of ICF team to learn and build climate finance expertise, in order to more effectively develop and manage ICF projects; learning is a key objective of the ICF. The recent 2017 Annual review also recommended that sharing of learning should be improved.

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The Lab has developed a methodology for KPI 15 and has found evidence of Transformational Change. It demonstrates innovation and leverage by selected projects that break barriers faced by the private sector and encourage private and public sector investments into mitigation and adaptation projects. It has also been replicated in other countries, and shares it’s work and lessons across countries and sectors. Equity A major aim of the Lab is to develop climate change adaptation and mitigation solutions. These are likely to have positive and employment and energy access benefits, as well as help communities develop adaptation solutions to climate change impacts. We are working with the development partner to establish these impacts through lessons learned gathering.

Ensuring value for money through monitoring and evaluation approach We will continue to ensure value for money by monitoring progress against targets and milestones as per previous rounds. CPI provide progress reports that include progress of the current cycle as well as of the previous round instruments. These reports will be included as a continuing requirement for future rounds. The next tranche of funding will allow the work of the Lab and the successes described above to continue. This business case proposes that our funding remains at the same level as in previous rounds, the equivalent of $350k per year in today’s exchange rate (we will commit the equivalent of $350k in pound sterling). The CPI team will also work to maximise the impact of the first and second rounds by following up on previously endorsed initiatives, and tracking and sharing lessons learnt. The ICF team will use this learning to influence other ICF programme design and implementation. The overall cost of running a Lab round has gone up by $75,000 to $1,650,000 per round. However, with the input from other donors our contribution has remained the same at $175,000 per round. The increase includes $25,000 to cover additional communications time, and some capacity from our financial team for reporting to donors. The remaining $50,000 goes towards for analytical support and lesson-sharing. More specifically our funding will cover: Funding for the Lab Secretariat to carry out the following activities:

➢ Support for the fifth, sixth and seventh rounds of the Lab. This includes convening and proposal analysis with the objective to crowdsource, develop, stress-test and support the piloting of further innovative instruments that unlock private finance at scale in developing countries;

➢ Surveys and members discussions on the strategic direction of the Lab; ➢ An international call for ideas issued by the Lab secretariat; ➢ Analysis of the proposals by Climate Policy Initiative (CPI), the Lab Secretariat, and shortlisting of the

strongest proposals; ➢ Convening of Advisors and Principals to discuss ideas and narrow down the list of promising

instruments; ➢ Further detailed analysis and research into the chosen instruments; ➢ Final convening of members to endorse proposals.

In addition to the above activities that have been the main focus of the Secretariat so far, our funding will also cover continued support of previously endorsed projects, as well as monitoring and evaluation:

➢ Continued support for the instruments from the previous Lab rounds, and those resulting from the future rounds, to ensure they achieve their potential; This role includes work for approximately one year after the conclusion of each Lab cycle, to shepherd new partnerships to fully implement planned pilots and to troubleshoot if necessary. As part of continuing analytical services, the Secretariat will also share lessons with Lab members and the broader community. There is strong

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10 CMCI business case: https://beisgov.sharepoint.com/:w:/r/sites/beis/201/_layouts/15/Doc.aspx?sourcedoc=%7B4689D0CA-

8323-5058-B880-E8EF3637DBAF%7D&file=Approved%20Business%20Case%20for%20Global%20Innovation%20Lab%20funding%20and%20procurement%20of%20analytical%20and%20administrative%20supp.docx&action=default&mobileredirect=true

support for the Lab to continue tracking and monitoring endorsed instruments and our contribution to the funding will ensure instruments continue to be supported to successful implementation.

➢ Instrument development and pilot support for four Lab instruments to catalyse investment for systemic challenges related to climate adaptation, land use, energy efficiency and renewable energy in the developing world.

➢ Extending analytical services to provide tracking and sharing of lessons learned with the implementation of pilots and work resulting from previous Lab rounds.

