WEF GreenInvestment Report 2013

7/29/2019 WEF GreenInvestment Report 2013

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The Green Investment ReportThe ways and means to

unlock private nance orgreen growthA Report o the Green Growth Action Alliance


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Acknowledgements

The World Economic Forum wishes to thank allmembers o the Green Growth Action Alliance ortheir leadership and contributing time, data, casestudies and opinions. These contributions orm thecore o this report. The Forum would also like to thankits knowledge partner Accenture, who synthesizedand developed the content, and Simon Zadek, whoprovided guidance in his capacity as an advisor to theWorld Economic Forum on sustainability issues and

Senior Fellow o the Global Green Growth Institute.

The authors would like to specically thank the ollowingorganizations that provided expert guidance, casestudies, research and data, without which this reportwould not have been possible:

- Bloomberg New Energy Finance

- Climate Policy Initiative

- International Energy Agency

- OECD

- The World Bank

- World Resources Institute

The ollowing organizations have also provided expertguidance or the report:

- Brookings Institute

- Overseas Development Institute

- United Nations Environment Programme

- UNEP Finance Initiative

Disclaimer

The viewpoints expressed in this report attempt torefect the collective engagement o individuals asGreen Growth Action Alliance members and do notnecessarily imply an agreed position among themor institutional endorsement by any par ticipating

company, institution or organization involved in theAlliance, or o the World Economic Forum.

World Economic ForumGenevaCopyright 2013 by the World Economic Forum

Published by World Economic Forum, Geneva,Switzerland, 2013www.weorum.org

All rights reserved. No part o this publication may bereproduced, stored in a retrieval system, or transmitted,in any orm or by any means, electronic, mechanical,photocopying, or otherwise without the priorpermission o the World Economic Forum.

ISBN-13: 92-95044-65-7 / 978-92-95044-65-4

World Economic Forum91-93 route de la CapiteCH-1223 Cologny/Geneva

Switzerland

Tel.: +41 (0) 22 869 1212Fax: +41 (0) 22 786 2744

[email protected]


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3The Green Investment Report

Contents

2 Acknowledgements

4 Foreword

5 Preace

6 Executive Summary

9 Introduction

11 Part 1: Green Investment: CurrentFlows and Future Needs

18 Part 2: Unlocking Private Finance

25 Part 3: Catalysing Leadership andPrivate Investment

27 Appendices

38 Reerences


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The Green Investment Report4

Shaping a global economy t or the 21stcentury is our greatest challenge. Such aneconomy in 2050 will satisy the needs o

more than 9 billion people, who will rightlydemand equal opportunities ordevelopment. Delivering such inclusivedevelopment in a sustainable way,however, requires that we remain within theboundaries o what our planet can saelydeliver. Economic growth and sustainabilityare inter-dependent, you cannot have onewithout the other, and greening investmentis the pre-requisite to realizing both goals.

Dramatic upgrades in technology, skills,policies and business models, along withan aligned public consciousness, are

needed or the transition to a green growthpathway. Inrastructure investment requiredor sectors such as agriculture, transport,power and water under current growthprojections stands at about US$ 5 trillionper year to 2020. This business-as-usualinvestment will not lead to a stable uture,however, unless it achieves environmentaland sustainability goals. This developmentneeds to be greened by re-evaluatinginvestment priorities, building capacity,investment-grade policies and improvinggovernance, among other activities.

Additional investment needed to meet theclimate challengeor clean energyinrastructure, sustainable transport,energy eciency and orestryis aboutUS$ 0.7 trillion per year.

Private nanciers see these massiveinvestment requirements as an opportunity.Today, we see major growth in cleanenergy investment, with nancial fowsworldwide approaching those in carbon-intensive energy sources. Further,developing countries are proving anincreasingly important source o capital.

Since 2007, clean energy investmentoriginating rom outside the Organisationor Economic Co-operation andDevelopment (OECD) grew at 27% peryear compared with 10% per year romOECD countries, albeit rom a ar lowerbase.

Yet today, despite signs o increasingprivate nance into clean energy and othergreen investments, there remains aconsiderable shortall in investment.Closing this gap is our collective task andone that we cannot aord to ail.

Foreword

Public nance, linked to smart, enablingpolicies, has a critical role to play. Given thescarcity o public unds, governments

contributions to closing the gap will dependon their eectiveness in mobilizing privateinvestment. Experience demonstrates thisis possible when supported by targetednancing mechanisms and institutionalarrangements that blend private and publicinterests, expertise and resources toreduce risk and address bottleneckspreventing private investment.

The Green Growth Action Alliance wascreated to accelerate this agenda at the2012 G20 Summit in Los Cabos, Mexico.The Alliances vision, one that I share and

actively promote as its ounding chair, is todrive greater investment in green growth byunlocking potential sources o nance.Collaboration between business,governments, civil society and internationalorganizations in overcoming barriers to andsecuring the benets o green growth is theDNA o the Alliances approach.

The Green Investment Reportis the rstreport o the Alliance. It aims to inorm andinspire policy-makers and public and privatenance providers to close the gap indelivering inclusive, sustainable growth. It is

the rst time that a number o importantinstitutions have joined to deliver a powerulmessage about the scale o the greeninvestment gap that must be lled, and tospell out the ways and means to addressthe gap in green inrastructure investment. Iappreciate this collective eort and wouldlike to thank, in particular, Bloomberg NewEnergy Finance, the Climate Policy Initiative,the Global Green Growth Institute, theInternational Energy Agency, the OECD, theUnited Nations Environment Programme,the World Bank Group and the World

Resources Institute or providing data,analysis, case studies and other supportthat enabled us to produce this report. Iwould also like to thank and congratulate theWorld Economic Forum or coordinating thewhole eort and producing this report.

The Green Investment Reportis one omany ways in which the Alliance isadvancing green growth. Its members arecollaborating on initiatives that aim to provethe ecacy o nancing green growth, romenergy eciency to renewable energy andclimate-smart agriculture. It is, as the name

states, an alliance or action. I invite G20governments, public nance institutions,investors and policy-makers to read thisreport and join us in leading the way tomaking a dierence.

Felipe Caldern,Chair, Green Growth

Action Alliance


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We live in an age o increasingly complex global challenges thatmandate new approaches. As we witness the combinedandincreasingly inter-relatedchallenges o the global economic

crisis and the climate change crisis, we also witness the needor new orms o both dynamicandresilient global leadership tosolve these challenges, using innovative, multistakeholderapproaches. Arguably, mobilising the required scale o greeninvestment lies at the core o the combined global economicand climate challenge and demands new such approaches ortriggering action. This makes it a pertinent agenda or the WorldEconomic Forum. Since receiving an invitation to create the2009 G20 multistakeholder Task Force on Low CarbonProsperity, the Forum has been delighted to support itsmembers and stakeholders to trigger public-private innovation inthis space, including the 2010 Critical Mass Climate FinanceInitiative with the United Nations Foundation and the International

Finance Corporation, supported by various institutional investorgroups; and support to the 2011 Green Growth Business 20(B20) Task Force or the French G20 Chair. From its investorcommunity, the Forum also ran a successul series ocomplementary Green Investment Reports, 2009-2011,reporting on the state o the global clean energy investmentagenda.

During 2012, the World Economic Forum brought together thesevarious workstreams to assist the Mexican G20 Chair with aseries o rereshed B20 Task Forces that provided guidance andinput to the G20 Summit in Los Cabos, including a Task Forceon Green Growth. The Green Growth Task Force broughttogether or the rst time leading public nance agencies, private

investors, inrastructure and agriculture companies, andinter-and non-governmental organizations, with a specic ocusto set recommendations or green growth. Task Force memberstook the decision to supplement their set o G20recommendations with an oer to launch the Green GrowthAction Alliance, a practical vehicle or action with a clear missionto advance the green investment agenda and to report onprogress to the G20.

