Innovative financial mechanisms, though widely discussed in the international community, are still relatively uncommon and little information is tracked at the project level, which is where innovation in financial structuring actually occurs. However, when deployed in the markets with robust financial policy frameworks in place, innovative financial mechanism have demonstrated the potential to successfully blend public and private capital as means to mitigate high investment risks, thereby unlocking greater private sector investment in climate projects. To replicate this initial success and deploy them at scale, GGGI believes that policymakers, public financial institutions, and other stakeholders must first appreciate the function, characteristic, and use of such mechanisms, specifically in the context of the project development lifecycle.
This brief presents the case of innovative financial mechanisms by mapping each traditional financial instrument to five broad categories of risk at every stage of project financing. The focus on risk reduction by encouraging innovative structuring will provide the basis for future work to create a repository of the most effective innovative financial mechanisms used in climate projects around the world, including GGGI-supported projects. The brief also provides three case studies to demonstrate the function, characteristics and use of innovative mechanisms in practice and underscore their potential for catalytic and scalable impacts.