Convening: Lab members are senior representatives of Governments and private organisations, usually at Ministerial and CEO levels and their Advisors. The Lab Secretariat issues a call for ideas and subsequently short lists them based on the Lab criteria and presents the options to Lab members. The Secretariat provides logistical support by organising the meetings where proposals are presented and scrutinised my members. The Secretariat organises and administers four meetings per cycle. This involves logistical support, such as securing venues and facilitating attendance as well as preparation for the meetings, communications, including press releases and post meeting follow-ups.

Analysis A team of Lab analysts work with proponents to better understand and improve proposals and help them through the process. They analyse the proposals and provide impartial advice. This also includes presenting in the meetings to ensure smooth execution at the event. This is crucial to donors as it provides an impartial view on the effectiveness of the proposals.

By providing funding to the Lab we are continuing our leading role in a high profile global initiative, which meets our objective of incentivising private investment. The amount requested by CPI remains the same at $350,000 and has not changed in the past four years, therefore the Lab continues to be value for money given the progress it has achieved. The original business case finance case10 covers CPI’s costs for researchers, analysts and meetings and subsequent Annual Reviews have commented on effectiveness and efficiency based on this budget. Although some new donors have been added to the list others have dropped out, depending on the round, or have reduced their funding (US funding has now run out and Bloomberg Philanthropies funding has been inconsistent in the past). In addition, the Lab has catalysed $250 of investment (public and private) for every $1 of donor funding for the Secretariat. This is great progress and given the cost to the UK remain the same we consider that it still represents value for money. Finance case: Financial considerations:

• The spending power for the Lab is the International Development Act 2002. • Budget. All funding comes from the BEIS International Climate Finance budget, which is part of the UK’s Official Development Assistance (ODA). • Disbursement. Funds are committed as a grant and paid to CPI following the receipt of invoices and progress reports. • Currency. Funds are provided in Pounds Sterling, for a set amount. The currency risk of converting Pounds Sterling to US Dollars (or project currency) is managed by the delivery partner. BEIS is not liable for any additional sums, including those due to currency fluctuations.

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• Monitoring expenditure. The Lab Secretariat, delivered by CPI, provides progress reports that cover the milestones and work done prior to payment. • Mechanism. Funds are disbursed to the Lab Secretariat as a grant for work delivered; CPI uses the fund to cover for expenditure of convening Lab meetings and providing Lab instrument analysis. • Financial governance and control of funds. BEIS is part of the Steering Group of the Lab along with Germany, the US, the Netherlands, Australia, Bloomberg Philanthropies and the Rockefeller Foundation. • State Aid. On consultation from the BEIS State Aid team, the programme does not come under the purview of State Aid.

Spending to date: The UK has contributed $350,000 per Lab round so far for four rounds from the ICF RDEL budget. We are committing the funding for the next three rounds in pound sterling and spending will be equal between the three rounds: UK contribution per round

Round Funding in $ Funding in £ circa

Round 5 2018/19 350,000 £272,000

Round 6 2019/20 350,000 £272,000

Round 7 2020/21 350,000 £272,000

The extension will commit spending from this round of the Lab, round 5, with the first invoice for round 5 for half of the round’s value ($175,000) due by February 2019. The funding covers the activities listed in detail above, convening of members and analysis of the instruments by analysts and senior analysts. This budget does not include a budget for forwarding on to specific instruments. We are proposing to have one grant letter agreement for all three rounds. Within that agreement we will specify the exact pound sterling amount for each round and that payments will be made in two instalments per year. Procurement and Contract management The initial US, UK and German funding ran out in April 2015 at the end of the first cycle. CPI were initially contracted by the UK and Germany following a competitive tender. BEIS has encouraged CPI to find other funders for the Lab, and to approach both the public and private sector, and they have been successful – as the Netherlands and Bloomberg Philanthropy have provided funding. In some cases, CPI have had to cover short term shortfalls in funding. CPI has been praised for its performance and commitment to administering the Lab and providing analysis. We believe the costs for the Secretariat are reasonable as the proposal submitted for future rounds matches our expectations and is in line with financing requests from previous rounds. The tender was a joint process for the UK and the German Government and both UK and German officials helped to review the bids. After consideration by BEIS, the German government and the Netherlands Government, we have concluded that it is not appropriate to conduct a second competitive tender exercise for the Secretariat function for this subsequent phase of the Global Innovation Lab. This is because CPI, in performing the current Secretariat role, has become integral to the effective functioning of the Lab. In addition, the Lab has moved forward from the initial tender and it is now funded by a number of different donors including private organisations. It is therefore not the UK and Germany’s proposal to procure and even in the event where this was decided we would need to halt the Lab process to re-procure; this is not possible given private organisations and other non-

