Topic: investment

Environmental and Social Policies in Overseas Investments: Progress and Challenges in China

Sarah Parsons — Wed, 08 May 2013 16:57:41 -0400

Summary

Like other countries that invest overseas, China—through the projects it finances and executes—can bring great benefit to the countries and communities in which it invests (“host countries”). However, investments can pose challenges and risks to host and investor countries. Effectively tailored environmental and social policies can identify and mitigate not only unanticipated environmental and social harm, but also some of the investment risks that can undermine the long-term financial success of a project.

Even in the midst of the 2008–09 global financial crisis, China’s outward foreign direct investment (OFDI) continued to grow.1 Between 2008 and 2009, China’s OFDI flows grew nearly 8 percent, while total world OFDI flows during the same period decreased nearly 40 percent (Unctad Stat 2012). In both 2009 and 2010, the Export-Import Bank of China and the China Development Bank together lent more than the World Bank did to developing countries (Dyer, Anderlini and Sender 2011).

Environmental and Social Policies in Overseas Investments: Progress and Challenges for China examines trends in China’s overseas investments and considers how social and environmental policies can reduce investment risks and enhance the positive impacts of China’s OFDI. We focus on three major forces in China’s OFDI: the central government, financial institutions, and centrally owned state-owned enterprises (SOEs). Although a variety of institutions are involved in overseas investments, the majority of Chinese OFDI originates from centrally owned SOEs, and its OFDI growth is fueled largely by the strong lending capacity of its financial institutions, especially the China Development Bank and the Export Import Bank of China. Aid, trade, and other types of financial interest that may be associated with overseas economic interests are not addressed here, nor are overseas investments by collectively or privately owned companies.

As China continues to expand overseas investments, understanding and managing the environmental and social impact of these investments in host countries can help it build mutually beneficial relation-ships with host countries. Already, methods to address environmental and social issues in overseas investments are emerging in China. Chinese regulatory authorities are creating guidelines in their areas of jurisdiction, and individual financial institutions are developing and refining their own policies. International experience with environmental and social risk mitigation offers a useful context for Chinese investors and policymakers to consider as they continue to develop these overseas investment policies.

Moving forward, China faces several challenges, not the least of which is a lack of understanding of the regulatory and legal environment in host countries. Attention to host countries’ regulatory and legal environments must be ratcheted up if investment risks are to be reduced. Supervisory challenges and coordination among ministries should also be prioritized. Finally, even though governments, financial institutions, and corporations have produced multiple guidelines and policies to guide more sustainable overseas investments, implementation remains a major challenge. Sufficient resources should be directed toward implementation to overcome barriers such as cost, coordination of resources, and time.

While these challenges are real, China’s rapid economic growth and global presence also create opportunities that offer insight for a global audience. China can shape the direction and return of its OFDI to maximize positive impact and achieve “win-win” relationships with host countries. As an experienced recipient of OFDI, China can now apply those lessons as it invests abroad. In addition, China can step into facilitator and leadership roles in the international agenda of promoting sustainable cross-border investment, especially in developing countries.

This issue brief is the first in a series of WRI publications by the International Financial Flows and the Environment (IFFE) project that examine the role of environmental and social policies in overseas investments. Future publications will look at the “business case” for adopting stronger environmental and social policies, and will include case studies of overseas investments from China and other countries.

The U.S. Contribution to Fast-Start Finance: FY12 Update

Sarah Parsons — Tue, 23 Apr 2013 14:06:17 -0400

Summary

As part of the international climate negotiations, developed country governments committed to provide developing countries with “new and additional resources, including forestry and investments through international institutions, approaching $30 billion in the period 2010-2012 with balanced allocation between adaptation and mitigation.” This fact sheet considers U.S. efforts to provide “fast-start finance” (FSF) over the full three-year period, drawing primarily from program data presented in the State Department’s report series, “Meeting the Fast Start Commitment.” The fact sheet is part of a series of analyses on FSF contributions, and updates a May 2012 working paper quantifying total U.S. contributions to the global FSF commitment.

