‘Leveraging’ is used loosely in the context of climate finance, where it refers to public finance (e.g. from international finance institutions) that is used to encourage private investors to back the same project. This can take the form of loans, risk guarantees and insurance, or private equity. The aim in each case is to reduce the perceived level of risk taken by the private sector, in order to make the project a more attractive investment.
Leverage is usually expressed in terms of ratios. For example, if the International Finance Corporation were to claim that for every $1 dollar it puts towards a particular investment, private companies have put $5, this would be a 1:5 leverage ratio. In practice, leverage ratios are difficult to calculate and there is no agreed methodology for doing so. Ratios are often inflated descriptions of subsidies for private activities that would have happened anyway without public involvement.
Many of the debates here are similar to those around additionality. Since leveraging is most attractive for investments that are already profitable (or nearly so) without IFI assistance, it tends to direct money towards large-scale projects in middle-income countries. It has been pointed out that too great a focus on leveraging private finance can result in too little attention being placed on the social, environmental and human rights impacts of projects.
Critics have also suggested that leveraging reduces transparency and accountability. Pooling public funds with private money can see it drawn behind a veil of ‘commercial confidentiality’, or directed via obscure companies set up as Special Purpose Vehicles in offshore tax havens.
Further reading and resources
Bretton Woods Project (2012) “Leveraging” private sector finance, How does it work and what are the risks
Bretton Woods Project and ‘Ulu Foundation (2010) “Out of sight, out of mind? The International Finance Corporation’s investment through banks, private equity firms and other financial intermediaries”
Brown, J. and M. Jacobs (2011), “Leveraging private investment: the role of public sector climate finance ”, Overseas Development Institute
Brown J. et al. (2011) “Improving the Effectiveness of Climate Finance: A Survey of Leveraging Methodologies ”, Overseas Development Institute
Friends of the Earth USA (2013) Pro-poor Climate Finance: Is There a Role for Private Finance in the Green Climate Fund?
Stadelmann, M., Castro, P., & Michaelowa, A. (2011). Mobilising Private Finance for Low-Carbon Development: Tackling Barriers to Investments in Developing Countries and Accounting of Private Climate Flows, Climate Strategies
Venugopal, S. and A. Srivastava (2012) Moving the Fulcrum: A Primer on Public Climate Financing Instruments Used to Leverage Private Capital