Tag Archives: finance

CPI analysis supports C40 call for action on increasing cities’ access to climate finance

October 19, 2016 | and

 

This week at Habitat III in Quito, Ecuador, C40 Cities Climate Leadership Group (C40) is making a call for action on municipal infrastructure finance, highlighting the financing needs of cities and their key role in driving sustainable, low-carbon and resilient growth.

Climate Policy Initiative (CPI) endorsed this call to action as part of our work to support cities’ access to climate finance and to help them achieve value for money. In the last year, we worked with the Cities Climate Finance Leadership Alliance to publish its State of City Climate Finance 2015 report and are currently analysing the green bond markets in order to develop guidelines for cities in developing countries to raise climate finance from this fast growing source of climate finance. This second piece of work is part of the Green Bonds for Cities project.

Our work supports C40 findings. For instance, C40’s call to action identifies multilateral and bilateral development banks as important actors in responding to city needs. Our analysis finds that taken together DFIs provide 94% of all green bond flows to cities in developing countries and multilateral and bilateral DFIs provide 82% of all green bond finance channelled to developing countries in general.

There are other possibilities for cities to tap green bond finance flows, however, aside from cities issuing their own bonds. National development banks provide an interesting option, for instance. While multilateral DFIs were the first to direct green bond flows to developing countries, domestic DFIs such as national development banks (NDBs) are now providing a growing share, now up to 18% of flows.

Green Bond DFI Flows to Developing Countries

The market is changing elsewhere too. Development finance institutions were the sole providers of green bond finance to developing countries from 2008-2013 but domestic corporates in the renewable energy sector have since begun to issue bonds. They have been joined by commercial banks from China and India which have linked the finance raised to green loans. City or municipal-based infrastructure development companies also commonly raise finance for cities in developing countries such as China, often with central government guarantees.

Global green bond market flows to developing countries

Our market analysis will feed into guidelines for city administrators and stakeholders in developing countries on how to access increased finance from the green bonds market. In the coming weeks, CPI and partners working on the Green Bonds for Cities project will provide toolkits and training sessions. The project is funded as part of the Low-Carbon City Lab (LoCaL) under Climate KIC.

CPI will also soon publish analysis looking into the role of NDBs in supporting implementation of nationally determined contributions. Sign up here for updates on these and other projects.

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Understanding green bond data can help cities in developing countries tap the market

September 6, 2016 |

 

The population in developing and emerging countries is urbanizing at three times the rate of developed countries. But cities in the ‘Global South’ have limited access to capital to invest in water, energy, housing and transportation systems to meet the needs of growing urban populations.

Many of them raise capital through local banking sectors whose loan terms are often unsuitable for funding new infrastructure. Capital markets offer an alternative source of cheaper and longer-term finance but less than 20% of cities in developing countries have access to local capital markets and only 4% have access to international capital markets.

In recent years, green bond markets have emerged as a new way for investors in the capital markets to access sustainable investments. Cities have taken note. European cities in France and Sweden have been issuing green bonds since 2012. Municipalities in the US have a long track record of raising low-cost debt in the municipal bond market but only recently have begun to label bonds as ‘green’ in order to meet this demand signal from investors.

So how much finance has flowed from green bond markets to cities in developing countries?

Climate Policy Initiative (CPI) analysis shown in the chart below shows that approximately USD 2.2 billion of total flows in the green bond market have been directed towards cities in developing countries (“the South”) compared to USD 17 billion in developed countries (“the North”).

Global green bond market flows

The figure below breaks down the sources of those flows to cities in the North and South. Cities in the North mainly use their own municipal (MUNI) issuance power (84%) but also benefit from Development Finance Institutions (DFI) linking city-based projects to their green bonds (13%) while cities in the developing countries in contrast rely almost entirely on DFIs to raise finance for their projects (94%).

To date, Johannesburg’s USD 137 million bond is the only municipal green bond issued in developing countries. Important work to help address this imbalance is underway. It aims to develop local capital markets and improve the creditworthiness of cities.