Over the FSF period, the United States has reported roughly $7.5 billion, or about 20% of the global self-reported total flows of FSF. Notable attributes of the U.S. FSF contribution include:

The levels of finance fluctuated over the three-year period, with the largest volume in FY11. This is related to variations in spending on the part of key agencies such as the Overseas Private Investment Corporation (OPIC) and the Millennium Challenge Corporation (MCC).
Over the three-year period, a significant share of the U.S. portfolio supported clean energy in Asia. OPIC and the U.S. Agency for International Development (USAID) played key roles in administering finance, and finance was channeled via a combination of grants and loans, guarantees, and insurance.

Transparency has improved in FY12 reporting, but there is room for further improvement. In addition to implementing the new international reporting requirements adopted at Doha, the following actions would help support verification of aggregate figures, as well as coordination and accountability:

Publishing a detailed, disaggregated, annual list of projects and programs;
Using the Foreign Assistance Dashboard as a platform for sharing information;
Aligning reporting under the United Nations Framework Convention on Climate Change (UNFCCC) with reporting to the Organisation for Economic Co-operation and Development (OECD); and
Continuing to work with other countries and multilateral institutions to strengthen and harmonize reporting systems.

China's Overseas Investments in the Wind and Solar Industries: Trends and Drivers

Sarah Parsons — Mon, 15 Apr 2013 17:00:58 -0400

Executive Summary

Shifting to a low-carbon economy will require current emitting countries and projected future emitters to rapidly scale up their investments in renewable energy. In recent years, major emerging economies like China, India, and Brazil have been catching up with leading developed country investors in Europe and the United States. By some estimates, China is already the leading global investor in renewable energy infrastructure, and is increasing its overseas investments in renewable energy, particularly solar and wind. If China achieves its goal of sourcing 15 percent of its energy mix from renewables by 2020 and 30–45 percent by 2050, renewable energy will become closer to a mainstream energy resource within the country. Cost reduction incurred in this process would benefit not only China, but also the rest of the world.

This working paper aims to help policymakers, investors, and researchers better understand the trends in China’s overseas investments in the wind and solar industries, and the factors behind those trends. It examines the scale, nature, and types of China’s overseas investments in the wind and solar industries, and identifies the policy and market factors that drive these investments. China has made at least 124 investments in solar and wind industries in 33 countries over the past decade. Of the investments for which data were available, the cumulative value amounted to nearly US$40 billion in 54 investments, and the cumulative installed capacity added was nearly 6,000 MW in 53 investments. Of the 124 investments, 41 were in the wind industry, 81 in the solar industry, and 2 in both the wind and solar industries.

The majority of investments were in electricity generation. Twenty-seven of the wind investments were in wind farms predominantly carried out through joint ventures, as were most of the 41 solar investments. Several investments were made in manufacturing facilities and to establish sales and marketing offices. Most of the investments were concentrated in a few developed countries: the United States, Germany, Italy, and Australia. A handful of developing countries, including South Africa, Pakistan, and Ethiopia, also attracted investments.

China’s investments in the wind and solar industries are driven by a multitude of factors including macroeconomic conditions; industry conditions; policies (both general and specific to the wind and solar industries) that “push” Chinese companies to invest overseas; policy incentives in host countries that “pull” Chinese investors; and financial support from Chinese banks that “enables” these investments.

China is driven to seek solar and wind markets overseas largely because its manufacturing capacity exceeds domestic demand. The Chinese government’s policy support and financial support—mainly from state-owned banks that respond to government policy—encourage this overseas investment trend. Host countries’ policies have also attracted investments from China’s solar and wind industries, either advertently through tax breaks, feed-in tariffs, or bilateral cooperation agreements, or inadvertently as a “side-effect” of policies discouraging imports.

Although the analysis in this working paper points to interesting trends and provides useful insights that enhance our understanding of China’s role as an overseas investor in the wind and solar industries, it is limited by a paucity of information. Beyond the data collected for the 124 investments, the authors also reviewed literature and carried out interviews to deepen the analysis. The analysis is confined to a subset of the renewable energy sector rather than the full range of possible low-carbon investments. The inadequacy of the data does not allow an analysis of the emissions impact of these investments. These limitations suggest areas for further research that could help improve an understanding of China’s potential to reduce emissions beyond its borders, and would allow policy analysis on how China could increase this positive impact, particularly in developing countries.