The World Economic Forum is honoured to serve as theSecretariat o the Green Growth Action Alliance, and to help itsmembers to achieve impact through advancing new solutions,engaging a wider set o public and private nance providers, andproviding workable models on nance to existing platorms and

institutions such as the United Nations Framework Conventionon Climate Change, the United Nations Sustainable Energy orAll Initiative, the World Bank Group, the InternationalDevelopment Finance Club, the Global Green Growth Institute,and the Global Investor Coalition on Climate Change.

The Alliance now counts nearly 60 members collaborating toidentiy ways that limited public unds and public policies can betargeted to unlock and scale up private-sector investment,through identiying innovative nancing and de-riskingstructures, supporting pilot-testing o new models in key regions,and eeding results into international processes. We hope thisrst report will provide a blueprint or action that government,business and civil society leaders can use to transorm the

global economy to an economically and environmentallysustainable pathway. We look orward to reporting on ourprogress in the uture.

Preace

Dominic Waughray,Senior Di rector,Environmental Initiatives

Thomas Kerr,Director, Climate Changeand Green GrowthInitiatives


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Figure i: The evolution o global new asset nance fows orclean energy (US$ billions)

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0

20

40

60

80

100

120

140

160

180

2004 2005 2006 2007 2008 2009 2010 2011

ProportionofSouthern-originating

investment(%o

ftotal)

Assetfinanceinvestment(US$billions)

Northern-originatinginvestment

Southern-originatinginvestment

Proportion of Southern-originating investment

Note: Data includes new-build asset nance only. Source: Bloomberg New Energy Finance1.

Executive Summary

Greening global economic growth is the only way to satisy theneeds o today`s population and up to 9 billion people by 2050,driving development and well-being while reducing greenhouse gasemissions and increasing natural resource productivity.

Considerable progress has been made in transitioning togreen growth. Global investment in renewable energy in 2011 hitanother record; up 17% on 2010 to US$ 257 billion. Thisrepresented a six-old increase rom 2004 and was 93% higherthan in 2007, the year beore the global nancial crisis. Globalagricultural productivity growth rates are exceeding overallpopulation growth rates, and since 1990, more than 2 billionpeople have gained access to improved drinking water sources.Energy eciency is widely recognized as providing economicopportunities and improved environmental security, while the ueleciency o vehicles has more than doubled since the 1970s.

Developing countries are playing a growing role in scaling upgreen investment. Cross-border and domestic investmentoriginating rom non-OECD countries grew 15-old between2004 and 2011 at a rate o 47% per year (compared with 27%per year or OECD-originating investment), albeit rom a lowbase. Clean-energy asset nancing originating rom developingcountries in 2012 is on track or the rst time to exceed thoseoriginating rom developed countries. This investment is due inpart to the creation o green growth strategies by a number odeveloping country governmentsto advance water resources,sustainable agriculture, and clean energy. Developing countrypublic nance agencies can accelerate this trend by targetingmore o their unds to leverage private nance.

Such progress, however, remains inadequate. Progress ingreen investment continues to be outpaced by investment inossil-uel intensive, inecient inrastructure. As a result,greenhouse gas levels are rising amid growing concerns that theworld is moving beyond the point at which global warming can

be contained within sae limits. A recently published World Bankreport warns that the world is on track or a global averagetemperature increase o at least 4C above pre-industrial levels,bringing urther extreme heat-waves, hurricanes and lie-threatening rises in sea levels. Natural resource productivity isnot increasing quickly enough to stem the depletion o criticalresources, notably water and orests. Soil erosion is acceleratingand sh stocks are declining precipitously. Such trends,combined with growing climatic instability, are driving upcommodity prices, threatening ood security in a growingnumber o communities.

Signicant barriers exist to securing the required scale andpace o progress.The continuing global economic crisis has

dimmed longer-term outlooks by business and governments.Financing or much-needed inrastructure is constrained bylimits in public nance, policy and market uncertainty and theunintended consequences o nancial market reorm. Legacyscal measures such as ossil-uel subsidies combine with theslow progress o international climate negotiations to weakenmarket signals that might otherwise incentivize greeninvestment. Lack o awareness o private nance providers ogreen growth opportunities and continued investment inossil-based resources are restricting progress.

Greening investment at scale is a precondition or achievingsustainable growth.The investment required or the water,agriculture, telecoms, power, transport, buildings, industrial and

orestry sectors, according to current growth projections, standsat about US$ 5 trillion per year to 2020. Such business as usualinvestment will not deliver stable growth and prosperity. Newkinds o investments are needed that also achieve sustainabilitygoals.Beyond the known inrastructure investment barriers andconstraints, the challenge will be to enable an unprecedentedshit in long-term investment rom conventional to greenalternatives to avoid locking in less ecient, emissions-intensivetechnologies or decades to come.

Taking the power sector as an example, investment in ossil-uelintensive inrastructure is increasing annually and is higher thanclean-energy investment. The International Energy Agency (IEA)predicts that an unprecedented long-term shit in investment

over the next ew decades rom ossil uels towards a cleanerenergy portolio is needed to avoid dangerous climate change.This is achievable by re-evaluating investment priorities, shitingincentives, building capacity, investment-grade policies andimproving governance.


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Figure ii: Conceptual assessment ramework

Figure iii: Total estimated investment requirements underbusiness as usual and estimated additional costs under a 2Cscenario

Figure iv: Potential public-private nance mobilization to closethe cost gap or climate-specic investment

Existing

infrastructure

investment^needs to

be greened

Infrastructure

investment*

required tosupport global

growth

Business-as-usualapproach

Green growth

Transition

Additional

investment#

Required to

deliver greengrowth

+

Enabling policy conditions, tools,

mechanisms and instruments

For policy makers

Water$1,320 bn

Transportinfrastructure

$805 bn

Telecommunications$600 bn

Agriculture: $125 bn

Transportvehicles$845 bn

Buildings &industry$613 bn

Energy$619 bn

Forestry: $64 bnTransportvehicles$187 bn

Energy$139 bn

Forestry

$40 bn


Additional investmentrequirements in a green growth

scenario: $0.7 trillion / year

Total investment requirements :$5.0 trillion / year

Investment that needs to be greened

Required privateinvestment

debt

US$ 342 399 bn

(6070%)

Required privateinvestment -

equity

US$ 171 228 bn

(30-40%)

Requiredprivate

investment

US$ 558581 bn

Requiredpublic

investment

US$ 116139 bn

Total requiredinvestment: US$ 698bn

Possible ratio:1:41:5

(+400-500%)

Notes: *Sectors assessed include water, agriculture, orestry, telecommunications, transport,power, buildings and industry. Quantity o business-as-usual investment that needs to begreened is not assessed. #Sectors assessed limited to transport vehicles, power, industry,buildings and orestry.

Sources: OECD2,3, IEA4, Food and Agriculture Organization o the United Nations (FAO)5, UnitedNations Environment Programme (UNEP)6

Note: All data converted to $ 2010 equivalents

Note: The debt-to-equity ratio is assumed at 70:30 based on the current average debt to equityratio o clean energy projects

There are additional, incremental investment needs o at leastUS$ 0.7 trillion per year to meet the climate-changechallenge.This investment is needed or clean energyinrastructure, low-carbon transport, energy eciency andorestry to limit the global average temperature increase to 2Cabove pre-industrial levels. While the IEA predicts thatcorresponding uel savings will more than compensate or theseinvestment needs, there are signicant policy, market andnancial barriers preventing business rom taking advantage othese protable investments. Additional investment needed tosupport green growth, beyond business-as-usual spending, inother sectors such as agriculture and water is not well known;

urther analysis is needed to better understand the ull set ogreen investment needs across these areas.

Closing the green investment gap is aordable but needs tobe supported by eective public policy. Public resources arelimited, especially during the current period o austeritymeasures across much o the OECD. Thereore, reliance onpublic-sector investment must be minimised, and more attentionpaid to attracting private nance, which is at the core o thegreen growth transition. Assets being managed in the OECDamount to US$ 71 trillion; but deploying these assets toward

green inrastructure is limited by policy distortions anduncertainties, market and technology risks, and reinorced bythe reluctance o investors to take a longer-term view.

