Here’s how to get private finance into climate action
Employees check solar panels, as they work on a grid-connected photovoltaic power generation project, at a power plant in Changxing County, Zhejiang Province, China June 13, 2017. REUTERS/Stringer
Investors are itching to support net-zero projects. But the projects that need capital the most can’t seem to find it. Why?
Makhtar Diop is managing director of the International Finance Corporation, based in Washington, D.C. and Oliver Bäte is chief executive officer of Allianz SE, based in Munich, Germany.
Climate change is a collective crisis. At least 85% of the global population has been affected by climate events, costing millions of lives and trillions of dollars in economic damage.
The recent floods in Pakistan, which saw the overflowing Indus River swallow countless homes and leave almost 10 million children vulnerable, are a stark reminder of what’s at stake in the race to reverse the worst impacts of global warming.
The 2015 Paris Agreement, which saw the world unite around the shared goal of limiting global temperature increases to 1.5 degrees Celsius, provides a path forward. But walking that path will require significant financial investments in climate technology and infrastructure projects that reduce emissions.
Where that finance comes from is a central question.
Public institutions are already strained by the pandemic, the fallout from the war in Ukraine, and a looming global recession. But even in the best of times, they would not have enough capital to invest in climate solutions at scale.
Yet as demand grows for net-zero solutions, so do business opportunities. By 2030, International Finance Corporation (IFC) estimates that emerging markets alone will have nearly $30 trillion in climate project opportunities.
The money is out there. It’s being held by banks, pension funds, and other investors that are eager to invest in the green economy. In fact, the Glasgow Financial Alliance for Net Zero has already committed more than $130 trillion of private capital toward climate solutions.
But this is the great paradox of climate finance: while private capital is eager to invest in projects that move us toward net zero, it often struggles to find its way into the countries, sectors, and projects that need it most.
There are a few reasons for this. Projects in middle-income countries—which are currently responsible for two-thirds of global emissions—rarely meet the risk-return profile that traditional investors are interested in.
Many emerging markets are suffering currency depreciation due to the global economic downturn, exacerbating this situation. Worldwide, there is also little consistency in taxonomies and standards for what “green” finance is.
Bridging this gap between global investors and the projects and businesses that need their capital can only be accomplished through close partnerships between the public and private sectors. What could these partnerships look like?
Allianz (with its asset manager, Allianz Global Investors) and IFC have created a template that has the potential to be scaled around the world.
IFC launched the Managed Co-Lending Portfolio Program, or MCPP, in 2013 to allow institutions to co-lend passively alongside IFC in impactful projects that would otherwise be deemed too risky to take on alone, especially in fragile and conflict-affected countries.
In 2016, Allianz joined IFC to co-invest in emerging market infrastructure through this program. Last year, we jointly announced MCPP One Planet, which brought in major global institutional investors like Allianz and the Hong Kong Monetary Authority to enable up to $3 billion of new financing for Paris-aligned climate projects.
To date, MCPP has raised more than $11 billion from 11 investors and supported 215 projects in 56 countries. These projects are delivering real results around the world.
In Egypt and Panama, MCPP investments are supporting development of wind power plants. In Vietnam, this financing is supporting renewables, energy efficiency, and high-tech agriculture that will reduce carbon-dioxide emissions by 35,000 tons per year.
And in South Africa, an MCPP investment to Nedbank will bring better access to financing for renewable energy and energy efficiency projects. Initiatives like these have only been possible because of public-private partnerships.
Climate change may be a collective crisis today. But it also presents us with a unique opportunity: to unite around a collective purpose that invests in the future and protects our planet.
We hope examples of success like MCPP One Planet will inspire the creation of new partnerships and financial structures that deliver climate solutions with the urgency this moment demands of us.
Any views expressed in this opinion piece are those of the author and not of Context or the Thomson Reuters Foundation.
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