Governance structures and financial mechanism

Legal assistance paper

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Date produced: 01/05/2013

1. What governance and oversight structures exist as part of, or complementary to, the financial mechanism under the UNFCCC? Is there an overarching governance structure, if not, is it fragmented and how? Who makes which kinds of decisions and what oversight is there? What are the gaps or limitations of this set up? How are governance structures set up for financing under other international agreements?

2. How does the governance structure related to financing under the UNFCCC, to the extent that it exists, compare to corresponding structures under other international agreements?

Summary

1. There is no overarching governance structure that is part of or complementary to the Financial Mechanism (FM). While a single institution, the Global Environment Facility (GEF) works as a bridging facility between the FMs of various Multilateral Environmental Agreements, in the case of the UNFCCC, the implementation of the FM is shared between the GEF and the recently established Green Climate Fund (GCF). To overcome possible lacks of coherence and overlapping between the two entities, the Conference of the Parties (COP) has set up a Standing Committee on Finance (SCF) with the core task of improving coherence, effectiveness and efficiency of the GEF and GCF.

2. In the current setting, three core limitations are found:

(i) there is no effective procedure to secure full compliance of the GEF and the GCF with COP guidance at project/programme level;

(ii) substantive policy and decision-making takes place within the GEF Council and the GCF Board. Hence, the extent to which efficiency and transparency are promoted depends on the decision-making and participation rules of those bodies; and

(iii) although being conferred important oversight functions, the SCF has only an advisory role to the COP, which reduces the impact of its outcomes.

Advice

Governance structure of the UNFCCC Financial Mechanism

1. The governance structure of the UNFCCC Financial Mechanism (FM) is currently divided between:

(i) a general oversight and programming role of the COP (UNFCCC Article 11(1)), seconded by the advisory role of the Standing Committee on Finance;

(ii) the intermediary activity of the accredited Operating Entities (OEs) of the FM; and

(iii) the executing role of Implementing Agencies (IAs).

2. The current OEs of the FM are two: the Global Environment Facility (GEF) and the not yet operational Green Climate Fund (GCF). Importantly, it must be noted that Annex II industrialized Parties can resort to other bilateral and multilateral institutions outside the FM to implement the financing obligations under the UNFCCC (Article 11(5)). This provision eventually increased the fragmentation of climate finance delivery, through the engagement of multilateral development banks and bilateral aid agencies. While the GCF is yet to be operationalized, ten IAs are currently implementing GEF approved projects and programmes in developing countries.

3. Article 11(1) of the UNFCCC establishes that the FM shall function under the guidance and be accountable to the COP, with the latter also deciding on its policies, programme priorities and eligibilty criteria for funding. Broad policy and guidance direction to the GEF and the GCF is given by the COP through a set of recommendations that the OEs are expected to follow according to bilateral Memoranda of Understanding (MoUs) (for the COP/GEF MoU see Decision 12/CP.2). Accountability is generally pursued through periodical reviews and annual reports to the COP by the OEs.

4. Aside from the broad policies provided by the COP, substantive decision-making and oversight on financing under the FM is taken within the various OEs competent bodies. The GEF Council (and GEF CEO) and the GCF Board are responsible inter alia for: (i) taking decisions on single projects and programmes; (ii) adopting operational modalities for access to funds, including direct access; (iii) social and environmental safeguards; and iv) internal independent review mechanisms. It is these four regulatory aspects of the working of each OE which are crucial for the effective functioning of the FM, since they detail the process and the requirements of disbursement, implementation and monitoring. In addition to the internal rules of the OEs, also IAs apply their own social and environmental safeguards and standards, once nominated as agencies for specific projects under the FM.

5. A recent development in the UNFCCC is the establishment of the Standing Committee on Finance. The SCF comprises ten members from Annex I Parties and ten members from non-Annex I Parties with guaranteed regional representation. The SCF’s core aim is to improve coherence, effectiveness and efficiency of the OEs and to provide means of coordination with other entities and funds acting outside the FM. A list of non-exhaustive activities that the SCF can undertake comprise, inter alia: (i) recommending on how to improve the proper functioning of the OEs; (ii) providing expert input through independent reviews during the periodical reviews of the FM; and (iii) preparing of biennial assessment and overview of climate finance flows also external to the UNFCCC FM. Despite its soft decision-making power, the SCF has a clear mandate to work in the direction of promoting effectiveness and transparency of the FM functioning.

6. A final process that can be deemed complementary to the one of the FM, is the creation of a National Appropriate Mitigation Actions (NAMAs) registry. Apart from identifying several voluntary mitigation policies proposed by developing countries, the NAMA registry also contains individual proposed programmes that require international financing. The registry can be viewed as an instrument of transparency to match specific financing needs of non-Annex I Parties with the provision of climate finance resources within or without the UNFCCC FM.

Governance structures under other Multilateral Environmental Agreements

7. Several Multilateral Environmental Agreements (MEAs) also envision their own financial mechanisms and some of them have the GEF as their operational entity. The GEF thus works as a bridging environmental finance intermediary among different MEAs and its internal policies are somehow tailored to respond to the needs of all the MEA FMs it implements. Aside from the policy guidance given by the various COPs of the MEAs, and participation in the GEF Council, the GEF Assembly meetings also provide a means for recipient countries to contribute to the general policy guidance of the GEF.

8. A notable case departing from the ‘GEF model approach’ is the Multilateral Fund under the Montreal Protocol on Substances that Deplete the Ozone Layer. The Multilateral Fund works under the guidance of the Meeting of the Parties to the Montreal Protocol (MOP), but its operationalization is bestowed on an Executive Committee directly accountable to the MOP. Similar to the GEF, the Multilateral Fund also relies on the collaboration of several IAs. This solution has thus been replicated in the case of the UNFCCC GCF, because of its direct establishment and oversight by the UNFCCC COP. Hence, it can be concluded that the governance structures under other MEAs do not show any significant difference or innovations in comparison with the UNFCCC FM.

Conclusion

9. Despite the various effeorts taken within the GEF to streamline procedures, ensure participation, transparency and direct access, there are several limitations that hamper a significant oversight by the COP or another overarching entity on the GEF’s operations. The same findings can work as caveats for the current operationalization of the GCF.

(i) There is no effective procedure to secure full compliance of the GEF and the GCF with COP guidance at project/programme level. The MoU between the UNFCCC and the GEF provides that, in the case the COP considers a specific project decision not to comply with the COP guidance, the COP may only ask the GEF Council for ‘further clarification’ and ‘reconsideration of that decision’. No further procedure is detailed in the case of ongoing disagreement between the COP and the GEF.

(ii) Substantive policy and decision-making takes place within the GEF Council and the GCF Board. Hence, the extent to which efficiency and transparency are promoted depends on the decision-making and participation rules of those bodies. In particular, the GEF Council decides on a weighted voting system that reflects prominence of donor states, rather than recipient ones. Such decision-making structure comes at odds with the ‘equitable and balanced representation of all Parties’ of Article 11(2) UNFCCC.

(iii) Although being conferred important oversight functions, the SCF has only an advisory role to the COP, which reduces the impact of its outcomes.