In view of the risks involved, these are macroeconomic impacts, such as the reduction in productivity and economic growth, which, in addition to the physical impacts, tend to affect the stronger developing countries. On the other hand, policy measures aimed at reducing GHG emissions – especially those resulting from the generation of electricity – are very likely to increase opportunities for investment in areas such as renewable energy and energy efficiency.
According to CPI estimates, the amount of climate finance invested around the world in 2014 is USD 391 billion, of which USD 148 billion of public climate finance – that is on the rise with contributions by governments and intermediaries, and USD 243 billion of private climate finance that remained the largest source (62%) of global climate finance captured.
Private investors are likely to consider of the utmost importance whether policies provide clear incentives for investment, or whether to reduce or delay investment due to policy uncertainty and volatility. The willingness of private finance to invest depends on the public policy and political and institutional stability within which investments are made (country risk), since return on investment (ROI) is dependent upon assumed risk. In developing countries the attractiveness of private investment toward costly and not yet experimented technologies (technological risk) is combined with country risk and financial risk.
Investment decisions that financial institutions and investors make will be crucial in determining the response of societies to climate change. These investment decisions are critical especially in areas such as energy infrastructure and power generation, where assets tend to have planned life spans of several decades, so that decisions made today are likely to continue to have a major impact on infrastructure development, greenhouse gas emissions, and ultimately on how our societies are moving towards a low carbon future in 2050 and beyond.
The Paris Agreement approved at the COP21 will drive a new momentum in climate policy worldwide, so that carbon intense projects and investments will likely face an increasing risk of stranding. A framework aligning the decisions of financial institutions with the long-term climate goals is taking shape, as a recent strain of literature started to evaluate how the operator’s carbon risk is passed on to lenders and investors with a stake in these companies. Investor’s carbon exposure should be evaluated and managed by a combination of different options ranging from disclosure to diversification, engagement and divestment.
In the coming years, each country in the world will be called upon to answer to the international community regarding the achievement of its NDCs (Nationally Determined Contributions, as presented in the context of the Climate Conference in Paris) and will be subject to periodic reviews in order to enhance their scope. For countries in the developing world, and especially African countries, compliance with the mitigation objectives of climate change will necessarily have to be reconciled with the fight against energy poverty, to ensure universal access to sustainable energy by 2030. In these terms, an especially crucial role will be played by Public-Private Partnerships, where companies in the energy sector can provide, not just financial support, but technical and operational support as well. These partnerships will enable access to funding/co-financing by international financial institutions for innovative projects based on low-carbon and/or renewable sources.
The aim of the hot topic “climate finance” is to demonstrate how changing finance is pivotal to finance change that is required by the Paris Agreement and the 2030 Agenda for Sustainable Development, with a focus on SDG7 and SDG13.
To this aim, ICCG will organize webinars and video lectures delivered by international experts and addressed to an academic public. Moreover, the 2016 edition of the Best Climate Practices Contest will focus on bottom-up ideas and projects designed to address and drive finance to small-scale mitigation and adaptation actions. Several other ICCG initiatives and studies will be focused on this Hot Topic.
Working on this Hot Topic, the ICCG aims to provide insights into the stranded assets issue, to show advantages and challenges of Public-Private Partnerships and to analyze the way in which public resources can be spent wisely to mobilize private investment for financing low carbon energy projects. Its aim is also to draw attention to the importance of a clear and stable regulatory and legislative framework in order to enhance the attractiveness of private investments in still risky and costly technologies (technology risk) and in countries characterized by high political and institutional risk (country risk).
Below is a list of actions taken by ICCG in the field of Climate Finance studies, and a list of other sources relevant for the hot topic.