But if a city cannot issue bonds, what is the potential of other channels open to them to access finance from green bond markets? Helping local governments and city administrators in developing countries to identify these channels and increase their access to the green bond markets is one way to close this investment gap. This is why CPI is contributing analysis and developing guidelines for accessing the green bond markets as part of the Green Bonds for Cities project.

Our analysis shows the sources of green bond market flows to developing countries are diversifying.

Since 2008, USD 39 billion has been directed to projects or activities in developing countries. From 2008-2013, this consisted entirely of flows from Development Finance Institutions but, from 2014, domestic corporate issuance began to grow and was then joined by issuance from commercial banks from China and India in 2016.

Global green bond market flows to developing countries

Clearly, cities don’t necessarily need to issue their own bonds to tap the green bond market. City or municipal-based infrastructure development companies could provide one option for them to do so. Such companies commonly raise finance in developing countries such as China, often with central government guarantees.

Public-private partnerships with corporations or commercial banking institutions could help cities leverage their green bond issuances for new infrastructure developments.

Perhaps the avenue with the most significant potential is through domestic, bilateral and multilateral development finance institutions (DFIs). DFIs could scale up their own green bond mandates to increase support for city-based infrastructure in developing countries, work to source and help finance projects, and eventually support cities to issue their own bonds through guarantees or other risk mitigation instruments.

Green Bond DFI Flows to North and South

The chart above reveals three interesting insights into DFIs’ green bond issuance:

  • Domestic DFIs in developing countries, such as NAFIN in Mexico and the Agricultural Bank of China, already account for 18% of total flows from DFIs’ green bonds to the South. They could provide a potential source of collaboration for cities.
  • Multilateral DFIs such as the World Bank, EIB, ADB and AfDB currently only link USD 2 billion of the USD 18 billion flowing to the south to city-based projects. There is potential to scale-up.
  • In combination, multilateral and bilateral DFIs such as EIB, EBRD and KfW’s send more green bond flows to projects in the North than the South. USD 25 billion of flows goes to the North versus USD 21 billion of flows to projects in the South.

CPI’s analysis will inform guidelines for city administrators and stakeholders in developing countries on how to develop a market access strategy for the Green Bonds for Cities project. From autumn 2016, this project will provide toolkits and training sessions with the aim of expanding green bond market flows to cities in the South.
CPI is working with South Pole Group on this in collaboration with ICLEI and Climate Bonds Initiative. The project is funded as part of the Low-Carbon City Lab (LoCaL) under Climate KIC.

This op-ed was originally published on Environmental Finance.

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Three ways international development partners can help Indonesia solve its land use challenges

February 24, 2016 | and

 

At least 25 major aid organizations have been actively engaged in efforts to reduce Indonesia’s greenhouse gas emissions from land use over the last five years. Several of these funders, including the UK Climate Change Unit Indonesia, and the Norwegian Agency for Development Cooperation, have even refocused a large portion of their programs in Indonesia on the land use challenge.

Land use challenges in Indonesia - Photo credit: Elysha Rom-Povolo

Photo credit: Elysha Rom-Povolo

This sharp focus isn’t surprising when you take into account that 44% of global land use and forestry emissions came from Indonesia in 2012 Last year saw unprecedented emissions from forest and peat fires in Indonesia, with emissions from fires alone expected to reach around 1750 MtCO2-eq., which is almost equal to Indonesia’s entire greenhouse gas emissions from all sectors in 2012.

The involvement of many international development organizations is also good news given that the Government of Indonesia has sent strong signals to the international community that their support is needed. Indonesia has committed to reduce greenhouse gas emissions by 26% by 2020, scaling up to 29% by 2030, and further extending their ambition to 41% with international support. Around 90% of that target is anticipated to come from reducing deforestation and peat emissions.

The question is, have the efforts been working?

We recently took on this question in a study that looked at international public climate finance flows to land use from major development partners, “Taking Stock of International Contributions to Low Carbon, Climate Resilient Land Use in Indonesia.”