Methodology and Database--Public Financing Instruments to Leverage Private Capital: Focus on Multilateral Agencies

Sarah Parsons — Tue, 12 Mar 2013 20:41:59 -0400

These documents are drawn from WRI’s working paper, Public Financing Instruments to Leverage Private Capital for Climate-Relevant Investment: Focus on Multilateral Agencies.

This working paper is part of WRI’s Climate Finance series, which tackles a broad range of issues relevant to public donors, intermediaries, and recipients of climate finance. A subset of this series examines how public funds can leverage private sector investment in climate-relevant projects to help meet developing countries’ significant investment needs.

Access other publications in this series.

Survey of Public Financing Institutions' Use of Instruments

Sarah Parsons — Tue, 12 Mar 2013 20:28:14 -0400

This document is drawn from Appendix I in WRI’s working paper, Public Financing Instruments to Leverage Private Capital for Climate-Relevant Investment: Focus on Multilateral Agencies. It maps the types of financial instruments used by various development financial institutions, export credit agencies, and climate funds to support their operations. This listing may serve as a useful reference for public sector decision-makers evaluating the broad toolkit of options available to support private sector climate change mitigation and adaptation projects in developing countries.

Public Financing Instruments to Leverage Private Capital for Climate-Relevant Investment: Focus on Multilateral Agencies is part of WRI’s Climate Finance series, which tackles a broad range of issues relevant to public contributors, intermediaries, and recipients of climate finance—that is, financial flows to mitigate greenhouse gas emissions and adapt to climate change impacts. A subset of this series examines how different types of public climate finance providers and intermediaries–or international finance entities like the proposed Green Climate Fund–can meet the significant investment needs of developing countries by mobilizing private sector investment. This subset focuses on how the public sector can finance and mobilize private sector investment and acknowledges the importance of overarching support for complementary climate change policies that create attractive market conditions domestically.

Access other publications in this series.

Mobilizing Climate Investment: The Role of International Climate Finance in Creating Readiness for Scaled-Up, Low-Carbon Energy

Sarah Parsons — Fri, 22 Feb 2013 15:20:51 -0500

Executive Summary

Between now and 2050, developing countries need an estimated $531 billion per year of additional investment in energy supply and demand technologies in order to limit global temperature rise to 2° C above pre-industrial levels. To achieve this scale of investment, developing country governments and custodians of international public finance will need to deploy limited public finance in ways that leverage an unprecedented volume of private sector investment. Despite growing global investment in low-carbon energy and falling costs, it will be difficult to achieve the scale and urgency of investments needed without the appropriate policy, institutional, industry, and financial conditions. Governments and their international partners need to undertake “readiness” activities designed to put in place the conditions that attract scaled-up investment and enable a transformation toward low-carbon energy development pathways.

Drawing on six developing country case studies, this report identifies a set of key lessons and insights for readiness. The report develops a framework to identify and prioritize readiness activities that will require public financial support to create the conditions necessary to scale up investments in renewable energy and energy efficiency (collectively referred to as low-carbon energy). The report discusses the implications of the findings for international climate finance and draws a number of recommendations for the Green Climate Fund (GCF). It targets international public funds and institutions looking to accelerate investment in low-carbon energy, as well as developing country governments looking to identify and prioritize activities for funding.

Enabling conditions for scaling up investment

We identify a number of policy and institutional, industry, and financial sector conditions that can attract scaled-up public and private investment in low-carbon energy. Policy and institutional conditions include plans and targets for low-carbon energy, institutional capacity to effectively implement climate change and energy policies, laws supporting investment in low-carbon energy, and regulatory and fiscal instruments to implement laws. Industry conditions include the capacity of developers to prepare bankable projects, information on renewable resource availability or options to conserve energy, engineering capacity, and the presence of a support industry and enabling infrastructure. Financial conditions include a stable financial sector with the capacity and range of financial products needed to support low-carbon energy.

