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Unlocking Climate Finance: How Can Multilateral Agencies Better Leverage the Private Sector?

The Doha negotiations that just concluded earlier this month have again drawn attention to the urgent need for climate adaptation and emissions reductions. Government representatives, civil society stakeholders, development aid organizations, and corporates agree that the world must make big strides—soon—if we are to have any hope of keeping global average temperatures to 2 degrees Celsius above pre-industrial levels.

One problem, though, is how to generate enough finance to fund these activities. A new WRI working paper aims to address this challenge by examining the role multilateral agencies can play in mobilizing private sector finance for climate change adaptation and mitigation.

Leveraging the Private Sector to Bridge the Climate Finance Gap

Developing countries—those most vulnerable to climate change’s impacts—will need $300 billion annually by 2020 and $500 billion annually by 2050 for mitigation activities alone. The newly established Green Climate Fund (GCF), meant to channel $100 billion annually into climate-relevant investments starting in 2020, is a significant first step, but does not fill the gap of what’s needed.

The public sector cannot tackle this challenge alone, and indeed, the GCF already envisions funding from a mix of public and private sources. The key, then, is to mobilize the private sector to create new investment opportunities and new markets.

New Research Helps Identify Ways to Boost Private Sector Climate Investments

WRI’s Climate Finance and the Private Sector project released a paper earlier this year that framed the issue of leveraging climate-relevant private investments. We just released the second installment of our series, Public Financing Instruments to Leverage Private Capital for Climate-Relevant Investment: Focus on Multilateral Agencies. It outlines the role that multilateral agencies can play in unlocking private sector finance through their significant financial support and global reach. The research focuses on the World Bank Group (WBG), the largest multilateral development bank; the Global Environmental Facility (GEF), the oldest and largest international environment fund; and the Clean Technology Fund (CTF), the newest multilateral fund focused on climate change.

The paper maps 214 climate-relevant projects approved and/or undertaken by these institutions between January 2005 and December 2011. These projects accounted for investments of approximately $17 billion, a total mobilization of $44 billion when including co-financing from other sources. By analyzing these existing climate finance projects, we were able to identify shortcomings, barriers, and areas for improvements when it comes to unlocking private capital. Essentially, we feel that more could—and must—be done to leverage private finance. Some of our findings include:

1) Private Finance Mobilization Varies Across Agencies

We found numerous examples to illustrate this point, including:

  • Grants and loans are the most frequently used public financing instruments even though equity investments, guarantees, and other risk-mitigation mechanisms are often more effective in addressing specific risks and leveraging private capital.

  • The International Bank for Reconstruction and Development and the International Development Association—known collectively as the “World Bank”— work exclusively with the public sector and as such, have limited ability to directly mobilize private capital.

  • The International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA), have institutional mandates to foster private sector project development and financing, so all projects financed by them involve private sector participation. Though MIGA’s political risk guarantees have been sparsely used in climate-relevant sectors, most of them were used in countries where political risks tend to be high - where guarantees are most needed.

  • CTF projects primarily focus on higher-income geographies. Private-sector financing for its projects, where present, ranged between 9 percent and 32 percent and averaged 24 percent of total project costs.

  • Almost half of the GEF projects reviewed included often-substantial private sector co-financing. The GEF was particularly successful in garnering private sector support in its energy efficiency financing.

2) Internal Barriers Present Real Limits

Multilateral agencies often face institutional barriers that prevent more effective engagement with the private sector. Examples include:

  • A preference for larger, more visible projects with proportionately lower transaction costs. These can preclude support for smaller projects that can demonstrate the feasibility of creating commercial markets but are unlikely to attract private capital directly.

  • Long approval and processing timeframes. Streamlining these processes would enable greater private sector participation given the need to time investments precisely to maximize returns.

  • The full potential of the flexibility in the choice of CTF financing instruments may not in practice be fully realized, as their use is determined by the mandates and practices of the implementing agencies.

  • The IFC and MIGA are mandated to respond to private sector demand rather than seek out private sector projects. Furthermore, the IFC does not generally provide more than 25 percent of the total financing requirement of any project, which tends to limit its presence to emerging economies with developed marketplaces rather than developing economies that may need finance the most.

Recommendations for Improvement

While we were able to survey a broad range of projects and financing modalities across the agencies reviewed, our study would have benefited from greater data transparency and availability. For starters, improved monitoring and evaluation of projects that attract private capital would lead to a better understanding of the drivers and results of private sector participation.

Our findings indicate that private sector participation could be increased through the following: a more judicious use of public financing instruments to optimize the risk-return profile of investments; policy-based analysis on improving investment conditions; and plans for tackling the various institutional barriers identified in the paper.

This is just the beginning of our work in this area—future papers will look at how national and regional development banks are leveraging the private sector. We’ll eventually synthesize findings into a wider report with more targeted recommendations. By getting a better understanding of the current finance landscape, we can help ensure that all forms of capital—private, public, and otherwise—are mobilized to create new investment opportunities that help vulnerable populations mitigate and adapt to climate change.

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