We found mixed results.

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Businesses Lead on Climate Change: The Road from Paris to Davos

January 22, 2016 |

 

When asked about last month’s Paris Agreement earlier this week at Davos, UNFCCC executive secretary Christiana Figueres remarked, “The signal is very clear. The signal is toward long-term transformation that is urgent…it is a transformation to decarbonizing the global economy.”

Many of this year’s World Economic Forum (WEF) attendees have already recognized that signal, and after Paris, more have become aware of the opportunities this transformation can bring. Costs of electricity for most renewables — including wind and solar — are now becoming comparable to those of fossil fuels, decreasing drastically over the past five years while costs for coal and natural gas have increased. And now that the Investment Tax Credit (ITC) and Production Tax Credit (PTC) have been extended, the US renewables industry finally has the policy stability it needs to securely finance a pipeline of projects without the risk of the tax benefits going away at the end of the year.

These factors and others have spurred private investors into pouring $243 billion in renewable energy in 2014, up 26 percent from the previous year. As climate exposure begins to pose serious fiduciary and business risks for investors, more and more financial leaders — including Blackrock, Citi, and Bank of America — are recognizing the risks and opportunities surrounding our current energy production and adjusting their portfolios accordingly. Tools, investment vehicles, and other products exist in the market to help businesses realize such exposure and make the necessary decisions to capture them.

Landscape_Figure5-transparent

Breakdown of total private investment by actor, 2012-2014 in USD billion

However, more can and needs to be done to effectively transition to a low-carbon economy. One area of opportunity is in unlocking additional international, cross-border finance. The majority of climate investment (74%) originates and is spent in the same place, illustrating limited cross-border investments. Domestic policy frameworks in many countries, as well as innovative financial interventions can help business scale up overseas investments, and help emerging markets embark on a path of sustainable growth.

The Paris Agreement demonstrated the recognition by the global community that action on climate change and economic growth can occur simultaneously, and the business leaders at the WEF this week are instrumental to keeping this momentum. Only by working in tandem can we realize a rapid transformation to a low-carbon economy, and it is evident from Davos that many are already on board.

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The Paris Agreement is a signal to unlock trillions in climate finance

December 14, 2015 | and

 

The objectives laid out in the Paris Agreement are visionary but not overambitious as they build on trends already happening in reality. The agreement’s guiding star is the science-based goal of limiting temperature rise to ‘below 2 degrees Celsius’. In combination with the mention of 1.5 degrees Celsius, this goal sends a clear signal, giving governments and businesses an incentive to escalate efforts to decarbonise their economies, supply chains and business models. Even more importantly for business, this deal has teeth. It includes a mechanism to ramp up action every five years, starting in 2018, and importantly, does not allow backsliding.

A strong signal steering investors away from fossil fuels, towards sustainable growth

For business and investors, it means the direction of travel is clear and with appropriate support it is time to seize the opportunities on offer. “This is one of the greatest wealth opportunities in human history,” says Jigar Shah of Generate Capital. The Paris Agreement also signals that investment in fossil fuels is no longer a low-risk enterprise – or, as Anthony Hobley, CEO of The Carbon Tracker Initiative, puts it, “[it] tells markets the fossil fuel era is over.”

The Agreement also builds the case for both public and private actors to explore low-carbon and climate-resilient options. For developing countries and emerging economies and their partners, the clear message is that growth without sustainability is off the table, whereas sustainable growth is a win for climate and development. As Hillary Clinton, former United States Secretary of State, says, “We don’t have to choose between economic growth and protecting our planet – we can do both.”

Many investors are already on board

CPI’s Global Landscape for Climate Finance estimated USD 391 billion in primary investment flows in 2014, up 18% from the previous year. Private investment surged 26% from 2013, reaching 62% of total global investment in climate action driven largely by falling renewable technology costs supported by government measures.

The Paris Agreement means that these investors and project developers who have already started transitioning their business models can now have the confidence to continue shifting their assets, in order to avoid stranding their own portfolios.