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11 Originally FiRe Awards (Finance for Resilience), funded by Bloomberg Philanthropies,

https://www.climatefinancelab.org/the-labs/fire-awards/

European Governments (for the Brazil and India Labs) are involved in funding it. The Secretariat’s role has evolved since the Lab’s inception in 2014, and CPI’s expertise, contacts and financial resources are now considered necessary to the functioning of the Lab. CPI has also independently sought new members to join the Lab. The Lab has developed into an established initiative, funded by multiple governments and private sector members.Going forward we propose the repetition of the last grant letter with a duration of three years/ rounds; again separate from German funding. Separate donor grant arrangements also provide the opportunity to manage our own timescales and include UK terms in the agreements. Delivery Partner Climate Policy Initiative is an established partner and it has delivered the first four rounds of the Lab. It is a trusted organisation. CPI has policies on gender equality, green commitments, harassment and discrimination, safeguarding and fraud amongst other things. We have been working with CPI on a number of programmes and we have experience of the partner’s performance. Options: Continue as is – recommended Under this option the UK will continue to support the Lab Secretariat as recommended in this business case and maintain the level of funding for three more rounds, to provide medium term funding stability. This way we will continue funding a successful programme and maintain the option to stop funding the Lab in the future and invite other donors to contribute too. Provide further funding- recommended for further consideration but under separate business case on Challenge Funds We can also choose to provide more funding for the Lab, for example in the form of an award for Lab proposals. This option has been discussed in the past with the Lab Secretariat and with other donors. So far the private sector, Bloomberg Philanthropies, have funded the Fire Awards11 as part of the Lab process but it has been more difficult to agree parameters for such an award between public sector donors. For example, for the UK maintaining some control over where the award goes to- e.g. excluding DFIs- has been an issue for consideration. Further funding through an award will also require separate State Aid considerations. We could consider providing funding for a Lab award in a separate Business Case on Challenge Funds that will look specifically into ways of administering awards. Stop funding the Lab- not recommended The UK has been a founding member of the Lab and has consistently been one if its key donors to date. We encourage the Lab Secretariat to fund raise and request support from other donors. We could therefore chose to stop funding the Lab to allow for this to happen, however, our funding is still required and under this option we would lose the benefits described above, including communications on the UK’s work on climate finance innovation, that come with the Lab. Risks: Possible risks still include uncertainty around funding. Should no other donors emerge or funding be insufficient, the scope of support for future rounds will likely need to be reduced, and future rounds might not be launched. The proposed renewed funding contribution from the UK will help to ensure that the Lab Cycle reaches its full potential – supporting the pilot implementation plans, helping to ensure the instruments lead to tangible investments on the ground. It also helps to ensure the future of The Lab, and its continued impact in scaling up climate investments in developing countries. In addition, visible support could encourage other donors to make up for the outstanding shortfall of funding. Funding the Lab is also an excellent way to improve visibility of the UK’s role and actions on climate change. Should contributions