In six case studies, we analyze the role that enabling activities have played in promoting scaled up investment in low-carbon energy, and the role that international public finance has played in supporting such activities. These case studies examine energy efficiency in Thailand, wind power in South Africa, solar water heaters in Tunisia, geothermal power in Indonesia, wind power in Mexico, and energy efficiency in India. Taken together, the case studies suggest two overarching determinants of success in scaling up investment: government leadership and effective responses to pricing distortions. When government leadership is strong, a commitment to policy and institutional reform and implementation of stated goals usually follows. This in turn strengthens the investment climate and increases investor confidence. In cases where market failures severely distort the market in favor of carbon-intensive energy sources, it has been more difficult to create the conditions that attract investment in low-carbon energy.

Lessons learned for the design of readiness activities

The case studies also reveal a number of lessons about the design of readiness activities and the role of international partners in supporting them.

Small amounts of long-term funding for enabling activities can help scale up investment

In each case study, small investments in enabling activities—from several hundred thousand dollars to several million dollars—helped pave the way for scaled up private and public investments by supporting the creation of conducive policies and market conditions. International support has been most effective when sustained over five or more years. Technical support can also be more effective if international advisors are integrated into national institutions and report to national, rather than international, authorities.

International support is likely to be more effective if it identifies and targets a few critical barriers to investment. In countries with comparatively few enabling conditions for investment, attempts to simultaneously surmount all investment barriers may result in resources being spread too thin to achieve a significant impact. Chapter 4 presents a framework that can aid governments and their international partners in identifying activities to support.

Strengthening the enabling environment should not end when investment begins. In each case study, readiness activities and larger investment took place simultaneously. Even in cases where the investment climate was already strong, there was still scope for additional enabling activities to address specific gaps.

Integrated, inclusive planning processes and policy and institutional reform are key to attracting investment

The integration of low-carbon energy into a broader development agenda can enhance coordination and alignment between different sectors of the economy. Civil society and private sector actors can bring valuable expertise and experience to the planning process, and play important roles in ensuring that low-carbon energy policies and plans are realistic, robust, and tailored to the needs of the country. International support should be aligned with national plans and priorities for effective and sustained outcomes, and should be flexible enough to respond in a timely manner to evolving priorities.

Changes to the policy and regulatory environment proved crucial to attracting investment on a significant scale in the case studies. International support for the design of policies is likely to be effective only if it is demand-driven and not seen as infringing on national sovereignty. Countries that have set up their own financial mechanism to support low-carbon energy projects are well positioned to implement their objectives effectively and independently, thereby reducing their reliance on international partners to finance their low-carbon energy needs.

Having the appropriate institutions in place to develop, implement, and regulate policy reforms—and empowering them with the mandate and resources to carry out their functions effectively—helped ensure that policies were coherent and consistent, which increased investor confidence.

In key institutions, strengthening the capacity of staff and management to carry out their functions is an important readiness activity that often requires international funding support. The case studies suggest that capacity-building support is most effective when carefully targeted to address particular skills gaps.

Tackling information barriers and strengthening industry and financial sector capacity can unlock investment

Public support for broad-scale renewable resource assessments or exploration can provide information on resource availability that is key to attracting investor interest. Similarly, measures to familiarize industry and other actors with low-carbon energy options—such as training centers, awareness campaigns, and seminars and workshops that bring together stakeholders—can strengthen industry knowledge of and capacity to implement renewable energy projects, and raise awareness of the potential cost savings from energy efficiency.

International support plays an important role in facilitating learning and demonstrating new financing models for renewable energy, as well as strengthening industry’s capacity to develop and implement low-carbon energy projects. In some cases, international support to strengthen the capacity of small and medium enterprises (SMEs) and improve their access to financing for low-carbon energy projects has helped unlock investment by this sector of the market.

Financial institutions can play a key role in opening the market for low-carbon energy technologies. However, some financial institutions lack knowledge of and experience with these technologies. Strengthening the capacity of financial institutions to support renewable energy and energy efficiency projects, including through pilot financing programs, has been important in scaling up domestic sources of finance for low-carbon energy in several cases. In some cases, the high risk—real or perceived—of investing in low-carbon technologies without a proven track record in the country has deterred domestic financial institutions. Mechanisms that carefully allocate risks to those best placed to manage them can help attract financing from domestic banks and other financial institutions.

