WRI’s “Climate Finance” series—which includes a subseries on public financial instruments—tackles a broad range of issues relevant to public contributors, intermediaries, and recipients of climate finance—that is, financial flows to developing countries to mitigate greenhouse gas emissions and adapt to climate change impacts.
Raising the Stakes—the fourth installment in the public financial instruments subseries—surveys 27 dedicated public and public-private climate change funds and initiatives that aim to mobilize private investment (PPCFIs), totaling representing approximately US$41.3 billion in aspired or current capitalization. Most PPCFIs are in their early stages and it is still difficult to measure their effectiveness. However, understanding their working methods and learning from their early experiences could hold the key to helping donor countries meet ever-increasing climate investment needs in developing countries. This working paper provides preliminary findings on the nature and efficacy of existing PPCFIs and offers recommendations on how they can collectively overcome challenges to mobilizing private investment.
Over the past decade and especially in the past five years, industrialized governments and development finance institutions have launched a multitude of dedicated climate change funds and initiatives intended to mobilize private sector investment in mitigation and adaptation projects in developing countries. This paper examines this increasingly used model to channel climate finance, hereafter referred to as public and public–private climate funds and initiatives (PPCFIs).
The current version of this working paper surveys 27 PPCFIs, representing approximately US$41.3 billion in aspired or current capitalization. It focuses on PPCFI objectives, scope, disbursement approaches, decision-making structures, and use of financial instruments Drawing from this initial survey of PPCFIs and from two workshops—co-hosted by the World Resources Institute (WRI) with KfW Development Bank in 2011, and with the Climate Markets and Investment Association (CMIA) in 2013—the paper also discusses PPCFI experiences in mobilizing private investment.
This paper comes at an important time as donors—industrialized nations—consider how to effectively mobilize finance for climate-relevant activities in developing countries through existing bilateral and multilateral financial institutions and new channels like the Green Climate Fund. Climate change investment needs are rapidly growing in developing countries. The World Economic Forum estimates that US$5.7 trillion annual investment in green infrastructure (US$0.7 trillion of which must be new and additional) will be required by 2020 to limit greenhouse gas emissions to manageable levels. Much of this investment will be required in developing countries, and the private sector will undoubtedly play a central role in achieving these targets.
1) PPCFI decision-making structures and instrument offerings are strongly related to their disbursement approach, including whether a PPCFI is making direct or indirect investments into private sector projects or providing technical assistance. These approaches are not mutually exclusive, but each has a set of advantages and disadvantages related to who is making project approval decisions: the PPCFI itself, the PPCFI and its promoting or implementing institution, or the PPCFI and an intermediary.
2) The limited level of co-investment in PPCFIs at the fund or initiative level may be driven by the following interrelated trends:
- Limited deal pipeline of attractive private sector projects (that is, projects with high enough returns relative to risks over an investment horizon), which can impede a PPCFIs ability to achieve returns in line with private sector expectations as a co-investor;
- Inadequate scale that creates high processing costs for the private sector relative to its potential capital contributions;
- Political and legal mandates or institutional culture that can constrain innovation as well as flexibility to respond to private sector requirements; and
- Limited track record of PPCFIs. As most have launched in the past two to five years, many have yet to disburse funds or demonstrate a track record of returns that would entice private sector co-investment.
The trends outlined above can also impede private sector co-investment at the project level. Other challenges at the project or disbursement level include:
- Limited private sector awareness of what PPCFIs exist, how to access PPCFIs, and PPCFI co-investment timelines and processes.
- Flexibility, innovation, and efficiency in financing projects are determined by the level and type of financial inputs into PPCFIs.
- A biased (i.e., oriented towards more mature markets) and limited global pipeline of investable projects can create finance supply and demand mismatches.
- Promote Scale and Innovation by Enabling Investment and Building Sound Institutions. Donor governments must allocate more resources to fostering climate-friendly markets through dependable policies that promote an attractive risk-reward profile, achieve scale, and promote healthy competition. Without allocating appropriate resources to these foundational activities, the pipeline of investable deals will remain limited, unhealthy competition among public institutions and between public and private actors will continue, and public money will likely be used ineffectively.
- Increase Private Sector Awareness and Information. To ensure equitable access to PPCFI finance, public actors must ensure that the private sector, recipient governments, peer PPCFIs, and development finance institutions are aware of available public money and can access this money efficiently. Passive information tools like online databases can help the private sector navigate the complex landscape of PPCFIs, but active tools such as relationship managers within public institutions and other advisory services can be particularly impactful.
- Improve Access and Processes while Maintaining Standards and Safeguards. Accessing PPCFIs can be complex and cumbersome given the varying requirements of public institutions and the multitude of PPCFIs. Some of this difficulty and redundancy may be fixed by streamlining and harmonizing processes among PPCFIs. However, due diligence concerns and institutional inertia might make it hard for institutions to come to a consensus. Furthermore, trimming processes could undermine environmental and social safeguards and the financial longevity of and confidence in public institutions.
- Apply Lessons to the Green Climate Fund. The future Green Climate Fund (GCF)—an international mechanism intended to serve as a major channel for climate finance flowing from developed to developing countries in coming years—can help optimize public climate finance by aggregating finance and matching supply to needs. The GCF board should consider how best the PSF can add value to, coordinate, or change the existing PPCFI landscape (for example, through financial incentives). The GCF board should also draw from the various PPCFI disbursement approaches, governance structures, and financial instrument offerings to inform its own operational and governance decisions.