Experience demonstrates the potential or closing the greeninvestment gap by mobilizing private nance through thesmart use o limited public nance. Evidence rom climate-specic investment illustrates that the targeted use o publicnance can scale up private nancial fows into green investmentthrough measures such as guarantees, insurance products andincentives, combined with the right policy support.

While leverage ratios are dicult to compare across projects,countries and instruments, ratios o 1:5 and above are notuncommon, and there are some cases o instrumentssuch asgrantsdelivering much higher ratios. There is strong potentialor increased lending, advancing and rolling out de-riskinginstruments, using carbon credit revenues, and targeting grantmoney combined with technical assistance to attract muchgreater private investment.

The green investment gap can be addressed through the use osuch instruments. I public-sector investment can be increasedto US$ 130 billion and be more eectively targeted, it couldmobilize private capital in the range o US$ 570 billion. Thiswould come close to achieving the US$ 0.7 trillion o incrementalinvestment required to move the world onto a green growthpathway. However, greening the remaining US$ 5 trillion ininrastructure investment will remain a major challenge requiringpolicy reorm and a stronger push toward investment-grade policy.


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Leadership by governments, international nancial institutionsand private investors is needed to address the greeninvestment gap.This rst Green Investment reportincludes ourrecommendations that, i understood and acted on, could addressthe gap in green investment:

1. Greening investment, and thereby the economy, is the onlyoption. Building rom the 2012 G20 Summit, G20 leaders

should rearm that greening the economy is the only route tosustained growth and development.

2. The transition is nancially viable.The incremental costs ogreening growth are insignicant compared with the costs oinaction. To accelerate and guide the green growthtransormation, governments, investors and internationalorganizations must improve eorts to overcome barriers andimprove global tracking, analysis and promotion o greeninvestment.

3. Eective policy pathways and the ecient deployment opublic nance to green investment is well understood,tried and tested, and must now be scaled up. The G20governments must accelerate the phasing-out o ossil-uel

subsidies, enact long-term carbon price signals, enablegreater ree trade in green technologies, and expandinvestment in climate adaptation. Investment-grade publicpolicy is an important prerequisite to engage the privatesector. Public nancial institutions need to more activelyengage private investors through scaling up deployment oproven instruments and mechanisms, while also designingnew unds and tools to attract private nance or newinvestment opportunities.

4. Private investors will need to take a new approach tobenet rom green investment opportunities. Greeninrastructure investment can provide attractive long-term,risk-adjusted returns. Private investors should not wait or

perect public policies to remove any reasonable risk. Theycan enhance comparative risk analysis o green investmentby making greater use o investor orums and engagementwith public nance agencies to advance new nancingsolutions that open up an attractive, sustainable market.


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Introduction

Meeting global climate and environmentalgoals will require the greening o growth,while converting existing carbon-intensive

assets

The Organisation or Economic Co-operation and Development(OECD) estimates that our current path will add a urther 3 billionpeople in developing countries into the middle classes within 20years7. This will create an unprecedented rise in demand orenergy, water, transport, urban development and agriculturalinrastructure. Meeting this demand while respecting planetaryboundaries will be challenging; under current policies, water useis predicted to increase by 55% between now and 20508.Agricultural production will need to double in the same timespan, leading to large-scale deorestation unless cultivationpractices change. Energy demand, i let unimpeded, will rise by

85% by 20509

, leading to a 46C increase in global averagesurace temperatures. This will bring urther extreme heat-waves, hurricanes and lie-threatening rises in sea levels.Damage rom Hurricane Sandy alone, which devastatedportions o the Caribbean, mid-Atlantic and north-eastern UnitedStates in October 2012, is estimated to have cost more thanUS$ 60 billion, while more than 250 lives were lost10.

Greening growth can alleviate the risks rom uture climatechange and environmental degradation, and progress is beingmade. In the transport sector, the uel eciency o road vehicleshas more than doubled since the early 1970s11. In 2011, globalinvestment in the renewable energy sector hit another record; up17% on 2010 to US$ 257 billion, a six-old increase rom 2004.

Investment was 93% higher last year than in 2007, the yearbeore the global nancial crisis12. This growth was driven in partby government policy support that led to rapid decreases in thecosts o renewable energy. These policies have come underreview due to the current scal crisis, however, creating volatilityin the global clean-energy markets in the past year. Markets arebeginning to consolidate and prices are stabilizing13, with theindustry showing signs o restructuring.

Further progress has been made in the water and orestrysectors. Since 1990, more than 2 billion people have gainedaccess to improved drinking water sources an importantachievement or one o the Millennium Development Goals toreduce by hal the proportion o people without sustainable

access to sae drinking water and basic sanitation14

. In theorestry sector, the United Nations Environment Programme(UNEP) estimates that more than US$ 64 billion is investedannually in orest protection and reorestation15.

Despite signs o progress, signicant barriers still exist tosecuring the required scale and pace o investment in thetransition to green growth. The continuing economic crisis inEurope and the United States, with its rippling global impacts,discourages business and governments rom developing

longer-term outlooks. Perverse incentives or carbon-intensivegrowth, such as ossil-uel subsidies, prevent green technologiesrom gaining competitive advantage. The revolution in shale gas,while environmentally benecial compared with coal, placesdownward pressure on carbon-intensive energy sources. Thishas the eect o making renewables comparatively more costlyand less attractive investments. Furthermore, greentechnologies oten cost more at the outset or are more riskyinvestments than conventional alternatives, and this has limitedthe scope or their expansion into areas where they are neededmost. Policy incentives provided by governments or clean-energy development have in some instances been removed,which has resulted in new policy risks or green-technologyinvestment.

Rising costs rom climate change are aecting economicorecasts. Recent storms demonstrate that conventional,business-as-usual investment trends may reduce economicresilience in the uture by locking in a carbon-intensive path thatleads to costly environmental damage and adaptation costs inthe long term16. Greening global growth requires a combinationo strategically allocating limited public resources, public supportto promote private-sector engagement, and increasing investorcondence. It also necessitates a change in uture investmentpriorities and policies, as well as decarbonizing existing andplanned inrastructure through carbon capture and storage(CCS) and energy eciency. Current country emissionreduction targets and climate nance pledges all well short othe required level o action to secure green growth and limittemperature rise to manageable levels17.

Government leaders recognize these challenges and haveincorporated green growth as an important theme or the G20and other international processes. At the 2012 G20 Summit inMexico, the Leaders Declaration reerenced a number o greengrowth recommendations and welcomed the creation o theGreen Growth Action Alliance to advance the green investmentagenda (see Box 1).


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Box 1: B20 Task Force on Green Growth:Recommendations rom the 2012 B20 Summit in LosCabos, Mexico

The B20 Task Force on Green Growth proposed ve priorityactions:

1. Promote ree trade in green goods and services: Initiatetrade liberalization on sustainable energy products and

services to eliminate taris, local-content requirements andother non-tari barriers, and to coordinate industrial andtechnical standards. Such arrangements will create atangible, positive incentive within the international tradingsystem to develop and expand the use o green-energygoods and services, helping to accelerate progress onmitigating greenhouse gas emissions while promotingeconomic growth, access to energy and energy security.

2.Achieve robust pricing o carbon: Ensure a carbon pricethat is high and suciently stable to change behaviours andinvestment decisions. This will strengthen incentives to investin economically and environmentally sustainabletechnologies. G20 leaders should ensure that national targets

and policies are ambitious enough to create consistentinternational demand or carbon units and provide anessential oundation or an international carbon market.

3. End and redirect inecient ossil-uel subsidies: Developnational transition plans to phase out inecient ossil uelsubsidies within the next our years and consider redirecting aportion o such subsidies to ensure access to energy or thepoorest and to other public priorities, including greeninrastructure investments. This will reduce scal imbalances,increase real incomes and reduce greenhouse gas emissionsand the overall cost o mitigating climate change.

4.Accelerate low-carbon innovation:Use revenues rom

carbon pricing measures to increase support or research,development, demonstration and pre-commercialdeployment o low-carbon technologies by poolinginternational eorts. This will underpin innovative resource-and energy-ecient solutions, increase competitiveness andcreate business opportunities to drive long-term economicgrowth.