A framework for guiding readiness support for low-carbon energy investments

Building on the experiences of the six case studies, we propose a framework to guide governments and their international partners in determining how best to provide readiness support to countries with low-carbon energy sectors in different stages of development. The framework describes some of the activities required to strengthen the enabling policy and institutional environment for investment. In the early stages of development, these include support for assessing energy options, engaging stakeholders in the energy planning process, capacity building for government agencies and civil society, technical support for developing plans and strategies, and outreach activities. In later stages, activities include support for designing and implementing regulations and fiscal instruments, and targeted capacity building for government agencies, including local governments.

The proposed framework also describes some of the activities needed to strengthen the enabling industry and financial conditions for investment. In early stages of development, these include renewable resource assessments and energy conservation awareness campaigns, capacity building for project developers and financial institutions, support for technology transfer and localization, feasibility studies and environmental and social impact assessments, and support for financial sector reform. At later stages, activities include strengthening engineering capacity for low-carbon energy projects, supporting ancillary industries (such as upgrading grid infrastructure), and supporting financial institutions to assess and finance low-carbon energy projects.

Recommendations for the Green Climate Fund

The six case studies illustrate different approaches that various international partners have used to support readiness activities. The lessons learned are intended to inform the recently established GCF as it attempts to identify how best to support a paradigm shift toward low-emission and climate-resilient development pathways. Although the GFC’s detailed operational modalities are not yet defined, it could take a number of approaches to support readiness. These include supporting readiness directly or partnering with existing institutions; establishing distinct channels and allocations for readiness or integrating enabling activities into existing channels and allocations; and supporting readiness through the private sector facility.

Communicating the "Financeability" of Energy Efficiency Projects (EEPs): Guide to Data Needs for Financing EEPs in China

Sarah Parsons — Tue, 08 Jan 2013 12:12:48 -0500

Executive Summary

The purpose of this guide (Guide) is to help industrial companies (Hosts) finance energy efficiency projects (EEPs) at their facilities as defined in Annex C of this document. The Guide is designed to help Hosts know what information is required of them by financing entities (Financiers) to streamline the evaluation and financing process. This Guide can also help financial institutions, energy services companies (ESCOs), vendors, and other project developers better understand the information required to finance EEPs. The Guide draws from the authors’ experiences and insights gained through extensive work with Hosts, Financiers, ESCOs, prestigious universities such as Shanghai Jiaotong University (SJTU), and other stakeholders in the financing of EEPs. It was developed in partnership with Chinese and global Financiers and energy efficiency experts.

Findings indicate that Hosts can accelerate and enhance the financing process and likelihood of success in three ways:

Communicating with Financiers as early as possible to understand their informational or structural needs, their financing decision-making criteria and processes, as well as any special services that the Financiers provide (i.e., technical assistance in designing EEPs).
Performing a “self-screening” assessment of any proposed EEPs that many Financiers would evaluate, such as type of Host or technology, size of project, and so on.
Providing as much detailed and accurate information as possible at the beginning of the financing process since plentiful data will increase credibility with Financiers.

Hosts often experience delays and rejection of EEP financing because Financiers were not provided critical Host and project data in a timely and accurate manner. This has prevented Financiers from receiving a compelling picture of the benefits and (limited) risks of a promising EEP. Being prepared to present the correct data to Financiers results in a smoother financing process and a much higher probability of success.

This Guide is designed to:

familiarize Hosts with the type of data most Financiers use to evaluate EEPs, as set forth in Annex A: EEP Assessment Indicators, and explain why the data are important;
explain the general indicators used by Financiers to evaluate Host and project attractiveness and why these indicators are used;
explain what information is important during the different stages of the financing process;
help a Host conduct its own assessment of its EEP prior to submitting an application to prospective Financiers, to help improve the quality of the financing application and likelihood of success;
highlight common mistakes Hosts make when seeking energy efficiency financing, and illustrate the impact different financing mechanisms have on a Financier’s evaluation and requirements of the Host and the EEP.

By using this Guide to become more familiar with the financing process for EEPs, Hosts can improve their success rate in securing attractive external financing to increase their facilities’ energy efficiency.

