By Caroline Fouvet
One of London Climate Week’s first events was organised by the Climate Policy Initiative (CPI) in association with Bank of America Merrill Lynch and focused on “Driving private finance to achieve 1.5-degree objectives”. It was an occasion for the CPI to hold panel discussions on the current needs and challenges to mobilise sufficient private finance in the context of the Paris Agreement. The event also showcased innovative ideas focused on enhancing private sector investments in climate mitigation and adaptation that were developed as part of CPI’s Global Innovation Lab for Climate Finance (the Lab).
CPI’s latest Global Climate Finance assessment shows that global climate finance flows amounted to USD 463 billion on average per year over the 2015-2016 period. This amount is mostly driven by the private sector, representing 54% annually for 2015/2016, including project developers, corporations, and commercial banks. Besides, over 94% of this amount was allocated towards mitigation, leaving only USD 22 billion to adaptation.
However, more resources are needed to achieve the Paris Agreement’s dual target when it comes to climate-related finance. Its objectives are both to make “finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development” (article. 2.1c)” as well as to provide “financial resources to assist developing country Parties with respect to both mitigation and adaptation” (article 9).
The event looked at how to scale up the private sector’s finance flows to tackle climate change in both developed and developing countries through two panel discussions. The first panel focused on how to unlock investment for climate action in infrastructure and mobility. It gathered representatives of a wide spectrum of organisations, from the public sector represented by the UK department for business, energy and industrial strategy, the European Investment Bank (EIB), and to private organisations Bank of America Merrill Lynch and asset managing firm Legal & General Investment Management. Discussion points included:
- Panellists stressed that the present climate challenge is huge and urgent, as we currently are on a 3.5-degree pathway.
- They further underlined the complementarity of public and private action in terms of climate finance, as private investors need to be supported by public policy to further mitigation and adaptation action. It was acknowledged that climate-related regulations for the financial sector, such as Bank of England’s and from the European Union, were useful to raise awareness on climate change and created a powerful momentum in the industry to address the issue. As for developing countries, panellists mentioned that there was a need for greater support from Development Finance Institutions (DFIs) to de-risk investments, and that climate and development aid flows should be regarded as similar types of finance.
- Overall, a recurrent obstacle for private finance to flow towards adaptation remains the difficulty to quantify it, whereas mitigation projects offer clearer targets and are hence easier to invest in. An option could be the concept of avoided costs, that can be useful to capture adaptation-related benefits. This however entails understanding which cities, for instance, are vulnerable to and requires public consultations on the matter.
- Private sector participants also mentioned their current action in the climate finance space. Bank of America Merrill Lynch representative mentioned the bank’s work with private equity firms to shift their investments to provide support to climate disruptive companies. Legal & General Investment Management explained that they both worked with investors to help them transition their portfolio away from brown assets, but also engaged with investee companies who develop their own climate strategies and make their own climate investments.
The second panel discussion focused on the Lab’s laureates and the investment solutions they had developed. This session was an occasion to show that a wide variety of financial instruments and mechanisms, including debt, leasing and private equity, could be used to finance climate action. They included:
- The Water Financing Facility: it mobilises large-scale private investment from domestic institutional investors, such as pension funds and insurance companies, by issuing local currency bonds in the capital market in support of their own country’s national priority actions on water and sanitation service delivery. It is currently engaged with 14 water providers worldwide and has been active in Kenya for three years. Its ultimate target is to reach USD 1 billion of local currencies in five to eight countries.
- Cooling as a Service (CaaS) initiative – by the Basel Agency for Sustainable Energy (BASE): it aims to scale up investments in energy efficient service facilities. Its business model aims to enable customers to base their decision on life-cycle cost rather than on the purchase price of cooling equipment. The goal is to help clients benefit from high end and energy efficient cooling technologies without the need of an upfront investment. CaaS involves end customers paying for the cooling they receive, rather than the physical product or infrastructure that delivers the cooling.
- Climate Resilience and Adaptation Finance and Technology Transfer Facility (CRAFT) – by the Lightsmith Group: CRAFT is a private equity fund focused on climate resilience and adaptation. It aims to invest in 10-20 companies, located in both developed and developing countries, which have proven technologies and solutions for climate resilience and have demonstrated market demand and revenue. It provides blended finance and includes a concessional capital layer to mitigate risk and a technical assistance facility to support companies in developing countries. It also measures impact against Sustainable Development Goals (SDGs), Climate Action in Financial Institutions and gender-related Key Performance Indicators (KPIs).
- Restoration, insurance, service companies for coastal risk reduction (RISCO) – by Conservation International: this is a social enterprise that invests in mangrove conservation and restoration in areas with high-value coastal assets, enabling property damage risk reduction and protecting blue carbon. RISCO assesses and monetises the coastal asset risk reduction value and carbon storage benefits of mangroves. It works with insurance companies, to embed mangrove risk reduction values into insurance models for coastal properties and allows for reduced premium prices. A portion of the premium savings, or other insurance-related revenue, is paid by coastal asset owners to finance the upfront cost of the conservation and restoration projects. RISCO also generates and sells blue carbon credits to organisations seeking to meet voluntary or regulatory climate targets.
- Responsible Commodities Facility – by Sustainable Investment Management (SIM): coordinates a suite of activities to promote the production and trade of responsible commodities in Brazil, starting with soy and corn. It provides competitive (low interest) credit lines for producers that meet Eligibility Criteria, i.e. do not contribute to deforestation.