Mobilizing private sector capital for low-emission investments : a risk allocation framework

Fighting climate change poses a scientific, political and financial challenge: containing greenhouse gases atmospheric concentration within the levels that science indicates as relatively safe demands a paramount shift of financial investment patterns on both geographical and sectorial terms. The capital stock in the global economy needed to fund required investments is already available today but neither the public nor the private sectors can meet this challenge independently: policymakers are called to set suitable regulatory frameworks and policies that can facilitate this investment shift, overcoming entrenched economic behaviors, removing knowledge gaps and barriers that make these investments perceived, often unduly, as high-risk. This work shows how understanding which sets of investors are willing to accept which types of risks and identifying where the market fails to provide the necessary mitigation tools is the necessary starting point to design effective policies aimed at increasing the share of private capital in the current climate finance landscape. A detailed financial analysis of several case studies proves that policymakers and public international finance can play a decisive role in controlling, alleviating and mitigating risks - through effective regulatory frameworks and dedicated financial instruments they can deliver cost-effective solutions that improve investments’ risk-return profile and, ultimately, decrease the public support needed to mobilize private capital. By focusing the research on the specific barriers that inhibit private capital and increase the cost of low-carbon investments, the aim is to offer actionable insights on the financial solutions that concrete policy initiatives, such as Nationally Appropriate Mitigation Actions and the Green Climate Fund – could implement to gather the financial resources required to the transition to a more sustainable economic growth-path. This work shows how understanding which sets of investors are willing to accept which types of risks and identifying where the market fails to provide the necessary mitigation tools is the necessary starting point to design effective policies aimed at increasing the share of private capital in the current climate finance landscape. A detailed financial analysis of several case studies proves that policymakers and public international finance can play a decisive role in controlling, alleviating and mitigating risks - through effective regulatory frameworks and dedicated financial instruments they can deliver cost-effective solutions that improve investments’ risk-return profile and, ultimately, decrease the public support needed to mobilize private capital. By focusing the research on the specific barriers that inhibit private capital and increase the cost of low-carbon investments, the aim is to offer actionable insights on the financial solutions that concrete policy initiatives, such as Nationally Appropriate Mitigation Actions (NAMAs) and the Green Climate Fund – could implement to gather the financial resources required to the transition to a more sustainable economic growth-path.