Public Financing Instruments to Leverage Private Capital for Climate-Relevant Investment: Focus on Multilateral Agencies

Sarah Parsons — Thu, 06 Dec 2012 10:12:49 -0500

Executive Summary

As private sector investment flows within and into developing countries rapidly increase, the public sector has a unique opportunity to ensure that these flows are directed to meet critical climate change investment needs. This paper informs the use of public funds to leverage private sector investment in climate-relevant projects. It focuses on the public sector’s use of financing instruments, which can help improve the risk-reward profile of climate-relevant projects, especially when combined with a foundation of complementary climate change policies and financial regulations.

This paper draws on the experiences of two types of multilateral institutions responsible for providing or intermediating finance to climate change projects in developing countries: (1) climate funds and (2) development banks. It maps the financing instruments available to various public actors, with a focus on three significant institutions: the Global Environment Facility, the Clean Technology Fund, and the World Bank Group. Future working papers will map the activities of other public institutions, including bilateral, national, and regional development banks; government agencies; and public-private partnership funds.

The results of these working papers will be aggregated into detailed analyses and recommendations that inform the future public provision of climate finance with respect to leveraging private capital.

Findings from this paper for public actors and international mechanisms, like the Green Climate Fund, include the need to:

1. Better tailor the use of public financing instruments and maximize flexibility in the use of these instruments. This includes:

Expanding the use of financing instruments beyond loans to equity and guarantees in order to mitigate specific risks faced by the private sector in different geographies.
Coordinating support for domestic climate change policies and robust financial markets with project finance.
Targeting grant support to markets where access to finance is most challenging and where public finance is instrumental in market development. This includes grant finance to poorer countries with less robust financial markets, as well as for new technologies that cannot achieve commercial returns without initial public support.
Capitalizing international mechanisms like the Green Climate Fund in a manner that allows maximum flexibility in the use of different financing instruments. Specifically, the governments of developed countries should consider providing a reasonable amount of grant funding to the Green Climate Fund and its Private Sector Facility to ensure that a suite of instruments can be used flexibly as needed to most effectively mobilize investments. Loans, equity, de-risking instruments, or investments in other funds will provide a suite of products for the Fund to most effectively leverage private capital in ways that are most appropriate for individual programs or projects.

2. Address internal, institutional barriers to private sector investment; for example, by:

Improving internal coordination and cooperation with the aim of offering a complementary suite of financing options for, or to attract private sector investment into, projects.
Instituting incentives for employees to proactively consider options to increase private sector participation in projects, while maintaining appropriate checks to ensure that private sector activities are not unnecessarily subsidized.
Streamlining fee structures and transaction processing times for all products, but particularly non-loan, non-grant instruments.
Improving tracking and monitoring systems, as well as data transparency and availability to better identify and incorporate best practices in leveraging private capital.
Familiarizing recipient governments with more complex instruments, like guarantees, to enable them to use such instruments when appropriate.

Glossary of Financing Instruments

Sarah Parsons — Tue, 14 Aug 2012 13:17:08 -0400

This document is drawn from Appendix II in WRI’s working paper, Moving the Fulcrum: A Primer on Public Climate Financing Instruments Used to Leverage Private Capital. This working paper demonstrates how the public sector can employ different types of public financing instruments — whether loans, equity, or de-risking instruments — alongside policy and technical support to scale-up private sector investment in low-carbon markets.

Moving the Fulcrum is part of WRI’s Climate Finance series, which tackles a broad range of issues relevant to public donors, intermediaries, and recipients of climate finance. A subset of this series, including this primer, examines how public climate finance providers—whether governments, development finance institutions, or international finance mechanisms like the proposed Green Climate Fund–can meet the significant investment needs of developing countries by mobilizing private sector investment. It focuses on how the public sector can finance and mobilize investment into private sector projects, but also acknowledges the importance of overarching support for complementary low-carbon policies. Low-carbon sectors specifically considered include renewable energy, energy efficiency, and related infrastructure and services, though lessons may equally apply to other climate change-relevant sectors like sustainable agriculture, transportation, and water infrastructure.

Current Initiatives Focused on Using Public Climate Finance to Leverage Private Capital

Sarah Parsons — Tue, 14 Aug 2012 13:09:11 -0400

These tables are drawn from Appendix III in WRI’s working paper, Moving the Fulcrum: A Primer on Public Climate Financing Instruments Used to Leverage Private Capital. This working paper demonstrates how the public sector can employ different types of public financing instruments — whether loans, equity, or de-risking instruments — alongside policy and technical support to scale-up private sector investment in low-carbon markets.

