Public financing to address climate change is increasingly focussed on encouraging private sector investment in renewable energy, energy efficiency and low-carbon infrastructure projects and programmes in developing countries. “Leveraging” is the buzzword used to described this emphasis, which the World Bank defines as “the ability of a public financial commitment to mobilise some larger multiple of private capital for investment in a specific project or undertaking.”
The basic idea behind leveraging private finance is that policy-makers should learn to think like investors, evaluating risks and returns. “Investment-grade policy” means that “investment opportunities must be commercially attractive compared to alternative uses of capital, with different capital providers having different appetite for risk and expectation of the return for that risk,” according to the UK’s Capital Markets Climate Initiative. In particular, proposals to scale-up private finance focus on encouraging more low-carbon investment by institutional investors (pension funds, insurance funds and mutual funds), which have the largest pools of capital deploy as well as a longer-term investment outlook that could be suited to low-carbon infrastructure financing.
Yet despite recent enthusiasm for leveraging private climate finance, it is unlikely that public finance encourages changes in private investment patterns to the extent that is often claimed. This new paper, for the Bond Development and Environment Group , examines the “Critical issues for channelling climate finance via private sector actors .”
It concludes that current evidence on the use of public funds to leverage private development and climate finance shows that it generally tends to reinforce the existing distribution of financial flows. Claims of additional financial benefits, let alone developmental and climate protection ones, appear to be largely unfounded.
In addition, evidence from existing climate finance initiatives shows that the vast majority of such funds go to supporting mitigation activities in middle-income countries and are not a good fit for meeting adaptation needs, particularly those of the poorest and most vulnerable people.
Public climate finance (including funds channelled through the Green Climate Fund) should aim to reach the parts that other investors, institutional and private, cannot reach. There should be a particular focus on adaptation, building long-term resilience to climate change impacts, and low- carbon development projects in Least Developed Countries. In particular, priority should be given to projects that will benefit the poorest and most vulnerable communities. Such finance should be provided in the form of grants, not loans, in line with the UNFCCC principle of common but differentiated responsibilities and respective capabilities.
Public finance provided in support of private climate investments should be subject to the same levels of scrutiny and oversight as direct public investments, adhering to best practice standards. Public finance should not be channeled through financial intermediaries unless there are robust social, human rights and environmental safeguards in place, along with transparent monitoring and reporting mechanisms and adequate public oversight.
Finally, decision-makers should build a coherent approach to climate financing policy. A climate-smart regulatory framework is required to shift investment away from fossil fuels and promote greater investment in energy efficiency and the development of low-carbon forms of energy and infrastructure at home and abroad. There must also be a focus on energy access and supporting an integrated approach to adaptation in poorer countries.