5. Increase the leverage o private investments: Scale up riskmitigation and co-investment unding structures to help closethe inrastructure nancing gap. G20 leaders should call onsources o public nance to move rom a project-by-projectapproach to a portolio one to ensure there is support orinitial project and programme development.

Aims o this report

This report is a rst step by the Green Growth Action Alliance todeliver on the G20 Leaders request. It aims to provide acommon point o reerence to guide policy-makers, nancialinstitutions and investors as they seek to better understand, andaddress, the global gap in green investment. This reportdocuments and synthesizes the best available green investmentdata, research and case studies rom a number o leadingorganizations, including Bloomberg New Energy Finance, theClimate Policy Initiative, the International Energy Agency, theOrganization o Economic Cooperation and Development, theUnited Nations Environment Programme, the World Bank Groupand the World Resources Institute, and provides importantmessages or dierent groups o stakeholders. New analysis isalso presented on clean-energy asset nance fows, the ndingso which can be used to guide investment decisions andpriorities in other sectors.

Policy-makers and development nancial institutions can usethis report to:

- Develop a common view on global fows o green investment

in key sectors

- Analyse the gap between business-as-usual investmentlevels and the amounts needed to address climate changeand other environmental challenges

- Identiy successul, replicable interventions that unlock privatenance with targeted public policies and public nance

Investors can use this report to:

- Identiy the leading green investment sectors and regions

- Demonstrate success in obtaining attractive returns romgreen investment

- Suggest mechanisms that target public nance and maximizeprivate investment

Report structure

Part 1: Green

Investment:

Current Flows and

Future Needs

Part 2: Unlocking

Private Finance

Part 3: Catalysing

Leadership and

Private Investment

What are global green

investment fows?

What investment is

required to achieve

climate change and

sustainability targets?

What is the role o

public unds and

public policy to

mobilize private

nance or green

growth?

What actions are

needed to eectively

scale up green

investment?


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Part 1: Green Investment:Current Flows and FutureNeeds

Securing green growth

- Investment required or the water, agriculture, telecoms,power, transport, buildings, industrial and orestry sectorsunder current OECD growth projections is approximately US$5 trillion per year until 2020.

- However, this business-as-usual investment will not lead to astable uture unless it achieves environmental and sustainabilitygoals. Beyond the known inrastructure investment barriers andconstraints, the challenge will be to enable an unprecedentedshit in long-term investment rom conventionala to greenalternatives to avoid lock-in. This can be achieved by re-evalua-ting investment priorities, shiting incentives, building capacity,investment-grade policiesb and improving governance.

- There are additional investment needs o at least US$ 0.7trillion per year to meet the climate challenge. This is neededor clean-energy inrastructure, sustainable and low-carbontransport, energy eciency in buildings and industry, and or

orestry, to limit the global average temperature increase to2C above pre-industrial levels. In other sectors, incrementalinvestment needs are unknown and more work is needed tounderstand these.

- Estimated separately, the additional investment requirementsbeyond current spending or adapting to climate change areestimated at US$ 0.1 trillion per year in a 2C scenario.

Current green investment ows

- Green investment fows have been summarized rom dierentsources or climate-specic investment, notably renewableenergy, energy eciency, transport vehicles, orestry andclimate change adaptation. In other sectors, such as transport

inrastructure (roads and airports), buildings, industry, waterand agriculture, fow estimates are lacking but business-as-usual spending predictions can be used as a proxy.

- Total investment in climate-change mitigation and adaptationin 2011 were estimated at US$ 268 billion rom the privatesector and US$ 96 billion rom the public sector (US$ 364 intotal, o which US$ 14 billion was or adaptation).

- For a subset o this climate-specic investment, namely clean-energy asset nance, investment has been growing at a rateo 32% per year since 2004. Investment fows in 2011 wereup 93% rom 2007, the year beore the global nancial crisis.In 2012, Southern-originating fows or clean-energy asset

nancing are set to exceed those originating rom the Northc.Most o this Southern nance is being used domestically andis an important emerging source o capital.

- Looking through the lens o climate-specic investment,nancial fows still ail to close the cost gap. There issignicant regional and technological bias in investmentpatterns. Investment is disproportionately ocussed in theNorth and emerging markets, or wind and solar technologiesin particular. To support global green growth and meetemission-reduction goals in a 2C scenario, investmentneeds to rapidly scale up in other non-OECD countries and ingeneral or renewable technologies beyond wind and solar.Investment in energy eciency and sustainable transport are

also lagging.- Financing or climate-specic investment was split about 1:3

between public- and private-sector investments in 2011. Part2 o this report elaborates on the strong potential orincreased private sector participation.

Box 1.1: Dening the scope and methodology

Scope o the report

In order to measure, monitor and scale up progress in greeninvestment, it is rst necessary to dene its scope. Eorts to datehave ocused on measuring and tracking investments to reduce

greenhouse gas emissions (mitigation) and to reduce the risksand impacts o climate change (adaptation). Global spending oninrastructure has generally been tracked separately. Thediagram below presents a conceptual ramework or greeninginvestment with the scope o assessment or this edition o thisreport. There is no comprehensive assessment o investment inthe various sectors. Data gaps have been identied or currentinvestment fows and uture investment requirements in non-energy related sectors. Future editions o this report will aim tooer strategies to close these gaps, with a longer-term aim oobtaining a clearer picture o green-growth spending.

c Southern countries are dened as non-OECD members and Northern countries are dened asOECD members throughout this report.

a The term conventional investment used throughout this report reers to typical business-as-usual investments, such as or ossil uel-based power generation and transport, orinrastructure where alternatives exist that are more sustainable in their long-term environmentaland social impact.

b Investment-grade policies are ones that are well designed to create an attractive and stableinvestor environment by reducing the risks o investing and increasing returns (UNEP FinanceInitiative).


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The rame o the assessment, which can be expanded in latereditions, includes a synthesis o investment requirements romdierent sources (detailed in Appendix 1) to support growthunder current projections. A subset o this business-as-usualinvestment needs to be greened to ensure that investments aresustainable or a transition to green growth. This subset,however, has not been quantied in this edition o the report.

In addition to investment or growth, additional investment is neededbeyond business-as-usual spending in order or green technologiesto limit climate-change temperature increases to 2C abovepre-industrial levels. This is assessed or transport vehicles, power,industry, buildings and orestry, but is unknown or other sectors,such as agriculture and water. The combination o greenedbusiness-as-usual investment and investment needed or greentechnologies comprise the total investment needs in a green-growthmodel or securing a sustainable uture under a 2C scenario.

The assessment o sectors in this edition o the report is notexhaustive and is based on data availability. Future editions willaim to expand the number o sectors assessed and the scope othat assessment.

Defning green growth and green investment

Various denitions o green growth exist18. For the purposes o thisreport the denition adopted by the Secretary-General o the UnitedNations (UNSG) High Level Panel on Global Sustainability is applied.The High Level Panel sets out a vision or growth thateradicates poverty and reduces inequality, while combatingclimate change and respecting a range o other planetaryboundaries. In this context, an inclusive green-growth strategy is animportant driver or innovation and creating sustainable wealth19.

Green investmentis a broad term closely related to otherinvestment approaches such as socially responsible investing(SRI) and sustainable, long-term investing. As most greeninvestment is needed to retrot existing and develop newinrastructured, this report ocuses on inrastructure spendingbut acknowledges the need or non-inrastructure spending,such as or capacity building, deployment, training and researchand development, to enable green and inclusive growth20.

Methodology

This report collects and analyses three categories o data:

- Investment requirements in a business-as-usual scenario,under current policies. These are estimates o investmentrequirements to 2030 to support economic growth projections ina range o sectors, based on models and predictions rom theOECD, the World Bank, the Food and Agriculture Organization

(FAO) and United Nations Environment Programme (UNEP), in ascenario where green growth and climate change is not a priority.