From ambition to action: the critical role of national policy

However, right now the bulk of climate investment (74%) originates and is spent in the same place, whether in developed or developing countries. This indicates there is still work to do to scale up finance that crosses borders, and our research indicates that policy frameworks and enabling environments are the first prerequisite. As Felipe Calderon, former President of Mexico, says, “The next step is for governments to turn their commitments into national policy.”

Building confidence for the next five years through enhanced transparency

Developed countries must continue to take the lead in implementing the world’s first universal binding climate agreement. Building confidence that commitments outlined in the agreement are being met is key, and transparency is critical to this goal. Transparency on progress toward the commitment to continue to mobilize at least USD 100 billion per year from 2020 onwards is a case in point, and here work remains to be done. The OECD Report done in collaboration with CPI on progress toward the USD 100 billion was the first serious attempt to estimate public and private finance mobilized by developed countries’ interventions in developing countries by applying a transparent accounting framework. CPI welcomes the fact the Paris Agreement puts efforts to increase consensus and transparency on this and other climate finance issues at the centre of its work plan going forward.

Such transparency can help ensure confidence that finance is flowing from north to south, and to the right technologies, and that private investors are being mobilised in line with country interests. As countries move from negotiations to implementation, CPI stands ready to support their efforts.

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COP21: A good deal for climate and for growth

December 13, 2015 |

 

COP21-good-deal-for-growth

This weekend, world leaders signed on to a new climate deal that aims to limit global temperature rise to well below two degrees, continue $100 billion a year in climate finance, and ramp up action every five years.

I’ve been present at the climate negotiations since the beginning, and I will leave Paris tomorrow optimistic for the future, but not for the reasons you might expect.

While the deal itself is a big step forward, the larger leap has been the recognition, all over the world, that action on climate change and economic growth can – and should – go hand-in-hand.  The Paris agreements have recognized that the substantial gaps between the costs of clean and fossil energy have collapsed, and that returns increase when we produce food by using less land better. The spread of market driven activities consistent with these realizations will provide the foundations on which the Paris commitments will deepen.

The deal this week wouldn’t have been possible if nations and businesses weren’t already moving in this direction. The plans for climate action that countries committed to ahead of Paris were already enough to cover a large portion of needed emissions reduction. And while analysts pointed out that the sum total of the plans pre-Paris wouldn’t be enough to limit warming from dangerous levels, they still show that there is significant momentum.

Businesses, too, stepped up this year. High-worth individuals, family offices, and foundations committed to financial support to help move new clean energy solutions to viability, and heads of large companies, including Richard Branson and Paul Polman, called for zero emissions by 2050.

Why have nations and businesses changed their tune?

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Indonesia’s INDC – A step forward or a missed opportunity?

September 28, 2015 |

 

 

Indonesia submits its INDC

As the Paris climate negotiations draw closer, countries have been asked to submit their Intended Nationally Determined Contributions – INDCs – by 1 October. INDCs identify the actions a government intends to take as the basis of post-2020 global emissions reduction commitments, that will be included in the future climate agreement. The process of setting the INDC is bottom-up and country-led, in contrast to the top-down approach of the Kyoto Protocol. INDCs already submitted have been heavily scrutinized and judged for the level of ambition or leadership.

Given the importance of the INDCs as a way for nations to take stock of their goals and needs and to chart paths towards an ambitious outcome in Paris, our question here is whether Indonesia has taken full advantage of this opportunity to close the gaps in existing and newly proposed policy frameworks, to pave the way for a prosperous, decarbonized economy.

Baselines – going back to the drawing board

Indonesia is presenting its INDC as a deviation from business as usual using projections based on the historical trajectory (2000-2010). It assumes projected increases in the energy sector in the absence of mitigation actions, however details of these assumptions and how they are modelled have not been disclosed in the INDC document.

