Shifting Private Finance Towards Climate-Friendly Investments
The European Commission’s Directorate-General of Climate Action has commissioned a project to look at what Europe’s role should be in “shifting private finance towards climate-friendly investments” – both within the EU and internationally.
Because of the enormous scale of investments required for combating climate change along with constrained public sector resources, the mobilisation of private sector capital is essential – in the developed world as well as in the developing world. To date the global response has too often been limited to discourse on the development of special (public) funds, like the Green Climate Fund. Instead, this project looks at the nature of investments required and the most effective and efficient ways in which private capital can be geared towards climate-friendly investments.
A team consisting of Triple E Consulting, as lead partner, in collaboration with the Frankfurt School - UNEP Collaborating Centre for Climate & Sustainable Energy Finance (UNEP-FS), Climate Bonds Initiative (CBI), CDC Climat, Climate Policy Initiative (CPI), the Carbon Disclosure Project (CDP), Climatekos and Get2C produced a report to provide European Union (EU) policymakers with an actionable toolbox for how they can contribute to mobilising private finance for climate-friendly investments.
Climate-friendly investments are defined as investments aligned with the transition to a low-carbon economy that limits global warming to 2°C – EU policy. The report aims to highlight how these actions to increase climate-friendly investments can be integrated with the current financial policy agenda in the EU, in particular the Investment Plan for Europe and the Capital Markets Union. A key premise of the report is that it is possible to generate profitable investments that will also have climate change benefits. To do this, an extensive literature review and close cooperation with investment professionals, including workshops in London and New York, were undertaken. Informal discussion with investors, bankers and other finance professionals provided further input.
The study looked at the current demand for climate-friendly investment; current channels of supply for climate-friendly investment; barriers to the use of those supply channels; and the policies, tools and instruments policymakers have at their disposal to address these barriers.
The report identifies two main types of barriers related to climate-friendly investments: those external to institutional investors’ decision-making framework and barriers arising from that framework. The former includes topics like the lack of a liquid market, less favourable risk-return, high transaction costs, small scale projects and the lack of accounting and disclosure. The latter includes short time horizon of decision-making, limited integration of climate in stewardship and fiduciary duty, and the lack of relevant climate-related risk and performance methodologies.
An action plan is developed, providing EU policymakers with recommendations to address these barriers and mobilise institutional investors for climate investments, both in the EU and globally. Policies to directly increase return on investment, such as feed-in-tariff, are a key driver of climate-friendly investment, but policy actions in the financial sector can play an important complementary role to increase investment at the large scale and rapid pace required.