Expanding green finance: What’s already working and what’s next?

, December 2012

 

Despite reaching $364 billion in 2010/2011, global investment to combat climate change still falls far short of the level required to stabilize global temperature rise to 2°C. According to the IEA, we need to reach $1 trillion each year of incremental investment in energy supply and demand technologies, and more will be needed to achieve climate resilient development globally.

Policymakers and others will need to scale up what’s working, and explore new approaches to pool more capital from the private sector. However, investors’ real and perceived risks are increasing as a result of stalled international negotiations and national policy frameworks reforms.

On the 20th and the 21st September, Climate Policy Initiative hosted the Second Meeting of the San Giorgio Group (SGG) on the island of San Giorgio Maggiore in Venice to discuss what’s already working in green finance, what’s not working, and to identify new options to bridge the gap between supply of climate investment and the demand for mitigation and adaptation finance. Here is a summary of some of the highlights.

Despite the challenges, there are real opportunities to support green investments.

Energy efficiency and small-scale technology investments face stiff competition (i.e. from natural gas) and insufficient support from local lenders, particularly in developing countries where most abatement opportunities reside. Increasing the capacity of the local banking systems while tailoring support measures to the needs of the end users would foster investment in the sector.                                                                                                     

Institutional investors such as pension funds and insurance companies have access to capital that could significantly help fund large-scale offshore wind deployment. However, these investors are traditionally risk adverse, while existing risks are still too high and are often mitigated by complex, expensive arrangements. To address perceived risks, policymakers should guarantee stable support frameworks. Improved access to historical performance data of renewable investment could also ensure more informed investment decisions.

Deployment of commercially immature technologies at scale requires strong backing from public resources. Competition and open bidding processes can help lower costs, but the involvement of the public sector is still necessary. Investors in these technologies should add more emphasis in relation to other sectors to local goals – such as energy diversification and local economic development – when planning investment.

Public policies are essential to drive systemic change in agricultural and land use investment. Linking the supply of agricultural credit to the use of ecosystem services can result in better farming practices and reduce incursions into forests. Policies and capacity building can overcome poor land title management and encourage the adoption of best practices, particularly from smallholders.

Where and how can we get more green investment?

Scarcity of public resources, combined with the likely increase in adaptation financing demand over the next years, requires a more cautious and effective allocation of current, available public resources. Long-term solutions should first address debt issues, regulation reform, and risk mitigation. Only subsequently should policymakers focus on the financial viability gap of green technologies.

The Green Climate Fund presents a substantial new opportunity and its design should be focused on a clear strategy aimed at filling the gaps in today’s climate landscape, including: a results-based financing approach aimed at favoring transformative solutions, the adoption of targets for both the energy efficiency and renewable energy sectors, and a more active engagement of the private sector.

National Development Banks should be better integrated in the global finance picture and strengthen their role in channeling green investment. Because of their long-standing relationship with the private sector, they have privileged access to local financial markets. This allows them to implement tailored solutions addressing local investment barriers and needs.

Capital from institutional investors and debt capital markets is essential for filling the gap between supply and demand of climate finance and requires an effective mitigation of uncovered risks. Insurance coverage seems to be particularly suited for targeting project-specific risks. Yet, the effectiveness of insurances needs to be reflected in rating and benchmark instruments, as institutional investors often rely on such tools for the assessment of risks and creditworthiness.

Climate Policy Initiative will continue to focus on how to expand green finance by conducting rigorously analysed empirical case studies, to understand what is already working, what is not, and where there may be new opportunities.

Our aim for the  San Giorgio Group case studies is to identify emerging financial practices that could be applied elsewhere and improve the performance of green investment portfolios and projects. We believe that over time, the lessons we observe can become an authoritative source for the international community, offering guidance on how to design effective funding mechanisms, for low-emission investments across developed and developing economies.

 

2 Responses

  1. Kumar says:

    What about the endowments of colleges and universities? Would you fit them into the category with insurance and pension funds that are risk adverse but hold potential capital?

  2. Valerio Micale says:

    Hello Kumar, endowments are indeed a subset of institutional investors. They meet the traditional definition of a long-term investor subject to future payment obligations (professorships & scholarships mostly). Nonetheless, the total value of their assets under management represents, jointly with foundations, USD 1.5 trillion, or approximately 2% of total assets available to all institutional investors (which also include pensions, insurance, sovereign wealth funds, & asset managers).

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