As Indonesia’s INDC sets out a 26% emission reduction by 2020 and 29% emission reduction by 2030 based on a 2010 projected business as usual scenario, at a glance, this seems to imply that the first target was very ambitious, or perhaps that the new one, which adds a further 3% over the next 10 years, is hedging bets. It could also imply that the Government of Indonesia has calculated the variables with extra care and has set a more realistic target. In any case, because inventory and monitoring systems have not been able to estimate progress to date, it is hard to decipher where Indonesia stands with respect to business as usual and where they could go.

Casting more light on this situation in the latest inventory, and outlining in detail the baseline as well as assumptions and modelling underlying it, for each sector, would add credibility to Indonesia’s upcoming Third National Communication to UNFCCC in 2016.

Capitalizing on low hanging fruits

Since forestry emissions (from land and land use change, as well as peat and forest fires) as per Indonesia’s Second National Communication to the UNFCCC of 2010 account for 63% of the emissions profile, a landscape-scale ecosystem management approach, emphasizing the role of sub-national jurisdictions to decarbonize the economy, could be highly relevant to Indonesia. The INDC document describes its strategic approach as recognizing that climate change adaptation and mitigation efforts are inherently multi-sectoral in nature and require an integrated approach. However current on-going efforts, such as the moratorium on the clearing of primary forests, are not enough to curtail rising pressures on land. Increased palm oil production and the recent push for expanding markets for biodiesel, upcoming food security programs which open one million hectares of new paddy fields, and 35 GW of power to be installed by 2019 – much of it coal based, while all important to Indonesia’s growing economy, could threaten Indonesia’s sustainability goals if not managed properly.

Climate Policy Initiative’s protection and production and land management approach (PALM), applied in applied in Central Kalimantan, in collaboration with the University of Palangkaraya, aims to lead the way in this regard by bringing together private, public, and smallholder-farmer stakeholders to unlock a new, collective approach to agriculture that will promote food security, energy security, socially inclusive economic development and environmental sustainability. The project has already identified opportunities to increase profitability and productivity for smallholder farmers through larger scale management in the form of cooperatives. Such opportunities reduce pressure on land, support sustainable development of the palm oil economy, and provide livelihood benefits to the smallholder community. Such initiatives could also potentially lead to quantifiable emissions reductions.

Scaling up climate finance required to deliver the INDC

The Landscape of Public Climate Finance in Indonesia conducted by the Indonesian Ministry of Finance’s Fiscal Policy Agency and CPI found that public climate finance in 2011 reached at least IDR 8.377 billion (USD 951 million). The Government of Indonesia disbursed at least IDR 5,526 billion (USD 627 million) or 66% of those flows. The finance was well targeted, with most of it flowing through to the forestry sector (73%) and laying a strong foundation for decarbonizing the economy through policy development and capacity building.

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India Needs to Fix Finances to Make Renewable Energy Dreams a Reality

February 16, 2015 |

 

Over the past few years, the government of India has set ambitious targets for wind and solar energy: current targets would see wind and solar capacity grow by 600 percent through 2022, to 60 GW and 100 GW of energy, respectively, from current cumulative installed capacity of about 25 GW. To put those numbers in perspective, 1 GW provides power for 700,000 modern homes; 160 GW would power a sizeable portion of India’s energy needs.

These targets are good for both India’s energy supply and for economic growth – a theme emphasised by US President Barack Obama and Indian Prime Minister Narendra Modi recently in announcing their joint commitment to increasing investment in clean energy and low-carbon economic growth.

However, this task is made difficult by the government’s limited budget, which is constrained by a large fiscal deficit and multiple development priorities.

Further, markets will not provide finance to meet these targets alone. In fact, our analysis shows that the single biggest challenge to scaling up renewable energy is the cost of finance – in particular to debt. Unfavourable debt terms add 24-32 percent to the cost of renewable energy in India, compared to similar projects in the US. Domestic debt is expensive due to unfavourable macroeconomic conditions as well as underdeveloped capital markets, and foreign debt becomes expensive once hedging costs are added.

The good news is that India can address this situation in a way that also saves money for taxpayers, electricity customers, and scales up renewable energy.

