Best Practice Report

Index

Mobilizing investment

Mobilizing investment

A fundamental objective of all green growth programs is to unlock the investment needed to achieve a transition to a green development pathway. However, governments face significant challenges in securing the level of investment needed due to real and perceived investment risks, insufficient returns on investment for some green technologies and practices, competing subsidies and policies, insufficient capacity, information gaps, competing development priorities and other adoption, and regulatory and institutional barriers.

Government financing strategies for green growth should seek to encourage green investment opportunities by combining effective use of government policy and funding arrangements with financial risk mitigation instruments. They should address investment needs for transformation of the whole economy and in specific priority sectors at both national and sub-national levels. This analysis of public finance has identified several specific lessons that can inform on-going and future government green growth financing initiatives.

Governments can play three primary roles in mobilizing green growth investment: i) Creation of an enabling environment for long term green investment; ii) Effective use of public budgets and investments, including through dedicated funds and/or financial intermediaries to encourage green growth; and iii) Tailored application of financial risk-mitigation instruments to mobilize private green investment. Governments will have the greatest success with public finance measures where they are integrated with national development programs, developed in consultation with the business and finance communities, and tailored to address local investment risks and market constraints. The role of government should be more prominent in the early stages of green market development, setting the foundation to unlock substantial pools of private capital and defining from the outset a clear exit or diminished role over time (Figure 1).1

Green growth financing strategies will be most effective when they are supported by an enabling framework that provides green price signals, investment grade policies, removes market barriers, aligns economic drivers, and supports early market projects. Governments can establish strong investment signals through clear, long-term, and binding, policies and regulations. Governments also need to align price signals to green growth goals, which may require redirecting existing incentives and subsidies, for example for fossil fuels, towards green policy objectives. The alignment process and shifting of investment decisions will take time due to the challenges of clean technology adoption. For this reason, governments can support early market development by deploying resources for innovation and commercialization of emerging technologies and systems, demonstration projects, public procurement, green project development, and other mechanisms to attract private capital. Governments should set a long-term green growth vision with the necessary policy framework and develop a credible strategy for financing its implementation with appropriate involvement of relevant public and private financial actors.

Effective allocation and management of public budgets and public investment, including the use of dedicated funds and other intermediaries for green growth, can greatly increase green investment flows when they are integrated with fiscal frameworks and strategic plans, and have strong governance systems. Governments can make public budget allocations directly to priority green growth initiatives and to national and sub-national agencies, such as the case of funding dedicated to the Moroccan Agency for Solar Energy to develop a pipeline of solar projects in Morocco. Other governments, such as South Africa, Brazil, and Costa Rica have established funds to support priority green development projects. Developing countries can also tap into international sources of public finance from international financial institutions, while increasingly national development banks are also playing a role in funding green investments in developed and developing countries alike. National institutional arrangements should ensure coherency amongst funding from multiple national and international partners for priority green growth programs. Public funding arrangements should have effective governance and review systems in place, be integrated with existing fiscal frameworks, and consider innovative revenue sources. In selecting among public funding mechanisms, governments can consider their relative stability, sustainability, administrative simplicity, and ability to leverage private funds.

Governments can employ a variety of financial instruments to mitigate the financial risk and increase the returns for private investment, which will be most effective when they are aligned with policy measures, provide an appropriate level of concessional support, and are transparent. Financial de-risking instruments can include loss concessional loans or equity, grants for investment and for technical assistance, guarantees and insurance mechanisms. In order to create effective demand and price signals to entice new investors into green sectors, such instruments must be deployed in tandem with complementary policies and regulations and other market-enabling measures, for example to increase transparency of market information and data. Concessional loans and grant resources must be designed carefully to sufficiently adjust the risk profile to attract appropriate investors without crowding out private capital or creating an unsustainable market that will depend on long-term government support. Risk guarantees or even credit lines from public budgets may be needed initially to mitigate the perception of risk associated with green projects in order to encourage financial institutions to offer concessional loans to investors in green projects. The establishment of monitoring and evaluation systems and processes will enable continuous refinements in the use of public resources to improve effectiveness whilst ensuring transparency and clarity of these changes.

Governments can team up with central banks, development finance institutions, institutional investors, and others to accelerate participation of long-term finance by developing innovative financial approaches and implementing regulatory and other measures to increase capital flow for green growth and engender sustainable investment practices. Governments need to pay careful attention to how current and planned financial regulations may impact credit supply and investment flows into green development priorities. In addition, governments can encourage investors, including commercial banks and institutional investors, to invest in green infrastructure and to adopt investment decision-making and risk management that expands beyond short-term calculations of financial risk and return and considers the long-term environmental dynamics impacting on project profitability. Currently, the majority of institutional investment is in fixed income and asset investments and some of these funds should be diverted to green investment, and in some cases to tap into resources available through sovereign wealth funds. Ongoing public financial management reform plans can support green growth financing and coordinate with climate change related reforms by ensuring that low emission and climate resilience options are prioritized in infrastructure procurement programs. Furthermore, green growth programs can advance efforts to promote socially sound sustainable banking and investment practices.

1. Interestingly, none of the case studies examined have an exit strategy (even the long running programmes). This raises questions about the viability of green growth as a market based stand-alone strategy and show that new approaches will need to be found.
 

Figure 1:
Role of public policy and finance in unlocking private investment in green growth