5 Ways to Mobilize Private Investment to Tackle Climate Change

By Shilpa Patel and Giulia Christianson 

One day after the momentous inauguration of the Green Climate Fund (GCF) earlier this month, World Resources Institute (WRI), Ministry of Strategy and Finance of the Republic of Korea and Korea Capital Market Institute co-hosted the Climate Finance and Private Sector: Investing in New Opportunities conference. More than 250 people—drawn from Korean and international business, finance, government and civil society communities—came to share their experience, discuss opportunities associated with climate-friendly investments, and provide insights to the GCF as it begins its operationalization process.

Photo courtesy of Shutterstock

Climate change mitigation and adaptation investment needs are urgent, significant and growing. The world will need to devote trillions of dollars into clean energy, sustainable transport and other green infrastructure to limit global temperature rise to 2 degrees C and prevent the worsening effects of climate change. Private sector investment will be critical to achieving the type of low-carbon, climate-resilient growth necessary to secure a sustainable future.

The event featured four plenary discussions in addition to keynote speeches. Each session delivered important insights about the role that the GCF can play in mobilizing private investment. Here are the main messages that event participants shared:

1. The Vision: The GCF Can Be a Bridge to a Lower-Carbon, Climate-Resilient World.

Tackling climate change will need a new growth model that focuses on quality of economic growth. Climate and economy need not be trade-offs. Addressing climate change does not have to be a story of costs and burdens, but a story of investment and inclusive growth, jobs and resilience.

There has never been such a strong business case for action. Risks are rising and climate impacts are already being felt around the world. The paradigm of the past is not only under increasing pressure, but is actually already giving way. The new paradigm—the low-carbon, resilient, high-profitability paradigm—is slowly emerging, but has not yet taken hold across the world.

The private sector has a significant role in the new paradigm, but public finance is required to catalyze massive private investment. The GCF can play a key role in establishing this new growth model and, through its Private Sector Facility, encouraging the private sector to invest in sustainable development. By engaging both the public and private sectors, the GCF can help nudge the world onto a lower-carbon, resilient development path.

2. Many Opportunities Exist, but Not All Are Being Realized.

Event attendees heard from “first mover” corporate leaders who have already invested in climate-relevant activities in order to capitalize on a business opportunity. They pointed out that the business agenda is not about climate change; if it is not related to pure economics there will be no investments.Increasingly affordable solar photovoltaics or a number of opportunities in the supply chain—lithium-ion batteries for hybrid and electric vehicles, for example—make business sense and allow “first movers” to develop a valuable competitive edge in the market.

Yet there are still several existing opportunities that businesses have not capitalized on. Energy efficiency, for example, can deliver big climate benefits while reducing costs, yet it is not happening at the scale needed. Energy efficiency is like low-hanging fruit, according to one panelist, but it is almost as if it is hanging below eye-level, so it is often overlooked.

The GCF can help overcome barriers to realizing these opportunities by helping address credit risk perceptions, providing financing and by finding ways to aggregate a number of small transactions to reduce overall transaction costs.

3. Public and Private: In Step and Synchronized

Climate change is a challenge that needs both public and private intervention. The private sector is very good at identifying opportunities, maximizing profit and managing risks. Working with the private sector allows public institutions to multiply the number of partners to work with, thus enabling scale. But the public sector must empower the private sector to invest in climate-relevant activities and products. They can do this by creating enabling environments and enacting conducive policies that encourage investment, such as renewable energy targets or energy efficiency standards. The GCF can also help address structural issues by promoting climate-friendly policies in member countries. Fossil fuel energy subsidies, for example, make it difficult for renewable energy investments to compete, and they discourage energy-efficiency investments. The GCF presents an opportunity to create a real partnership between the public and private sectors to fund low-carbon, resilient development.

This partnership should be based on clear principles on the use of public funds to prevent moral hazard, including avoiding distorting markets and preventing prolonged dependence on the GCF. Given that public resources are scarce, the GCF needs to seek “bang for buck.” A key question is, how can we minimize financial support from the GCF while maximizing investment from the private sector? Innovation has a role to play, but an appropriate balance between the new and the tried-and-true needs to be found so that the GCF can start quickly, scale up rapidly, and deliver results.

4. The GCF Must Carve Out its Own Niche.

The GCF was established at the 2010 climate negotiations in Cancun to be the premier channel for climate finance. The international community wanted a new kind of institution with a new kind of governance to address climate change challenges. But it was never meant to be the only institution in this space. The GCF is the new kid on the block – and it needs to play with others while defining its niche.

To determine the most effective role for itself, the GCF should take a hard look at existing institutions—such as the Global Environment Facility or the Climate Investment Funds—and identify what works and what does not in the context of climate finance. When asked to describe the ideal aspirations of the GCF in a few words, panelists spoke of ambition, leadership, partnerships, impact—in short, a game-changer. Establishing a clear, value-added role is the only way to ensure that the GCF becomes the game-changer it’s intended to be.

5. The GCF Can Act as a GPS for the Climate Investment Community.

There are very large pools of institutional capital, but insignificant amounts are currently going into green investments. Partly this is due to lack of familiarity on the part of fund managers. Partly it is natural inertia: It is easier to make short-term money investing in the familiar rather than investing in a long-term green project such as solar power installations in the developing world. But money must flow to climate-relevant investments if we are to contain global temperature rise.

What will this take? Speakers mentioned:

• Project pipeline: There are simply not enough viable, commercially competitive, climate-relevant projects out there to fund, so project development is needed. The GCF’s Readiness Facility can help in pipeline development.

• Upside: Investors have to see the benefits to them, so projects must be commercially viable. This can be especially challenging in newer or smaller markets. The GCF’s Private Sector Facility can help provide concessional financial support.

• Downside: Investors may be scared off by a project’s potential risks, such as uncertain financial viability, technical performance or mid-course policy changes. The GCF’s Private Sector Facility can help absorb some of these risks by providing tailored mitigation instruments and mechanisms—many of which are already available.

• Ecosystem: For any new asset class, an ecosystem of players—fund managers, credit rating agencies, and benchmark indices—is needed. This does not yet exist for green infrastructure. With its presence and some early successes, the GCF can spur the development of such an ecosystem.

Becoming a Major Force in Climate Finance

The GCF has the potential to become a powerful force in unlocking private sector finance—if it takes the necessary steps to become a game-changer. The unique strength of the GCF should be its ability to intervene holistically and help investors navigate the complex climate finance landscape. By mobilizing and more effectively deploying climate finance—from both public and private sectors—the GCF can play a pivotal role in helping the world mitigate and adapt to climate impacts.

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