Part 3: Catalysing Leadership and Private Investment
Green investment can be scaled up to deliver sustained global growth
This first Green Investment report synthesizes, crystallizes and draws out key implications and recommendations from the best available research on green investment from Alliance members and other leading institutions. Based on current analysis on global green investment flows and the amounts needed to address climate and other environmental challenges, and given the growing base of experience in targeting public funds and policies to attract private investment in green growth, there are four recommendations for government, business and public finance leaders.
1. Greening investment, and thereby the economy, is the only option: carbon and resource-intensive growth is simply not a viable growth pathway
This first message is a broadcast to political, business, labour and civil society leaders and the general public. Economic growth cannot be sustained without dramatic increases in natural resource productivity and reductions in carbon emissions. As a result of the clear evidence of negative climate change impacts today, and the potentially devastating impacts in the future, greening investment is a pre-condition for a stable, vibrant and inclusive global economy. Building from the 2012 G20 Summit, G20 leaders should reaffirm that greening the economy is the only route to sustained growth and development.
2. Transitioning to a green growth pathway is achievable at low cost
Closing the gap between current investment flows and what is needed to achieve sustainable growth is completely achievable. The incremental costs of greening growth are insignificant compared with the costs of inaction, with fuel savings compensating in large part for the investment requirements. However, there are key barriers that must be overcome, from institutional inertia to first-mover disadvantages and a resistance to change. Political and business vision and leadership is needed to transform the business-as-usual investment pathway from traditional fossil-based infrastructure to low-carbon solutions.
To accelerate and guide the green growth transformation, governments, investors and international organizations must improve global tracking, analysis and promotion of green investment. While considerable progress is being made through the individual and collective efforts of many institutions, there is a pressing need to extend data and methodologies to include the broader dimensions of green investment needs, including agriculture, water, and transportation infrastructure requirements.
3. Effective policy pathways and the efficient deployment of public finance to green investment is well understood, tried and tested, and must now be scaled up
On public policies, whilst there is always more to learn, there is a broad consensus on what needs to be done. Part 2 of this report illustrates some of the many ways and means that can close the green investment gap. There is a need to reinforce the collective political will to advance public policies to incentivize green investment and economic growth, including:
- accelerating the implementation of the G20 commitment to phase out fossil-fuel subsidies, and bringing into force fiscal and other instruments that establish robust carbon prices.
- enabling greater free trade in green technologies, including those developed with commercial and public finance, through initiatives such as those adopted by APEC (Asia-Pacific Economic Cooperation) leaders
- integrating the adaptation agenda into green investment by supporting initiatives that promote the scaled-up deployment of clean energy, water and agriculture across poorer communities, as exemplified by the United Nations Sustainable Energy for All Initiative.z
On public finance, historically low interest rates and the need to kick-start the global economy are the perfect conditions for mobilizing and investing public finance in green infrastructure that will serve the needs of long-term, sustainable growth. There is sufficient experience in using financial instruments to enable public finance to be used to balance the mobilizing of private finance with public-sector risk-taking. To this end, G20 governments and emerging economies can demonstrate leadership by:
- encouraging development finance institutions to accelerate and rationalize the broad adoption and scale-up of tried and tested public financing instruments, such as those that reduce investment risks for the private sector. The International Development Finance Clubaa is well-positioned to lead this agenda.
- engaging private investors directly in debate, co-design and wider dissemination of experience of relevant co-financing mechanisms. More public-private collaboration is needed to explore how best to accelerate investment in green infrastructure; this can inform the design of the next generation of catalytic green funds, such as the Green Climate Fund being developed for the United Nations Framework Convention on Climate Change.
4. Investors should seize the green investment opportunity by calibrating risk-return analysis to the current climate in pursuit of long-term returns
Investors are increasingly looking to diversify their portfolios and exploring unconventional assets for returns. Throughout the investor community, infrastructure investment is attracting attention as a potential source of stable returns. Private investors do not need to wait for public policies or subsidies to remove all material risk. The rapid pace at which green solutions are developing is an ideal opportunity for investors to enter a growing market. With investor leadership – perhaps facilitated by the new Global Investor Coalition on Climate Changebb — there are a number of tried and tested public-private collaborations that can be expanded upon. Actions to be taken by private investors include:
- enhancing financial analysis of green investment opportunities by building on the experience of first mover investors, factoring in more explicitly the risks of climate change and the potential for stranded, natural resource intensive assets.