- Investment requirements in a 2C scenario, where climatechange is a priority. These are estimates rom the InternationalEnergy Agency (IEA), UNEP and the World Bank o investmentrequirements to 2030 in a range o sectors based on a scenariowhere the eects o climate change are kept at bay.

- Current known and historical investment fows. These arelimited to climate-specic investments: mitigation andadaptation, summarized by the Climate Policy Initiativee.

The investment landscape and cost gap:Business-as-usualinvestment data was collated rom the sectors outlined above and is

presented below. Any incremental costs were calculated bysubtracting the investment requirements in a scenario that aims tostabilize the global climate at 2C rom those under a business-as-usual scenario. Climate-change adaptation investment requirementswere not aggregated and are presented separately. Collated datawas not altered in any way, apart rom converting United Statesdollar amounts to their 2010 rate or ease o comparison. All datasources, assumptions and calculations are provided in Appendix 1.It should be noted that the investment gaps presented in this reportshould be taken as indicative, and as a lower-range estimate,because urther work is required to include other sectors andincremental costs to strengthen the scope o the analysis.

Green investment fows:A subset o climate-specic public and

private investment is studied in more depth. O this investment,new-build asset nance or clean energy (comprising about halo the total investment) is presented in directional fows betweencountries and domestic sources o nance.

About US$ 5 trillion in global inrastructure investment isrequired per year to 2030 in various sectors; this investmentmust be greened to secure uture growth

To support a uture global population o 9 billion people an estimatedUS$ 5 trillion per yearneeds to be invested in global inrastructure(~US$ 100 trillion over the next two decades, Figure 1.2). Thisbusiness-as-usual approach would maintain investment inconventional, emissions-intensive technologies, endangering uturegrowth. A 2012 World Bank report21 highlighted that the planet is on

track or a global average temperature rise o at least 4C beyondpre-industrial levels, which would bring impacts detrimental togrowth, including unprecedented heat waves, severe droughts andmajor foods. The McKinsey Global Growth Institute has estimatedthat rates o environmental degradation are unsustainable or thelong-term unctioning o the global economy22. Existing and utureinvestment, thereore, must be greened to avoid dangerous levels oclimate change and adverse environmental impacts that coulderode the benets rom new green developments; i non-greeninvestments continue to grow in parallel with increased investment ingreen inrastructure, it will not be possible to achieve green growth.

e The scope o currentmitigation fows includes: investment in renewable energy generation,

energy eciency, sustainable transport, agriculture, orestry and land-use, waste and wastewater, capacity building and technical assistance, uel switching and others. The scope ocurrent adaptation fows includes: investment in agriculture and orestry, water preservation,supply and sanitation, inrastructure, capacity building and technical assistance, disaster riskreduction and others.

For example, the World Resources Institute estimate that 1,199 new coal-red power plants witha combined capacity o 1.4 TW are currently being proposed globally, with China and Indiatogether accounting or 76% o the proposed capacity (Global Coal Risk Assessment, WRI,November 2012). Without carbon capture and storage, these investments signicantly dampenthe benets o parallel investment in clean energy.

d Inrastructure can be dened as the basic physical and organizational structures and acilitiesneeded to operate a society or enterprise that enables economic growth and acilitates theeveryday lie o citizens. Inrastructure can reer to transport (vehicles, roads, rail), water, energyand telecommunications. Green inrastructure can be dened as inrastructure that enableseconomic growth and at the same time improves the environment (quality o air, health o citizens),helps conserve natural resources, reduces emissions and enables adaptation to climate change.Green inrastructure could include renewable and low-carbon power plants, sustainable andlow-carbon vehicles and transport, and energy-ecient, climate-resilient buildings.

Figure 1.1: Conceptual assessment ramework and scope othis report

Existing

infrastructure

investment^

needs to

be greened

Infrastructure

investment*

required to

support global

growth

Business-as-usualapproach

Green growth

Transition

Additional

investment#Required to

deliver greengrowth

+

Enabling policy conditions, tools,

mechanisms and instruments

Notes: *Sectors assessed include water, agriculture, orestry, telecommunications, transport, power,buildings and industry. ^Quantity o business-as-usual investment that needs to be greened is notassessed. #Sectors assessed limited to transport vehicles, power, industry, buildings and orestry.


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While greening investment is one aspect o the challenge, thekey is to secure nancing or inrastructure needs in general.Approximately US$ 24 trillion is earmarked to be spent oninrastructure beore 2030, alling short o the cumulative US$ 60trillion needed28. Development capital needs are in addition tothe annual US$ 5 trillion gure cited in this report, and the IEAestimates that the share o energy-related investment in publicresearch, development and demonstration has allen by twothirds since the 1980s29. Better inter-agency planning andstrategic integration is required to determine common green-growth goals between sectors.

More work is needed to better understand the investment needs

in the agriculture, water, transport inrastructure andtelecommunications sectors. In the power generation, buildings,industry and transport vehicles sectors, the IEA has estimatedthere will be signicant incremental capital costs or technologiesbeyond business-as-usual spending. Business-as-usual andincremental costs in sectors beyond the scope o assessmenthave not been assessed in this edition o the report.

It is possible that or some sectors, the incremental costs could belower or some types o inrastructure in a 2C scenario comparedwith a business-as-usual scenario. For example, investment ininrastructure to transport and distribute oil and gas should be lessthan the US$ 155 billion per year (2005 US$) projected by theOECD under a business-as-usual approach. Transporting ossil

uels accounts or more than 40% o the tonnage o maritime tradeand more than 40% o rail tonnage in the USA; so the expectedincreases in investments in port and marine inrastructure under abusiness-as-usual approach should be lower in a 2C scenario30.

In all sectors, the green-growth challenge is multi-aceted:

- Capital costs or inrastructure to support growth are high andnot being met. Other than clean energy, investment fows arenot well documented.

- To ensure growth is sustainable, an unprecedented shit inlong-term investment is required rom conventional to greenalternatives, producing synergies between development andthe greening o growth.

- There are also incremental investment needs or technologiessuch as CCS that carry greater risks or investors.

- Research and development spending is equally important tohelp demonstrate and commercialize green technologies.

Table 1.1 collates and normalizes as much as possible theinvestment requirements rom dierent sources or varioussectors under business-as-usual growth and under a 2Cscenario.

The next section in this chapter ocuses on the agriculture andwater sectors, where the incremental costs under a 2C scenarioare not well known; a qualitative explanation is oered. More workis also needed to understand the nancial implications oradaptation in the IEAs Current Policies (6C) scenario, and theincremental costs or the telecommunications sector. Finally, thischapter estimates incremental costs (under a 2C scenario) or theenergy, buildings, industry, transport and orestry sectors.

Figure 1.2: Total estimated business-as-usual investmentrequirements and additional investment under a 2C scenario

For policy makers

Water$1,320 bn

Transportinfrastructure

$805 bn

Telecommunications$600 bn

Agriculture: $125 bn

Transportvehicles$845 bn


Energy$619 bn

Forestry: $64 bnTransportvehicles$187 bn

Energy$139 bn

Forestry$40 bn

Buildings &

industry$331 bn

Additional investmentrequirements in a green growth

scenario: $0.7 trillion / year

Total investment requirements :$5.0 trillion / year

Investment that needs to be greened

Sources: OECD23,24, IEA25,UNEP26, FAO27

Business-as-

usual scenario

investment

needs

2C scenario

investment

needs

Incremental

investment

required

Sec

tor

Cumu

lative

2010

2030

Annua

laverage

Cumu

lative

2010

2030

Annua

laverage

Cumu

lative

2010

2030

Annua

laverage

Sources

Power generation 6,933 347 10,136 507 3,203 160 IEA

Power

transmission and

development

5,450 272 5,021 251 -429 -21 IEA

Energy total 12,383 619 15,157 758 2,774 139

Buildings 7,162 358 13,076 654 5,914 296 IEA

Industry 5,100 255 5,800 290 700 35 IEA

Building &

Industrial total

12,262 613 18,876 944 6,614 331

Road 8,000 400 8,000? 400? - - OECD

Rail 5,000 250 5,000? 250? - - OECD

Airports 2,300 115 2,300? 115? - - OECD

Ports 800 40 800? 40? - - OECD

Transport vehicles 16,908 845 20,640 1,032 3,732 187 IEA

Transport total 33,008 1,650 36,740 1,837 3,732 187

Water 26,400 1,320 26,400? 1,320? - - OECD

Agriculture 2,500 125 2,500? 125? - - FAO

Telecommunications 12,000 600 12,000? 600? - - OECD

Forestry 1,280 64 2,080 104 800 40 UNEP

Other sectors unknown unknown unknown unknown unknown unknown

Total investment 99,833 4,991 113,753 5,689 13,934 698

~$100 tr ~$5 tr ~$114 tr ~$5.7 tr ~$14 tr ~$0.7 tr

Table 1.1: Annual estimated investments needed under abusiness-as-usual and low-carbon scenario (US$ billions peryear between 2010 and 2030)

Sources: OECD31,32, IEA33, FAO34, UNEP35. Data presented in US$ 2010 rates.

