Leveraging private investment
Private leverage achieved by different instruments varies depending on the definition and context
Public investments need to deliver extra financing from the private sector and environmental and social benefits from the project. Public actions, as summarized above in the form of technical assistance and capacity building, need to create an attractive investment environment. The effectiveness of such public actions in mobilizing additional finance cannot be easily measured but when it comes to determining the efficacy of alternative tools and mechanisms, assessing private finance mobilized can shed some light on where resources could be best allocated based on past performance (Table 4 ).
Note: The methodologies used to calculate leverage of the different instruments shown differ, and therefore individual ratios should not be compared with one another.
To measure the success of public financing interventions to ‘crowd in’ private funding, lenders and public institutions can measure additional co-financing produced as a result of their investment by determining the ‘leverage ratio’. Methodologies to determine leverage differ and there is no one consistent definition available, often because the goal of what is being measured changes from organization to organization. Two critical methodological concerns arise from determining leverage:
- the ‘additionality’ of financing: whether private investment would be deployed irrespective of the public finance support
- co-financing: which sources of finance are used in the leverage calculation; for example, private sources only or further public sources
The OECD assessed 50 green investment projects and concluded that depending on the methodology deployed, leverage factors ranged from 1:0 (no leverage) to 1:78 (extremely high).81 Leverage factors varied widely depending on the technology, mechanism used and region of investment. Public funds often do not leverage private investments but come as a windfall profit, crowding out private funds, and high leverage does not necessarily equate to a large impact (such as emissions reduction or positive social gains). A stricter and more functional common definition and methodology for leverage of private investment is needed to measure the effectiveness of public interventions, and should take into account the benefits of private investment beyond the provision of capital (mitigation or adaptation benefits, for example).
More work is needed to understand the social and environmental benefits of deploying public finance, such as generating jobs or reducing greenhouse gas beyond mobilized private investment. High levels of finance mobilization do not necessarily mean high levels of environmental or social benefit.
Box 6: Carbon-credit financing as a source of supporting funds for private-sector investment
Carbon finance, through the monetization of Certified Emission Reductions (CERs) and Emission Reduction Units (ERUs) and voluntary carbon offsets, has provided an important incentive for climate-change mitigation projects in both developed and developing countries. Since the Kyoto Protocol came into force in 2005, more than 4,500 Clean Development Mechanism (CDM) projects have been registered with the United Nations Framework Convention on Climate Change (UNFCCC), with a further 4,300 in the pipeline.86
At the end of 2011, US$ 28 billion worth of pre-2013 CERs had been contracted forward. If all underlying projects are implemented, these contracts will have supported additional investments of more than US$ 130 billion in developing countries.87 Research from Climate Strategies88 suggests that the CDM mobilization ratio is in the range of 1:3–1:4.5 after adjusting the leverage definition to include only mobilized funds that were not already earmarked for climate finance.
Project-based markets have suffered as a result of the economic recession and the uncertainty around the future of the Kyoto Protocol. The total market value of CDM finance as an incentive has more than halved since its peak in 2007.89 Governments need to keep the momentum high by pushing for new binding reduction targets to drive continued climate-change mitigation investment in emerging economies.