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exceed the project budget for subsequent cycles, there would be opportunities to consider expanding the Lab and its work, further accelerating the potential impact of The Lab. The previous business case noted that there is also a risk that on deeper investigation, the Lab ideas are not sufficiently robust or cannot be developed into workable proposals. Over the last four round the Lab has shown that a number of proposals can be turned into commercially viable instruments. CPI’s knowledge of financial instruments and analytical expertise helps ensure that ideas selected by the Lab can be developed into robust proposals. We have also designed the Lab membership to include a broad range of experts who provide ongoing feedback on improvements as concepts develop. Progress to date, including a healthy financial mobilisation figure demonstrates that this risk did not materialise in previous Lab rounds, and it is therefore considered a relatively low risk for future rounds. Exit Strategy More donors are joining the Lab; Bloomberg Philanthropies has re-joined the list of donors and we have recently welcomed DFAD (Australia) in the Global Lab Steering Group of donors. This is very positive news for the Lab but it does not yet address the fundraising challenge as donor funding is not always guaranteed for a period of time and some donors, for example the US, are not expected to continue to fund the Lab going forward. On the other hand, the UK has been a key and stable funding source from the start. We recognise there is still a genuine need for our funding for the next three rounds and propose to leave the question of exit from the donor Steering Group open for the following reasons:

- There might still be need for UK funding in three years and the UK could still see benefits to funding the Lab as described above especially if the success of the Lab continues.

- There can also be limitations to grant type of funding; following approval of the business case we will draft a grant letter covering three rounds. Extending the grant letter will need to be discussed and agreed with procurement at the end of this new three-year period.

- In addition, as mentioned above we welcome other donors coming in and potentially taking over and continuing our role. We suggest that this is revisited towards the end of round 6 to reassess the need for UK funding.

- As our strategy changes we could decide to focus on certain themes of the Lab. This year some donors are aligning their funding to specific themes (for example, Bloomberg Philanthropies are funding the cities workstream). Our strategy could change in the next three years to focus more on specific technologies or regions. We can revisit the way we engage with the Lab at that point to fund a workstream specific to what the UK sees as a priority for tackling climate change.

Consideration of gender impact: Gender inequality was not given consideration in the original business case. In line with the gender equality provisions in the International Development Act 2002, we have considered whether and how the project is likely to impact on gender inequality in developing countries. At a high-level, there is evidence that climate change will have a disproportionately large impact on women and girls. In addition, improved energy access and security will impact on social development, including gender. Thus the clean energy projects that will be proposed under the Lab will contribute to improved outcomes for women and girls. More specifically, in terms of the Global Innovation Lab, we can insist that consideration of gender impact should be a part of the Lab’s assessment of proposals in the next phase. In addition, we will explore how gender impact can be considered in the monitoring and evaluation of the Lab, including monitoring the gender of the Lab members and the proponents. The Lab discussions so far have been providing feedback to proponents on their objectives towards gender equality and have asked them to make it part of their analysis and offerings.

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Describe any key changes to the original business case

The previous Lab business case included budget for research for wider ICF programmes, which was separate to the Lab funding. This business case is solely a Lab funding extension and does not include research budget for ICF. Further research for ICF programmes is now being covered by the new KEEP programme.

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How the funds will be paid out:

- CPI will liaise with the BEIS G7 Lab programme manager. - Going forward the BMUB (German Environment Ministry) will manage their own funding.. This means

that UK and German funding are no longer tied together. - The contract manager will check the BEIS invoice against the requirements set in the grant letter before

authorising a payment to CPI.

Monitoring and Evaluation

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Given the relatively modest scale of resources available to the Lab, a full evaluation of the Lab is not considered to be proportionate. However, the Secretariat of The Lab (delivery partner) do annual engagement survey of stakeholders as part of their work, the results of which will be reported back to the responsible person at BEIS to inform the annual review. The Secretariat also produces an impact report that details progress from all Lab rounds and provides updates on finance mobilised and challenges for the future. As mentioned above, with UK funds CPI will also run monitoring and evaluation on the progress of Lab instruments. This information is provided in progress reports that are provided prior to making payments to CPI and inform our annual review and provide detailed information on the impact of the projects endorsed by the Lab.

While a formal evaluation will not be completed, an assessment against KPI15 will continue using the agreed methodology.

