How the creative use of public-private capital can accelerate the financing of low carbon transformations

December 9, 2015 by  
Filed under Insights

This article is contributed by Jovin Hurry, who is reporting from Paris.

COP21

Earlier articles on Green Business Singapore such as Shifting into high gear with carbon pricing and The growing financial investment for transition towards a low carbon economy highlighted how climate action from investors, bankers and insurers has increased tremendously, building on the targets and commitments announced at the 2015 UN Climate Summit in Paris.

For instance, by making financing choices – both from a risk and an opportunity perspective – banks realise they can have a huge impact on the real economy. More of them are aligning their policies with climate objectives in order to pursue an orderly path from a fossil fuel economy to a low emitting one. Some have publicly announced that they have stopped financing high emitting sectors. Others have committed to issue or underwrite green bonds that allow for financing new low carbon projects on renewables or energy efficiency.

Another example is the insurance sector, that is scaling up its efforts to respond to the climate impacts that are already locked in. Around 70% of natural disasters that affect people’s lives and livelihoods are still not covered by insurance. The International Cooperative & Mutual Insurance Federation (ICMIF) has launched its 5-5-5 initiative that will protect 25 million more people in the poorest areas by 2020.

However, these voluntary commitments, while being highly promising and should be widely encouraged and duly applauded, may well turn out to be unfortunately insufficient to complete the shift to a low emitting economy globally and in the long term.

To reach the level required by the 2 degrees Celsius objective, private climate finance still needs to overcome barriers, and some tall ones. The whole financial system literally needs to be adapted to mobilize capital towards a green economy. In fact, new forms of finances need to be developed to address sectorial climate challenges.

National transition strategies described in the countries’ Intended Nationally Determined Contributions (INDCs) (See Singapore’s Intended Nationally Determined Contribution and what it means) require new rules, while they admittedly offer simultaneously new opportunities for the financial sector too.

During the COP21 Paris talk, the Lima-Paris Action Agenda hosted a high-level discussion themed “Focus on Private Finance” whereby innovative initiatives were showcased and debated, ones that may in fact not only accelerate but also increase the private capital shift to finance the necessary transformation to a low carbon, sustainable global economy.

The Lima-Paris Action Agenda is a joint undertaking of the Peruvian and French COP presidencies, the Office of the Secretary-General of the United Nations and the UNFCCC Secretariat.

It aims to strengthen climate action throughout 2015, in Paris in December and beyond through mobilizing robust global action towards low carbon and resilient societies, providing enhanced support to existing initiatives and mobilizing new partners.

The experts in the roundtable discussed how the Long Term Infrastructure Investors Association’s program for financing the sustainable infrastructure component of the INDCs is one example of the private sector taking advantage of the new opportunities that have arisen from the INDCs.

This pilot program will provide implementation support to volunteering countries with regard to investments in particular for infrastructure projects which are part of their INDCs.

Prominent global initiatives were presented around the idea of innovative blending of public and private finance.

On the scaling-up of energy efficiency financing, the European Bank for Reconstruction and Development (EBRD) presented an innovative programme, supported by the Global Environment Facility (GEF), for scaling up energy efficiency financing through local private commercial banks of emerging or developing countries. Through this program, up to $25 billion could be provided for energy efficiency with estimated carbon emissions reductions of 62 million tons per year.

Moreover, to boost the energy efficiency green bonds, the Inter-American Development Bank’s (IDB) will provide up to $450 million, with additional support from the Green Climate Fund. This would be up to $217 million and involves a guarantee to green asset-backed securitized bonds for refinancing of energy efficiency loans in several Latin-American-Caribbean countries. The carbon emission reductions from the underlying projects are expected to be 17,000 tCO2e per million of US$ invested over the lifetime of the projects.

Meanwhile, the International renewable Energy Agency (IRENA) has launched the Sustainable Energy Marketplace, a web-based platform that helps to identify promising renewable energy projects and links them to public and private financiers to help scale up investments in emerging markets. The Marketplace will be launched with regional hubs for Africa, the Caribbean and Latin American.

There is also the eye-catching Global Innovation Lab for climate finance that offers new climate finance tools, from incubation to implementation. TCX Investment Management Company B.V announced that KfW will provide €30 million to one of the Lab projects, the Long-Term Foreign Exchange Risk Management instrument (TCX) for renewable and energy efficiency projects in sub-Saharan Africa. The expected result is to unlock up to $1.3bn of private investment until 2025 and to achieve a CO2 reduction of up to 500,000t per year.

Last and not least, the Land Degradation Neutrality Fund (LDN Fund) was presented – an innovative investment vehicle that aims to finance the rehabilitation and sustainable management of 12 million hectares of land per year. With the launch planned for the end of 2016, the LDN Fund is expected to offer investment opportunities that meet risk/return objectives of many institutional investors.

Parties admit publicly that finance is a core part of the UN climate framework and a key driver of the outcome. Without finance, there’s no support and transition to talk about especially for the poorest and the most vulnerable.

Creative financing instruments need to be put in place and these initiatives mentioned may help in providing needed assurance and in motivating countries to make ambitious commitments and to come forward to deliver their plans – clearly then expressing their sense of responsibility, capacity and accountability.

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