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Six climate finance themes out of Lima that will shape 2015

December 17, 2014 |

 

Government representatives from around the world met last week in Lima, Peru to negotiate global emissions reductions as part of the annual UNFCCC Conference of Parties (COP20). Once again, the need to mobilize more investment in a low-carbon, climate-resilient economy was an important point of debate.

Climate Policy Initiative’s analysis is playing a key role informing serious discussion on climate finance and finding solutions to increase the effectiveness and scale of climate finance investments. Here are the themes we saw at this COP that we feel will shape climate finance action and debate over the next year.

Entrance-to-Lima-Cop20

Entrance to Lima COP20

1. Finance is flowing but it’s not enough.

The COP20 High-Level Finance Ministerial began with a presentation of the UNFCCC’s Biennial Assessment and Overview of Climate Finance Flows 2014. This research, which draws on Climate Policy Initiative’s work to track climate finance, tracked between 340 and 650 USD billion in annual investment. As CPI has shown, this figure is far short of the need.

Global Landscape of CLimate Finance needs

Annual climate investment compared to the need

2. Governments voiced support for innovative initiatives that unlock private finance.

CPI’s analysis shows that while public finance often provides the conditions for climate investment to take place, private investors contribute the largest share of finance, year after year, in countries across the world. It also shows that public finance alone will not be enough to meet the investment need. Several government representatives spoke of the need to find innovative ways to unlock increased private investment. Representatives from Denmark, the Netherlands, the UK, and U.S. used their time on the COP plenary floor to voice support for one such initiative – The Global Innovation Lab for Climate Finance – which CPI supports as its Secretariat, advancing innovative financial instruments to drive significant additional investment in developing countries.

3. The Green Climate Fund reached more than $10 billion in commitments – good progress ahead of COP21 in Paris next year.

Following the pledges from Japan, the U.S. and UK over the last weeks, Australia, Belgium, Mexico, Peru, Colombia, Austria, Spain, Norway, and Canada helped the Green Climate Fund reach its $10bn goal at this COP with new pledges. These pledges to help developing nations deal with climate change are good news. They increase the chances for a global climate deal next year in Paris, and if spent wisely, can supplement domestic public resources where they fall short and drive billions in private investment toward low-carbon and climate-resilient growth.

4. Finance for adaptation is becoming a higher priority.

The Green Climate Fund restated its intention to use half of its finance for adaptation purposes. Germany also stepped up on adaptation, committing an additional 50 million euros to the Adaptation Fund. CPI’s work shows that while adaptation finance grew by 12% last year, it still falls short of the need.

 5. Tracking of climate finance continues to improve.

Following on recommendations from the UNFCCC’s Biennial Assessment and Overview of Climate Finance Flows 2014, many countries used their time on the COP20 plenary floor during the Finance Ministerial to talk about the need for an agreed-upon definition of climate finance and improved tracking systems. CPI’s analysis supports this need and shows that climate finance tracking can support countries’ attempts to formulate better policies.

 6. Economic growth and combating climate change can go hand in hand.

Last but not least – there was a growing sense that acting on climate can also spur economic growth at this year’s COP. Many experts have documented that climate change and the resulting extreme weather would have huge social and financial costs to the global economy. This year, the New Climate Economy report showed that measures that reduce climate risk can not only help to avoid a shrinking economy in the future, but can also help grow the economy, today.

 FelipeCalderon-speaks-about-New-Climate-Economy-from-COP20

President Felipe Calderón speaks about the New Climate Economy report from the COP20 plenary floor

Going into 2015, one big-picture lesson is clear – climate finance will continue to be an important focal point for those working to respond to climate change. CPI will continue to work to provide analysis that supports these discussions.

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Video: New business models for a low-carbon electricity system in the U.S. and Europe can save billions

November 10, 2014 |

 

New finance and business models for a low-carbon electricity system in the U.S. and Europe can save consumers, investors, and taxpayers billions. Watch the video or read the analysis to learn more.

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