WRI Launches Project on Climate Finance and the Private Sector

The Intergovernmental Panel on Climate Change (IPCC) estimates that our best chance of containing global temperature rise to 2°C is to keep atmospheric concentration of carbon dioxide below 450 parts per million (we’re currently at 390 ppm). In addition to several other climate mitigation strategies, sticking to this cap will require significant new investment in low-carbon infrastructure and activities in developing countries.

Experts estimate the cost of funding this development to be about $300 billion annually by 2020, growing to $500 billion by 2030. The problem is, there’s a huge funding gap when it comes to meeting these costs—industrialized nations have only committed to mobilize $100 billion of new funds annually by 2020 to meet these needs. The world will need to figure out a way to come up with the rest of the funding if we’re going to prevent developing nations from feeling climate change’s most severe impacts.

Introducing WRI’s Climate Finance and the Private Sector Project

Tapping into the private sector is one way to bridge the climate finance funding gap. The World Resources Institute’s new Climate Finance and the Private Sector (CFPS) initiative has been designed to specifically address how the public sector can leverage private investment in a low-carbon future.

Private sector investors – individuals; private equity firms or venture capitalists; and larger institutional investors like pension funds, insurance companies, or sovereign wealth funds – currently control several trillions of dollars worth of assets. Financial institutions have the capacity to provide resources for infrastructure development and other activities. The challenge will be to channel these resources towards climate-relevant investments in developing countries, such as renewable energy and energy efficiency projects and other activities that help nations mitigate or adapt to climate change.

One way to make sure funds are directed to these kinds of investments is to improve the investment attractiveness of climate-relevant projects. This is where the public sector can play a significant role.

CFPS seeks to help the public sector understand and fill the roles it has to play in attracting private capital to low-carbon development projects, while also serving as a translator between private sector investors and public sector policymakers. The CFPS project will attempt to address the following questions:

• What types of public support best address private sector needs?

• How can the public sector ensure that private capital is leveraged at the lowest cost to the public while generating the greatest environmental benefits?

• How can governments and public-private initiatives work together to leverage private capital in markets where access to finance is the most challenging?

• How successfully have existing sources of finance from development banks, international mechanisms (like the Global Environment Facility and the Climate Investment Funds), and public-private funds leveraged private capital?

• What lessons can be learned from past successes and failures?

Look for Our Series of Publications

The CFPS complements ongoing WRI research in areas related to climate change mitigation, adaptation, and finance. We aim to present our findings through a series of working papers that speak to the challenge of mobilizing private capital for climate-relevant investments.

Our first paper, Moving the Fulcrum: A Primer on Public Climate Financing Instruments Used to Leverage Private Investment, is now available. This working paper frames the issue of leveraging climate-relevant private investments and provides context for the subsequent papers in the series. It outlines how the public sector can foster attractive investment conditions by addressing investment risks in developing countries through the targeted use of public financing instruments. For example, governments could correct energy-pricing distortions that work against renewable energy, directly assist low-carbon projects in a transition phase, or provide loan guarantees and other financial instruments that can help mitigate perceived investor risk.

The second paper in the series, Public Financing Instruments to Leverage Private Capital for Climate-relevant Investment, is forthcoming. This paper will examine some public financing activities, with specific reference to multilateral agencies such as the international climate funds and multilateral development banks. It will include case studies of how public financing institutions have worked together to increase private sector participation in a project.

Subsequent papers will look at the activities of other public institutions, including bilateral, national, and regional development banks; government agencies; and public-private partnership funds. By gaining a broad understanding of the instruments and mechanisms that have been employed to date by various agencies, we can learn lessons about how the public sector can best leverage private sector climate finance in developing nations.