A WRI-wide initiative focused on Climate Finance and the Private Sector.
Experts estimate developing countries will require new investments of up to $300 billion annually by 2020—growing up to $500 billion annually by 2030—to adequately limit their growing greenhouse gas emissions1. These countries will also require several hundred billion additional dollars to protect themselves from the worsening physical and economic impacts of greenhouse gases already in the atmosphere. While developed countries, through international agreements, have committed to channeling $100 billion by 2020 to developing countries for their climate mitigation and adaptation activities, this level of investment is clearly far from what is required.
Recognizing this funding gap, public actors have become increasingly interested in using public funds to leverage private capital investment in climate change projects in developing countries. Private sector investors—whether individual investors, private equity including venture capitalists, or larger institutional investors like pension funds, insurance companies, or sovereign wealth funds—have assets under management representing several trillions of dollars globally. In addition, global, regional, and local financial institutions have the capacity to provide much needed capital and financial services to finance privately-developed climate change projects – if the terms are right.
Fostering private participation in low-carbon markets can not only addresses near-term development needs, but also ensure the longer-term viability of these markets. Thus, a unique opportunity exists for public and private actors to work together to increase climate change-related private capital flows to developing countries.
A WRI Cross-Institute Initiative to Respond to a Window of Opportunity
Responding to this opportunity, in 2011, WRI’s Markets and Enterprise (MEP), Institutions and Governance, and Climate and Energy (CEP) programs, recently launched a cross-Institute initiative focused on Climate Finance and the Private Sector. The initiative aims to improve the effectiveness of public climate finance with respect to catalyzing private capital flows to developing countries. Bridging private and public sector perspectives, it engages with government agencies, public financial intermediaries, as well as private investors and project developers. The initiative’s conclusions will inform the provision of all climate finance, whether channeled through development banks, aid agencies, public-private funds, or international mechanisms like the Green Climate Fund. Initially, the Initiative will focus on leveraging private sector participation in low-carbon development through the targeted use of public financing instruments.
Three Work Streams to Leverage Private Sector Participation in Low-Carbon Developing Country Markets
The project is comprised of three work streams that examine how donors and intermediaries can more effectively use financial, and other, instruments to leverage private capital and thus create transformative climate change outcomes. These work streams focus on development finance institutions, public-private partnership funds and initiatives, and bi-lateral climate finance frameworks, respectively. Through these work streams, the Initiative will address important questions, including:
- What types of public support best respond to private sector requirements in low-carbon development markets?
- can governments and public-private initiatives more effectively work together to leverage private capital, particularly in poorer developing nations and “small and medium enterprise” markets?
- What safeguards must the public sector institute to ensure that private capital is leveraged at the lowest cost to the public, while generating the greatest environmental benefits?
- How should the roles of different types of public financing institutions and governments in leveraging private capital be delineated?
- How successfully have existing sources of finance from development banks, international mechanisms , and public-private funds, leveraged private capital?
- What lessons can be learned from past successes and failures, whether in climate finance or in other development arenas?
(1) Estimates from IEA 2008 and McKinsey & Company 2009 projects to stabilize worldwide GHGs to 450 ppm CO2e, which would provide a 22-74% chance of staying below 2⁰C warming by 2100, according to the Intergovernmental Panel on Climate Change (2007)