By Peter Dunscombe
Chairman of the Institutional Investors Group on Climate Change (IIGCC)
The climate is changing and the investments needed for mitigation and adapation are huge. Private
sector capital will be critical to meeting this challenge, with estimates suggesting that around 85% of
the total investment must come from private sources, including institutional investors such as pension
funds and sovereign wealth funds. 50-60% of these investments must be made in emerging economies.
Many private investors are already acting to address climate risks and opportunities. They integrate
climate issues into their investment practices, address climate strategies in dialogues with
companies and they consider investment opportunities in energy efficiency and renewable energy.
However, no matter how committed investors may seem, private sector investment will not reach the
scale required to address climate change effectively unless governments provide clear and ambitious
policy signals. The single most significant driver of private sector investment in climate change
solutions is strong, stable, transparent and credible policy.
Pension funds are bound by fiduciary duty to provide the best possible risk adjusted returns across their
portfolios. It falls within this responsibility to take stock of the risks and opportunities associated with
climate change and to adapt investment strategies and practices accordingly. Investors will only allocate
capital to climate change investment on the scale required if policy provides clear, credible and sustained
incentives. For pension funds to allocate a greater proportion of their investments to climate solutions,
these investments must provide similar risk adjusted returns to other types of investments, and climate
policy is critical to this.
Institutional investors urge greater dialogue between policymakers and the finance sector
This is why the Institutional Investors Group on Climate Change (IIGCC) and similar investor groups around
the world called on policymakers in the run-up to COP15 to agree a strong and binding global agreement which
would set the framework for strong action on climate change at national and regional levels. A basic lesson
to be learned from past experience in renewable energy in countries such as Denmark, Spain and Germany is
that almost without exception private sector investment in climate solutions has only been attracted by
consistent and sustained policies.
As outlined in the 2010 Investor Statement on Catalysing Investment in a Low-Carbon Economy, investors are
looking for policies that put an effective price on carbon and accelerate the development of carbon markets
and energy and transportation policies that support the deployment of energy efficiency, renewable energy,
green buildings, clean vehicles and fuels and low-carbon transportation infrastructure.
The importance of credible regulatory frameworks and low-carbon domestic policies for attracting private
sector investment in size applies to both developed and developing countries. In some emerging
economies, investors may face additional risks, for example more limited transparency, third party
dependency, transaction costs and higher financial as well as political uncertainties and risks. This means
that private sector investment in climate solutions in these countries will only be accelerated if risk
levels are brought down through a combination of capacity and policy development and the formation of
financing models to attract private capital.
Leveraging private finance by altering the risk reward balance
Lessons from other regions and other major development efforts, e.g. the Marshall Plan, the preparation for
EU accession and sub-national infrastructure development programmes, suggest that the risks associated with
investments in climate solutions in developing countries can be brought down substantially by a combination
of policy and capacity building measures, and by developing coherent national or regional strategies which
place each project in the context of a development plan.
Public sector finance mechanisms should be designed with a view to leveraging private finance and assisting
private investments by altering the risk reward balance. This could be achieved through strong and credible
national policies involving private-public partnerships as well as through the provision of public finance
mechanisms. The latter should be based as far as possible on existing mechanisms such as MIGA/ECA export
credit guarantees or lending arrangements by development banks, and any potential distortion of traditional
market structures should be curtailed.
Investors are calling for a focused dialogue on the nature and the design of such measures between
multilateral development banks (MDBs), bilateral finance institutions and private investors such as pension
funds. It is important to adopt a flexible approach that recognizes that countries are at different levels of
development; an approach that can be adapted to very different political and financial contexts and to the
requirements of different kinds of investors.
In addition, these measures must be adaptable, as domestic policy frameworks are strengthened and carbon
markets develop. The deal flow for low carbon projects in developing countries will be improved with the
implementation of strong and credible national policies, and public financing mechanisms should be designed
bearing in mind that the need for them will diminish over time.
If policies are right, money is available
A key priority for the recently established high-level Advisory Group on Climate Change Financing should be
to consider how some of the funds pledged under the Copenhagen Accord could be used to leverage private
sector investment in developing countries. Investors are willing to contribute to this discussion, and hope
to have greater clarity on the scope of the funds agreed in Copenhagen, as current uncertainties are
hampering investment decision-making. There is a risk that the notion that “something new“ is on
its way may stall markets and/or drive them unintentionally in a specific direction.
The Advisory Group may want to consider how some of the $30bn fast start money could be used to produce a
series of “early wins”. Such an approach would assist relevant international financial
institutions and private investors in forming alliances focusing on concrete projects. An aim should be to
develop more generally applicable financing models and to provide examples of concrete risk mitigation
measures in order to leverage private sector money to be invested in this field.
These experiences can then be adapted to other projects in different countries. In addition, the fast start
fund as well as the Copenhagen Green Climate Fund should support countries in developing their capacity,
policies and strategies, which in turn would support well-coordinated and well-designed flows of bankable
projects that attract private sector investment.
Therefore it is critical that the Advisory Group establishes a dialogue with the financial community on how
to accelerate private sector investment in developing countries. If policies are right, money is available
– even in the short term.