- making greater use of proven public-private financing mechanisms to de-risk investments.
- strengthening the appetite of developing country public finance agencies and investors in green investment opportunities, by adapting the financial and policy mechanisms outlined in this report.
The recommendations above will be advanced through the Green Growth Action Alliance, while the related initiatives outlined above and progress reports will be provided in future reports for the G20 and other stakeholders (see Box 7).
Box 7: The Green Growth Action Alliance: combining public and private expertise to scale up investment for green growth
The Green Growth Action Alliance is supporting the scale-up in green growth through the collaboration of more than 50 leading financial institutions, corporations, governments and non-governmental organizations. By bringing together the knowledge of many different stakeholders, the Alliance aims to work with governments to help them adopt a systematic approach that rewards innovative green sectors through sound policies and improves their access to finance. Alliance members aim to achieve this by: collaborating to identify and deploy public money that can be used to unlock and utilize private-sector investment; identifying innovative financing and de-risking structures; supporting pilot testing of new models; and feeding results into international processes.
Some examples of initiatives and working groups trying to achieve these goals are given below.
Development and testing of new financing tools
In India, the Alliance worked with the Asian Development Bank, the Clinton Climate Initiative and the United Kingdom Government’s Capital Markets Climate Initiative to design and test public financing structures to mobilize private finance for India’s solar sector. This initiative resulted in the Renewable Energy Certificate Financing Facility designed to give private lenders confidence that debts can be repaid and to reduce the marginal cost of financing. The Alliance is also helping to unlock private financing for clean energy in Kenya by exploring bottlenecks to deploying private finance. Specific models being developed through this process include a bespoke insurance product for early-stage geothermal drilling risk, and a Policy Risk Insurance Mechanism for small- and medium-sized enterprises.
Promotion of green free trade
Removing trade barriers will promote free trade in green goods and services, accelerate green technology deployment, spur competition, innovation and job creation, and reduce the cost of energy. Recent progress has been made by APEC (Asia-Pacific Economic Cooperation) leaders, with tariff reductions for green goods and services currently being negotiated.91 More progress is needed, however. By working pro-actively with governments and civil-society organizations, the Alliance is developing solutions, such as possible new green free-trade areas.
Promotion of large-scale renewable-energy purchases by corporations
Corporations can boost confidence in renewable-energy projects by using their balance sheet, pooling funds or renewable-energy purchases and entering into long-term power-purchase agreements directly with developers. The Alliance brings together corporate consumers, renewable-energy project developers and financiers to test and pilot end-user financing models in specific countries.
Energy efficiency financing
The Alliance is advocating for new financing models that deliver energy efficiency. It is drawing on the experience of member organizations and collaborating with national governments and prominent international platforms to incubate new models to increase the availability of private finance and to help produce a vibrant market for delivering efficiency measures; for example, through new funds for energy-service companies in Mexico and Russia.
Climate-smart agriculture financing
The Alliance is developing replicable models that produce private financing for sustainable agriculture. The first pilot is being conducted in Vietnam and has identified specific interventions, including: developing a local investment fund to promote forest protection; using renewable energy to reduce greenhouse gas emissions from agricultural wastes; developing irrigation infrastructure for improved land management; and technical assistance to local banks to help them identify and lend to smallholders that follow good environmental practices.
Innovative finance models
The Alliance is helping to shine a light on successful green investment models with potential for scale through its partnership with the UNFCCC Secretariat’s Momentum for Change: Innovative Financing for Climate-friendly Investment initiative. The Alliance will note meritorious innovations, such as the models outlined in this report, and push for their recognition at future UNFCCC and World Economic Forum events so that they and other successful approaches might be replicated.cc