Reading Resources on Using Public Climate Finance to Leverage Private Capital

Sarah Parsons — Tue, 14 Aug 2012 12:52:35 -0400

This document is drawn from Appendix II of WRI’s working paper, Moving the Fulcrum: A Primer on Public Climate Financing Instruments Used to Leverage Private Capital. This working paper demonstrates how the public sector can employ different types of public financing instruments — whether loans, equity, or de-risking instruments — alongside policy and technical support to scale-up private sector investment in low-carbon markets.

This document was originally published in August 2012, and updated in June 2013 to include new resources.

Moving the Fulcrum: A Primer on Public Climate Financing Instruments Used to Leverage Private Capital

Christine Potochny — Wed, 25 Jul 2012 15:11:56 -0400

Executive Summary

The Problem: Projected climate change mitigation investment needs in developing countries–including for low-carbon sectors–are significant, growing, and may not be met. Experts estimate new investments of up to $300 billion annually by 2020, growing up to $500 billion annually by 2030, are required to mitigate developing countries’ greenhouse gas emissions to levels in line with global targets. While industrialized nations have committed to mobilizing new funds of $100 billion annually by 2020 to meet these needs, this level of funding is far from what is required.

One Solution: Redirect the private sector’s growing investment in developing countries to help fill the growing climate finance gap. McKinsey estimates that the financial stock—that is, the total value of outstanding stocks and bonds—of developing countries grew by $11 trillion in 2011. By intervening to improve the investment attractiveness of climate change-relevant markets, the public sector has a significant opportunity to harness and redirect these significant private sector capital flows away from fossil fuel-driven sectors and toward low-carbon development.

The Challenge: Mobilizing private sector investment will require better targeted public support that improves the risk-reward calculus of lowcarbon markets. The private sector seeks markets that exhibit (i) attractive returns relative to associated risks over an appropriate investment timeframe (“attractive risk-reward calculus”) as well as (ii) adequate size, liquidity, and transparency. These conditions are often absent in developing countries due to the nascent natures of both low-carbon and financial markets in these geographies.

Recommendation: To improve the risk-reward calculus of investments—arguably the most fundamental barrier to leveraging private capital—the public sector can complement support for low-carbon policies with direct finance that manages the following risks:

Political and macroeconomic risks. Political risk guarantees, interest-rate/currency exchange products, and local currency loans can help investors and project developers financially manage political (for example, political instability) and/or macroeconomic (for example, exchange rate volatility) risks. As these financing instruments are not easily accessible in poorer countries, by providing these instruments, the public sector can catalyze low-carbon investment in geographies where access to finance is most challenging.
Low-carbon market risks, including policy, technology, and operational risks. These risks, which range from unexpected policy changes to technology failures, can affect both new and mature low-carbon markets. In newer low-carbon markets, public financing instruments like first-loss equity and debt investments and concessional loans can be instrumental in encouraging early investment. Projects in more established low-carbon markets—like solar, wind, and energy efficiency—can benefit from flexible loans, partial risk and credit guarantees, and risk sharing facilities.

Given the varied investment conditions across developing countries and their respective low-carbon markets, each market will require a unique combination of finance and policy support to scale-up private sector investment. Future WRI publications, drawing on private sector perspectives, will delve deeper into how public climate finance providers—whether governments, development finance institutions, or export-credit/aid agencies—can tailor direct finance to scale-up private sector investment in different markets.

STATEMENT: Development Banks Announce "Game Changer" for Sustainable Transport at Rio+20

Lauren Zelin — Tue, 19 Jun 2012 23:38:38 -0400

The world’s largest multi-lateral development banks — led by the Asian Development Bank, the World Bank, and others — committed to provide more than $175 billion over 10 years to support sustainable transport in developing countries.

The announcement was made at the UN Sustainable Development Conference in Rio de Janeiro (Rio+20) by the African Development Bank, Asian Development Bank, CAF- Development Bank of Latin America, European Bank for Reconstruction and Development, European Investment Bank, Inter-American Development Bank, Islamic Development Bank, and the World Bank.

