Inside USAID's $150 billion strategy to fight climate change

Two years ago, at the 26th climate change conference, or COP 26, the U.S. Agency for International Development set out an ambitious target — to raise $150 billion to combat climate change. Last year, that commitment formed a key plank of a more detailed strategy, covering the period up to 2030, involving investments in clean energy and financial instruments such as green bonds and grants. Now, officials tell Devex, the move represents a key transition for USAID. The agency is making climate a central part of its broader development agenda. All parts of the sprawling foreign aid agency — from humanitarian affairs, public health, and education all the way to democratic rights and governance — will include climate as part of their mission. This comes at a time when policymakers are scrambling to raise the trillions of dollars needed to fight global warming amid fears that the world is running out of time to avert a climate disaster. But the agency’s climate strategy is fraught with questions of how it will convince investors to get on board and whether the amount it plans to raise is enough to meet the scale of the challenge. The $150 billion is the tip of the iceberg on what’s needed, USAID officials acknowledge — and most of it will not be the agency’s own money; it will put up some cash, but chiefly it aims to attract money from external investors. “The point of this exercise is to turn a little money into a lot more money,” Gillian Caldwell, USAID’s chief climate officer, told Devex in an interview. “We are all affected” USAID brought in Jacqueline Musiitwa in December, a trained lawyer with experience in the private sector and public policymaking, to lead the effort to raise the funding. Caldwell said climate has now moved from being a concern of individual departments to permeating every aspect of the agency’s work to hit that $150 billion headline figure. “It is a big number,” she said. “It's not a business as usual scenario at USAID right now and I don't think we should be expecting business as usual results.” Musiitwa told Devex that the agency will look to bring to the fold large corporations across the financial, tech, and other private industries to raise the money. “It's all of our responsibility,” she said. “We are all affected.” Caldwell said the bulk of the funding — $138 billion worth — will come from investments from the renewable energy industry. The agency aims to build on the work it did over the past decade, where it said it helped source nearly $25 billion of investments in large-scale wind and solar plants across 10 countries. It worked with governments to create investor-friendly business environments and design auctions for companies to bid on climate projects which helped governments bring in billions of dollars for renewable energy projects. In the Philippines, with USAID’s help, 11 power developers won auctions to deliver what is equal to about 10% of the country’s current energy capacity that will start flowing this year. Some analysts, however, warned against an overreliance on renewables as they can create unintended consequences. As countries transition away from industries responsible for climate change, such as coal, governments should work to protect communities from the loss of jobs and other disruptions to their livelihoods, they say. There is a need to ensure that “the impact on people is also being taken care of as much as we are taking care of the environmental side of investments,” said Krisztina Tora, a senior executive at The Global Steering Group for Impact Investment, or GSG, a British-based organization that represents impact investors. In its strategy, USAID accepts that the shift to cleaner energy sources will be neither easy nor quick. Without presenting specifics, the agency said it will work to ensure the transition is inclusive and that through education and investment, governments can prepare communities for the change. New cash sources The agency says countries need to take advantage of new sources of financing, such as green bonds — debt that institutions can raise to invest in environmentally friendly projects, which USAID said is currently an under-utilized resource. India, for example, is the world’s third largest greenhouse gas emitter but has only 2% of the world’s green bonds, and this is money on the table that can go toward climate projects. The agency said it used its convening power to bring together Indian businesses and financiers and institutional investors to help them structure green bonds. “That's real money that would not be flowing to these economies,” without USAID’s help, Caldwell said. But that leaves a $12 billion gap needed to reach the $150 billion goal. Caldwell said that the agency will use concessional financing — cheaper loans that banks normally charge — to raise even more funding for projects. Caldwell hopes that injecting some cash into climate projects will reduce the risk for the private sector to pour its own money too. This move could potentially multiply the amount of funding invested in climate adaptation — efforts to protect people against climate change’s worst outcomes, such as moving communities to higher ground to avoid rising sea levels, planting crops that can withstand persistent drought, or building housing that can resist the effects of floods. GSG’s Tora said that USAID’s desire to work with banks and governments to tap into new sources of funding, such as green bonds, were all moves in the right direction. The question was whether $150 billion was enough. “So [$]150 billion between now and 2030 is really not enough compared to the need,” she said. Tora acknowledged that USAID is only one agency. Yet, she pointed out that trillions of dollars are needed to meet the sustainable development goals and also help countries transition to using clean energy to power their economies. The question, Tora told Devex, is whether USAID and other donor agencies can do more to bring in the type of capital needed from different sources, particularly the private sector, to meet the scale of the problem facing the planet. “It's great. But how can we spread the love and ensure that this is happening at a much bigger scale,” she said. Something to build on Shaun Martin, a vice president for climate change and resilience at the World Wildlife Fund, welcomed USAID’s approach. “We are glad to see that the administration is putting some money where their mouth is,” he told Devex. USAID’s commitment could help businesses get over fears of investing in parts of the world they may have been reluctant to pour cash into in the past. “Once they see that, okay, ‘someone is taking the initial investment, the initial risk, and now we have something to build on,’” Martin said. Climate funding for a long time has mostly gone to things that will mitigate the effects of climate change, such as efforts to reduce emissions. Less has been invested in adaptation. Only about 2% of private sector climate funding currently flows toward adaptation efforts, according to the World Bank. Businesses are wary of making large investments when they see worsening wildfires, never-ending droughts, unpredictable rains, flooding, and other disasters that are growing every day. “There's the money and then there's the growing apparent climate risks that are making people nervous. So they're looking for governments to bear some of that risk,” Martin said. By showing that it is willing to pour money into climate adaptation, USAID is sending a message to businesses that the government wants to reduce the risk of investing in such projects. “That’s exactly what they are supposed to be doing. By using grant money they are able to take significantly more risk and go into places where other people wouldn't go,” Tora said. USAID can fund at the riskier stage of projects, she added, and pave the way for investors to come in at a later time when success is less of a gamble in their eyes. More ambition In Africa, which foreign investors have in the past been reluctant to put money into, there are examples of how USAID’s support can help new businesses grow. One such business is SunCulture, a Kenyan-based company founded in 2013 that provides solar-powered water irrigation systems to farmers. When the company started, it relied on grants from the likes of USAID to prove its idea which was relatively new on the continent. SunCulture’s chief executive Samir Ibrahim said USAID’s decision to take a risk in investing in the company at such an early stage was a game changer. “Not many people were funding such early stage companies in Africa,” Ibrahim told Devex. “We've been able to create an industry around solar irrigation and the support of USAID was pivotal in that.” Ibrahim declined to say how much total capital the company has raised but according to the data firm Crunchbase, SunCulture has secured more than $37 million worth of funding since its founding. “We were Africa's first solar irrigation company. So we used grant funding to prove the concept. Now we've raised money from very reputable private investors, institutional investors, venture investors and lenders,” Ibrahim said. He was adamant, however, startup businesses like his own still need money from the likes of government agencies such as USAID to try out moonshot ideas that investors may be too nervous to take a risk on. “Even today, we're working with a number of donors on a number of different projects, because they're taking the risk of funding the discovery of new ways of developing and deploying climate tech in Africa,” he said. Ibrahim believes that USAID can be even more ambitious. “We need to try many ideas now,” he said. “There needs to be a shift away from the spray and pray approach to now putting bigger pots of money towards bigger projects and bringing in a lot more private capital behind it.” Update, March 8, 2023: This article has been updated to clarify that Krisztina Tora is a senior executive at The Global Steering Group for Impact Investment.