Meeting UK Legal Requirements The Equality Act 2010 BEIS is required by the Equality Act 2010 to give due regard to the need to eliminate unlawful discrimination, advance equality of opportunity and foster good relations between those who share a characteristic and those who do not in relation to the following:

• age

• disability

• gender reassignment

• pregnancy and maternity

• race

• religion or belief

• sex

• sexual orientation. Many of the above are not directly relevant to the Global Innovation Lab. BEIS will follow Climate Policy Initiative (CPI) standard procedures to comply with these requirements where applicable and the Equality Act 2010 is referenced in all contracts. CPI’s practice in relation to this states that: “We are an Equal Opportunity Employer and value diversity in all forms. The Company does not tolerate any type of discrimination, of any form, against any individual. This policy affirms the Company’s commitment to the principles of fair employment and the elimination of all vestiges of discriminatory practices by the Company that might exist. We encourage all employees to take advantage of all opportunities for advancement.” International Development Act 2002 The International Development Act (2002) enables the SoS to provide any person or body with development assistance if he is satisfied that the provision of the assistance is likely to contribute to a reduction in poverty. “Development assistance” means assistance provided for the purpose of (a) furthering sustainable development in one or more countries outside the United Kingdom, or (b) improving the welfare of the population of one or more such countries. “Assistance” includes financial assistance. “Sustainable development” includes “any development that is, in the opinion of the Secretary of State, prudent having regard to the likelihood of its generating lasting benefits for the population of the country or countries in relation to which it is provided”. This project aims to contribute to furthering the sustainable development and poverty reduction of developing countries. The Lab aims to accelerate proposals for innovative climate funding and scale up capital flows in low carbon, climate resilient activities in these countries. The Lab also supports governments in developing a stronger and common understanding and appreciation as to why and how to effectively and efficiently leverage private capital by helping to address information barriers. This helps governments put in place appropriate enabling environments and use public and private climate finance to help meet adaptation and mitigation targets. The projects that are endorsed through the Lab aim to improve access to power, water, financing for renewable energy projects (mitigation) and small holders (adaptation), and other key services that are vital to

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eliminating poverty and promoting growth. Projects of this nature are also likely to give rise to lasting benefits for the population of the countries where they take place. We consider that both the Lab and future ICF projects are investments likely to contribute to a reduction in poverty because climate change is projected to have serious impacts on the poorest people around the world, which could undermine decades of progress in development assistance and poverty reduction. World Bank research has shown that climate change is an obstacle to ending extreme poverty, and that as the impacts of climate change worsen, it will become harder to eliminate poverty. The International Development Act 2002 also requires consideration to be given to the desirability of providing development assistance that is likely to contribute to reducing poverty in a way which is likely to contribute to reducing inequality between persons of different gender. The Lab asks proposals to take gender equality considerations and empowering women into account and invites proposals that meet the criterion of potential to achieve socioeconomic, development, and environmental impacts, enabling consideration to be given to whether proposals are likely to contribute to a reducing gender inequality.

State Aid Considerations There are two key arguments to be made that not all of the four state aid ‘tests’ are met when applying to the Lab Programme and therefore that there is no state aid present. The four cumulative ‘tests’ that define whether aid is present in a measure are:

I. It is granted through the State or through State resources II. It provides a selective advantage to certain undertakings or production

III. It distorts or threatens to distort markets/competition IV. It affects or has the potential to affect trade between Member States

Concerning the flow of funds to CPI: CPI as a non-profit corporation is unlikely to constitute an “undertaking” offering goods and services on the market. Consequently, the second limb of the state aid test is unlikely to be met. The role of CPI in facilitating the LAB is to develop expertise in innovative climate financing proposals that incentivise private sector investment in climate related projects. The Lab aims to share knowledge between public and private organisations on climate financing on a non-exclusive basis.

CPI and the Lab are based in San Francisco and as a globally focused organisation are not offering instruments which would be likely to affect trade between EU Member States. Whilst CPI has an office in the UK, the work is delivered by the San Francisco CPI office, which also bills us for the work. Consequently, the fourth limb of the state aid test is unlikely to be met. Therefore, we consider that the risk the Commission would find that there is state aid present in this funding proposal is low. A challenge could stem either from (a) a complaint to the Commission (likely minimal risk given the open competitive process used in the first instance) or (b) the Commission investigating of their own accord (likely minimal risk as the project is already up and running, the provider was originally procured through a competitive tender and the relatively small amount of funding being provided.)

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