Note: Total investment does not include synergy e ects that can occur between other investmentsbesides energy, buildings and industry and transpor t. The total amount provided is a proxy outure investment. Investment in water and telecommunications inrastructure covers the OECDand emerging markets only. Investment in agriculture covers 93 developing countries only. See

Appendix 1 or ull details o assumptions, scope and calculations.


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The World Bank estimates the cost o adapting to a 2C increasein global average temperatures will be US$ 85121 billionh peryear between now and 205040. However, under the IEAsCurrent Policies scenario (6C), adaptation costs will be signi-cantly higher and have not yet been ully estimated, or example,to ensure that disasters are managed and development is moreresilient to extreme weather events. Furthermore, there is nocertainty that adaptation is possible beyond 2C o warming41.

The Climate Policy Initiative estimates investment fows or climateadaptation o US$ 1216 billion in 201142, implying a shortall oUS$ 69109 billion per year in adaptation investment.

At least US$ 0.7 trillion in incremental costs beyond business-as-usual spending is required to support green growth

Aside rom the challenge o greening investment in the sectorsdescribed above, to achieve climate stabilization at 2C at leastUS$0.7 trillion in incremental, net investment is neededbeyond spending under a business-as-usual approach (a urther~US$ 14 trillion by 2030)i. Data on current and historical investmentfows in low-carbon transport, building energy eciency and greenindustrial spending is insucient. Further analysis is needed toimprove estimates o the necessary investment fows beyond whatis predicted under a business-as-usual scenario. To dene theincremental cost gap, this section assumes investment will ollow abusiness-as-usual path in line with the IEAs Current Policies (6C)scenario.

The incremental costs are or investments in power generation,transport vehicles, energy eciency in buildings and industry(sourced rom the IEA) and orestry (sourced rom UNEP FinanceInitiative). The US$ 0.7 trillion per year in net new investment takesinto account an estimated US$ 146 billion per year in business-as-usual energy spending that would need to be redirected romconventional outlays or ossil uel-powered electricity, heat andtransport to less-emitting options. Setting orestry aside, hal othe incremental cost is needed or energy eciency while theremainder is needed to cover investments to decarbonize powergeneration and transport.

The IEA estimates that these incremental costs are economi-cally viable: the corresponding predicted uel savings willmore than compensate or the higher investment needs inthe transition to a low-carbon energy sector. Between 2010and 2050, even when applying a 10% discount rate to savingsrom reduced demand or coal, gas and oil, the IEA orecasts anet saving o about US$ 5 trillion over the period, indicating thatdecarbonizing the energy system is clearly aordable43.

More spending will need to be diverted rom conventional toclean power in the uture, with a much higher proportion o

spending targeted in the renewables sector under a 2C scenario

- The IEA estimates that total investment requirements o thepower sector are US$ 758 billion per year or US$ 15 trillion to2020j (Figure 1.3).

- Investments are needed in conventional (ossil) and clean andrenewable technologies but reduced investment in ossiluel-based energy generation provides some relie (46%)towards the incremental capital required or renewables,nuclear and carbon capture and storage.

- For coal and gas power, carbon capture and storage is acritical technology that requires much greater investment;US$ 52 billion per year in total to 2030 on top o the

investment needs or gas and coal power generation.- By 2050, almost all gas and coal power inrastructure will need

to have carbon capture and storage under the 2C scenario44.

h Numbers adjusted to US$ 2010 rates.i See Appendix 1 or a breakdown o investment needs and sectoral scope assumptions.ji Power sector investment scope includes: coal, gas, transmission and distribution, renewable

energy such as wind, solar and others, nuclear and carbon capture and storage.

g This number is an underestimate, covering mainly urban water services and to a lesser extentrural water services. It relates to mainly replacement, maintenance and repair in Europe and NorthAmerica rather than additions to existing networks.

Agriculture

The Food and Agriculture Organization (FAO) has estimated thegross investment requirements or primary agriculture indeveloping countries at US$ 125 billion per year to 2030. TheFAO urther breaks this investment down by the need to replaceexisting capital stock (60%) and or new capital stock (40%) toincrease agricultural productivity to double current levels by205036. In practice this means that energy or production will

need to be low carbon (or both vehicles and electricity needs),and research and development will need to ocus on livestockand crop practices that reduce emissions, require less ertilizerand chemical input, and provide climate-resilient crop varieties.Agricultural growth needs to be more inclusive, supporting theequitable reduction o poverty and hunger, and balanced withpreserving existing high-value ecosystems. This productivityrevolution in the sector could require additional costs beyondcurrent spending but no estimates exist o the incremental costor greening the agricultural sector.

The International Food Policy Research Institute estimatesthat only 6% o investment in agriculture in developingcountries is rom private sources, compared with 55% in

developed nations37. Private investment rom oreign anddomestic sources will need to be mobilized to deliver mostcapital requirements, particularly or equipment, to developinrastructure and maintenance, and or research anddevelopment or new crop varieties and breeds. Reducingsubsidies or input-intensive agriculture could release unding tobring about private investment.

Water

As the worlds population tripled in the 20th century, waterconsumption increased in absolute amounts and per capita.Rapid demographic and economic growth has put increasingpressure on the quality and quantity o water resources. With a

growing population, water resources must be managedeectively to address water pollution, excessive consumption,preserve the ecology and the environment, and to saeguard thehydrological cycle in general while providing adequate, long-term supplies o acceptable-quality water or domestic, industrialand agricultural needs.

The OECD estimates that US$ 1.3 trilliong needs to beinvested annually38 to replace and maintain waterinrastructure in developed countries and emerging marketsalone. In addition to these baseline nancial needs, eectivepolicies and nance are needed to support new, resilientinrastructure.

Climate change adaptation

A world that is at least 2C warmer than in pre-industrial timeswill experience heightened rainall and more requent andintense weather events, such as fooding, droughts and heatwaves. The Intergovernmental Panel on Climate Changes(IPCC) Fourth Assessment Reportillustrates the strong linksbetween climate adaptation and growth. For example, morethan one sixth o the worlds population lives in areas supplied byglacial melt water, and as glaciers decline, so will long-termwater availability. Coastal areas are in danger o being foodeddue to impending rises in sea levels, with poorer communitiesthe most vulnerable due to lack o adaptive capabilities. Highlynegative health impacts are predicted rom increasedtransmission o disease39.


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Fuel savings rom gasoline and diesel more than compensate orthe incremental costs required in the transport sector

- The IEA estimates that more than US$ 1 trillion per year to2030 is needed in transport vehicle investment (~US$ 21trillion over the next two decades)46; the OECD predicts that aurther US$ 0.8 trillion is needed per year in transportinrastructure .

- The net additional investment required compared with abusiness-as-usual scenario is estimated at US$ 187 billionper year, taking into account a diversion o US$ 26 billion peryear rom gasoline vehicles to greener alternatives, such ashybrid vehicles, electric and natural-gas powered vehicles.