Following is a statement from Holger Dalkmann, director of EMBARQ, the World Resources Institute’s center for sustainable transport:

“This is a game changer for sustainable transport. It will ensure that hundreds of millions of people will have cleaner air, less congested roads, and safer transportation.

“Ten years ago transportation wasn’t even in the discussion; now it’s a major outcome from the world’s preeminent conference on sustainable development.

“Banks are putting their money where it matters — on streets built for people, not just cars. The world’s population is expected to surpass 9 billion by 2050, with more than half living in Asia, mostly in urban areas. At the same time, the rate of vehicle ownership is predicted to skyrocket from around 800 million cars a decade ago to around 2 billion in 2030. These two mega-trends are coming together to create an environment where people must compete for financial, institutional, and physical resources. In response, we need better urban designs; more sustainable transportation modes, like walking, biking and mass transit; and improvements in existing vehicle and fuel technology.

“This investment is not just about improving the way people move from point A to point B; it’s also about providing access and mobility for the poor and improving road safety, not to mention reducing transport-related greenhouse gas emissions. Transport is no small piece of the climate change pie: the sector represents approximately one-quarter of global CO2 emissions.

“Today’s announcement will no doubt encourage other decision-makers, especially national governments, to consider financing transport projects based on social and environmental benefits. It will push sustainability into the core of urban development.

“At the same time, we need to make sure that the money gets invested into the right kind of projects, and that there are sound mechanisms to measure its impact. This will require full transparency and independent monitoring.

“Countries often invest in transportation and infrastructure, but much of that goes into highways. We need to be smarter about where money flows, whether that means creating vibrant public spaces, providing safer infrastructure for pedestrians and cyclists, or building high-tech, low-cost transit systems. Doing this would be a paradigm shift in the way we finance the growth of sustainable cities, similar to what the Asian Development Bank has done with its Sustainable Transport Initiative, a lending and technical assistance program for transport projects in Asia and the Pacific that emphasizes inclusive economic and environmentally sustainable growth.

“EMBARQ, the World Resources Institute’s center for sustainable transport, is a founding member of the Partnership on Sustainable Low Carbon Transport, which helped to catalyze this new financial commitment by the banks.

“Years from now, we may look back at Rio+20 as the moment when transport was pushed to the top of the sustainability agenda.”

-ENDS-

For more information on EMBARQ, visit: www.embarq.org.

Note: To schedule an interview, contact: Michael Oko, moko@wri.org.

Climate Finance and the Private Sector

Christine Potochny — Sat, 16 Jun 2012 16:38:50 -0400

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)}

LEARN MORE: Download our brochure for more information on Climate Finance and the Private Sector.
ADDITIONAL RESOURCE: WRI contributed to the Green Growth Action Alliance’s Green Investment Report. Download the report.

Sustainable Procurement of Wood and Paper-Based Products: Version 2

Ruth Nogueron — Fri, 22 Jul 2011 08:52:22 -0400

Find out more at http://www.sustainableforestprods.org

Version 2 contains updates to the sections on legality and useful resources, known as the "guide to the guides." The guide now describes 47 tools and resources (13 more than in the previous version) that aid sustainable procurement of forest products.

Decisions regarding the purchase and use of wood and paper-based products can have far-reaching, long-term impacts for the forests where they are harvested, the communities supported by wood-using industries, and the places where those products are purchased and used.

The information in this joint WRI/WBCSD publication is organized around ten key issues, posed as "essential questions" that procurement managers might address related to the sustainable procurement of wood and paper-based products:

Origin: Where do the products come from?
Information accuracy: Is information about the products credible?
Legality: Have the products been legally produced?
Sustainability: Have forests been sustainably managed?
Special places: Have special places, including sensitive ecosystems, been protected?
Climate change: Have climate issues been addressed?
Environmental protection: Have appropriate environmental controls been applied?
Recycled fiber: Has recycled fiber been used appropriately?
Other resources: Have other resources been used appropriately?
Local communities and indigenous peoples: Have the needs of local communities or indigenous peoples been addressed?

The publication is designed as an information tool to help customers develop their own sustainable procurement policies for wood and paper-based products. It is also a decision support tool providing simple and clear information on twenty-two existing approaches to the procurement of wood and paper-based products from legal and sustainable sources, as well as providing additional references and resource materials.