- Under the 2C scenario, US$ 784 billion per year willbecome available rom gasoline and diesel-uel savings, owhich just US$ 69 billion will be needed to cover increasedcosts o natural-gas usage, biouels, electricity and hydrogen.

Approximately US$ 296 billion per year in incremental energy-efciency investment is needed in the buildings sector to 2030

- The IEA estimates that more than US$ 13 trillion overall needsto be invested in energy eciency over the next two decadesin the buildings sector. This will be crucial to reduce thedemand or producing new energy.

- New buildings will need to meet stringent energy-perormance requirements, while existing buildings will needretrots with longer paybacks; this raises the importance onancing mechanisms, discussed urther in Part 2 o thisreport, to help unlock energy eciency investment orcommercial and residential buildings.

Incremental costs in the industrial sector are estimated at US$35 billion per year to 2030

- In the ve most energy-intensive sectors (cement, iron andsteel, pulp and paper, aluminium and chemicals andpetrochemicals), signicant opportunities exist in improvedenergy management, uel switching, recycling and carbon

capture and storage to capture process emissions.- Compared with a business-as-usual scenario, the

incremental investment required or a 2C pathway is lowerthan in other sectors, estimated by the IEA at US$ 35 billionper year47.

Figure 1.3: Total estimated investment required per year to2030 in power generation (US$ billions)

128

272

49

29

39

50

50

619

-21

Gas

46

-4

Coal

33

-95

Nuclear

51

82

Power

758

139

CCS

52

43

Solar

92

63

Wind

119

70

T&D Other

renewable

81

251

31

1

Incremental investment needsBAU investment

Incremental investmentrequirements

Business-as-usualinvestment

Totalinvestmentneeds

Sources: IEA45

m Calculations as o 2006.n Climate-specic investment fows or adaptation are estimated by the Climate Policy Initiative

(2012) rom various sources and include: agriculture and orestry; water preservation; supply andsanitation; inrastructure; capacity building/technical assistance; disaster risk reduction, andothers.

o Other climate-specic investment fows or mitigation include agriculture, orestry, land-use,waste and waste water, capacity building/technical assistance, uel switching and others.

An additional US$ 40 billion per year is needed in the orestrysector

Forests play a central role in climate regulation and carbonsequestration, and one billion people rely on orest ecosystemsor shelter, ood, uel, jobs, water, medicine and security. TheFood and Agriculture Organization has estimated that the orestindustry contributed almost US$ 0.5 trillion to global GDP in200648. Competition rom other industries, such as agriculture,

or land use puts pressure on orest ecosystems, resulting in thecurrent unsustainable rates o deorestation. In many countries,much o the native orest cover has been stripped to supportcharcoal production, and in others, reliance on wood uel orcooking can lead to increased pressures on local orests andnatural resources49.The green investment challenge or orests isto provide policies and incentives that help avoid unsustainabledeorestation, encouraging green growth and driving resourceproductivity, particularly in developing countries.

- UNEP estimates that approximately US$ 64 billion isinvested in orests annuallym, o which 28% is spent onorest management and the remainder invested in orestproduct processing and trade.

- An additional investment o US$ 40 billion per year isneeded or reorestation (54% o the total) and to paylandholders to conserve their orests (46% o the total).

- Through this additional investment, orest area is predicted toincrease, leading to 28% higher carbon storage, greateremployment and a gross added value o US$ 600 billion in2050 compared with a business-as-usual scenario.

Climate-specifc investment ows are growing, with US$ 268billion invested per year rom the private sector and US$ 96billion per year rom the public sector

While data rom IEA and UNEP indicate at least US$ 0.7 trillion in

incremental costs or the sectors outlined above, the ClimatePolicy Initiative estimated that approximately US$ 364 billion wasinvested globally in climate-specic project investment in 2011.O this, US$ 14 billion was or adaptationn and the remainder ormitigation, chiefy or renewable energy generation (54% omitigation investment), energy eciency (18%), sustainabletransport (10%) and other projectso, including land use, wasteand uel switching50. The ratio o public to private investment wasabout 1:3 in 2011 (see Figure 1.3). Private sources o investmentdominated, with approximately one-third o overall climate-specic investment originating rom project developers.


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Investment in clean energy has rapidly grown over the past ewyears

Investment in clean energyp grew at an average rate o 33% peryear between 2004 and 2011, with the highest growth in thesolar sector52. Rapid growth in the industry has partially resultedrom the reduced cost o wind and solar power combined withmore generous subsidy programmes. Bloomberg New Energy

Finance estimates that small-scale solar projects (less than 1megawatt) alone attracted US$ 22 billion in the second quartero 2012, 13% up rom the same quarter in the previous year.Over 2011, solar module prices ell by 50%, and by the end o2011 it was also clear that installed renewable energy hadsurpassed overall installed nuclear capacity by 50% globally53.

Clean energy technologies have experienced dramatic costreductions, due to:

- the adoption by many countries o clean energy policies andrameworks over the past decade

- growth in emerging markets

- benecial economic stimulus packages avouring cleanenergy investment

- rising costs o ossil uels

The past year, however, has brought signs o slowing investmentin wind and solar energy as governments have reducedsubsidiesq. Demand has also dropped ollowing a all in industrialoutput during the global nancial crisis, and the currentoversupply in the solar and wind sectors could lead toconsolidation in the market in the short to medium term54.

In the longer term, the current revolution in shale gas could placedownward price pressure on carbon-intensive energy sources,making renewables comparatively less attractive investments.While gas (which is less carbon-intensive than coal) will continueto be part o the energy mix in a green-growth scenario, itscontribution will need to decrease over time to less than 3% ooverall power investment needs by 2050, according to the IEA55.Avoiding gas lock-in will be a major challenge or governments

in the coming decade.

Global green investment could be accelerated by ocusing moreon developing country markets as a source o investment

Looking through a clean energy lens, investment in asset nanceoriginating rom non-OECD countries or both domestic andcross-border uses grew rom US$ 4.5 billion in 2004 (19% ototal asset nance) to US$ 68 billion in 2011 (41% o total assetnance), at a rate o 47% per year (see Figures 1.5, 1.6). Foreigncross-border investment rom outside the OECD representedthe highest growth rate in any clean energy fow category: 61%per year on average, a 28-old increase57. Based on current

growth rates in investment originating in non-OECDcountries, clean-energy asset nance fows are expected toexceed those originating rom the OECD in 2012. In the wakeo the global nancial crisis, investment originating rom non-OECD countries did not slow as much as those rom the OECD,highlighting their resilience and potential as a source o utureinvestment or green growth.

r Public markets: Funds raised by publicly quoted or over-the-counter/o-exchange trading (OTC)supported clean energy companies on the capital markets;Venture capital and private equity:Early- and late-stage venture capital unding rounds o clean energy companies as well as undsraised privately or expansion; Small distributed capacity: Estimated data o non-trackedinvestment in small scale solar photovoltaic (


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Targeted public action can address the investment shortalland promote green investment

The need to scale up green investment is evidenced through theexample o clean energy. As outlined above, total investmentneeds in the power sector in the IEAs 2C scenario are US$ 758billion annually. Out o this total, 39% (US$ 294 billion) is requiredor renewable energy. Climate-change mitigation fows areestimated at US$ 350 billion per year by the Climate PolicyInitiative (taking into account both public- and private-sectorfows), o which an estimated US$ 189 billion was spent onrenewable energy projects in 201161. This indicates a shortall oabout US$ 100 billion per year. While this may seem a relativelysmall amount, in reality the shortall is larger because investmentis biased towards wind and solar technologies in the OECD andemerging markets. Investment in other types o renewable-energy technologies need to be scaled up equitably acrossregions in order to meet the emission-reduction targetspredicted by the IEA. Larger investment gaps in Arica and othernon-OECD countries beyond the emerging markets will bechallenging to close given the higher level o investment risk inthese areas.

The Climate Policy Initiative estimated fows in energy eciencyinvestment at US$ 63 billion in 2011, with sustainable transportinvestment at US$ 35 billion62. While there is a lack ocomprehensive data on investment, these early estimates showthat these sectors all short o the required incrementalinvestment (US$ 331 and US$ 187 respectively).

Bloomberg New Energy Finance estimates that annual fows inclean energy are increasing more rapidly than in conventional,ossil-uel energy investment. Despite this, overall annualinvestment in ossil-uel energy remains higher than clean-energy spending63. While ossil uels orm part o the requiredenergy mix in the uture, investment needs to decrease overtime, with a shit to greener technologies.

The public sector can address the green investment gap byunlocking private investment through targeted nancialmechanisms that reduce risk and lower the cost o capital. Atthe same time, greener alternatives need to be promoted overconventional ones through better policy rameworks and a shitin incentives and behaviour. Strong carbon-pricing signals andremoving ossil-uel subsidies, in particular, play an importantrole in the transition. These actions, i successul, can promotelong-term nancing or green technologies and alleviate thebarriers to investment. Part 2 o this report expands on thesebarriers and the potential instruments and actions that can helpunlock the investment needed to support greener growth.

Figure 1.6: Current estimated climate-specic investment fowsin 2011 (US$ billions)

Figure 1.7: Historical clean energy investment by fow type(US$ billion)

OECD

$52bn

Crossborder

investment Originatingfrom

non-OECD

Originatingfrom OECD

Domestic

investment

Crossborder

investm

ent

Domestic

investment

$21bn

$31bn

$1bn

$103bn

Privateinvestment

Publicinvestment

Non-OECD

$150bn

$63bn

Originating fromnon-OECD

Originatingfrom OECD

$75bn

$4bn

$8bn

Origin-atingfromOECD

Origin-

atingfromOECD

80

70

60

50

40

30

20

10

0

2011

52(33%)

63

4 (2%)

4 (2%)

3 (4%)

2 (3%)

2 (4%)

4 (20%)

4 (19%)

1 (4%)1%

7 (6%)

2 (2%)

2 (2%)2 (2%)

1 (1%)

1 (1%)

30(23%)

21(21%)

30(26%)

24(27%)

17(25%)

6 (4%)

8 (5%)

1 (1%)

1 (1%)


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Part 2: Unlocking PrivateFinance

Greening growth will require a signicant reconguration o currentand uture investment, with urther incremental costs beyond abusiness-as-usual approach that need to be nanced. Given thecurrent nancial crisis, public resources are limited, however, andthe reliance on public-sector investment in the longer term must be

reduced to ensure sustainable green growth. This places privatenance at the core o the transition.

Unlocking private nance can be challenging: certain greentechnologies have real or perceived higher risks or a potentialinvestor when compared with conventional ossil-basedinvestments that have a track record o consistent returns.Unamiliarity with technologies also plays a role, particularly indeveloping and emerging markets where green growth needsare particularly high. Green technologies oten have highercapital costs, especially during the earlier stages odevelopment, which can urther deter investors.

An emerging body o experience suggests considerable potentialexists or closing the green investment gap by mobilizing privatenance through the targeted deployment o public nance. It iscrucial to reorm policies and incentives to give the right signals toinvestors, providing a strong enabling ramework or investings. Inparallel, private sector investment can be achieved by using arange o proven instruments and mechanisms to help reduce thecost o capital and investment risks.

While public-private nance mobilization and leverage ratios aredicult to calculate or compare across projects, countries andinstruments, ratios o 1:5t and above are not uncommon, andthere are some cases o instruments, such as grants, deliveringratios o 1:8 and higher.

To close the cost gap to support green growth through targetedpublic action, public investment would need to increase by2146% to US$ 116139 billion but could act to doublecurrent private-sector investment to US$ 558581 billion(Figure 2.1). This assumes that public nance has the potential tomobilize our to ve times its contribution rom private sourcesand that all o the public nance is leveraged at this average rate.

This chapter ocuses on the instruments and mechanisms (Table2.2) that public agencies can use to accelerate privateinvestment in green growth by:

- improving the risk-reward calculus

- reducing the cost o capital

- providing prerequisites and enabling conditions

The analysis o initiatives and case studies (Table 2.1) highlightssuccessul examples o nance mobilization throughout this chapter.

Figure 2.1: Current and potential public-private nancemobilization to close the cost gap

Table 2.1: Case studies analysed

Required privateinvestment

debt

US$ 342 399 bn

(6070%)

Required privateinvestment -

equity

US$ 171 228 bn

(30-40%)

Requiredprivate

investment

US$ 558581 bn

Requiredpublic

investment

US$ 116139 bn

Total requiredinvestment: US$ 698bn

Possible ratio:1:41:5

(+400-500%)

Note: The debt-to-equity ratio in Figure 2.1 is assumed at 70:30 based on the current average debtto equity ratio o clean energy asset nance projects according to Bloomberg New Energy Finance

Full details o case studies are given in Appendix 2. Note that some investment sources given in thetable may be estimated based on the designed nancial structure and do not necessarily indicateachieved perormance.s For a recent review o these issues see: Coree-Morlot, J. et al. Toward a Green Investment Policy

Framework: The Case o Low-Carbon, Climate-Resilient Inrastructure, Environment DirectorateWorking Papers, No. 48, Paris: OECD Publishing, 2012.

t Indicating that US$ 1 o public unding mobilizes a urther US$ 5 o private investment.

Name Country Public

investment

Private

investment

Total

investment

Source

1 Mexico Citys

Metrobus

Mexico US$ 287 m US$ 119 m US$ 402 m OECD

2 Walney Oshore

Windarms

UK Incentive

mechanisms

~1,300 m ~1,300 m Climate Policy

Initiative

3 Ouarzazate

ConcentratedSolar Power Plant

Morocco US$ 2,569 m US$ 253 m US$

2,822 m

Climate Policy

Initiative

4 Energy eciency

programmes in

Thailand

Thailand ~US$ 525 m ~US$ 450 m ~US$ 975 m World

Resources

Institute

5 Solar water

heaters in Tunisia

Tunisia US$ 24 m US$ 110 m US$ 134 m World

Resources

Institute/

Climate Policy

Initiative

6 Wind energy in

Uruguay

Uruguay ~US$ 7 m ~US$ 2,000

m (various

sources)

~US$ 2,000

(estimated)

UNDP

7 The case o

watershed

protection inEcuador and

Colombia

Colombia US$ 30 m ~US$ 150 m ~US$ 170 m

(estimated)

World Water

Council


19/40


Table 2.2: A taxonomy o public instruments and mechanismsto create attractive green-growth investment conditions

Publicsupport

mechanisms

Publicfinancing

instruments

Feed-in tariffs

Tax credit programmes

Renewable energy quotas

Standards

Repealing support for brown sectors

Grants

Subsidies

Project aggregation

Project lending

Debt funds

Bonds

Concessional/ flexible loan terms

Direct capital investment

Loan guarantees

Insurance

Foreign exchange/ liquidity facilities

Policy and overarchingpolicy support

Project level assistance

Lending (debt)

Equity investment

De-risking instruments

Instruments and mechanisms Examples

Source: Adapted rom World Resources Institute, 2012

Public action and support can attract private investment byimproving the risk-reward calculus

Private investment in green technologies aces a number orisks:

- Political risks include changes in government that aect thelegal system, and the risk o civil unrest in certain countries.

- Macroeconomic risks include fuctuations in economicconditions and commodity prices, interest and exchangerates.

- Policy risks entail regulatory changes, such as those toeed-in taris or ossil-uel subsidies that can alter a projectseconomic viability.

- Technology and operational related risks are thoseintrinsically related to the technology in question. These rangerom perormance-related risks, where revenues might belower than expected, to risks resulting rom the lack o orunreliable supporting inrastructure, such as electrical andwater-grid networks.

- Capacity risks reer particularly to development assistanceand aid, where institutions and governments are unable toensure unding is disbursed to projects and utilized.

Mobilizing private nance at scale requires that the risks o greeninvestments be reduced to about the same levels as those acedby alternative, conventional investments (or example, ingenerating ossil uel-based energy or environmentally sub-optimal inrastructure). As shown by the case studies in theAppendix, development nance institutions, multilateraldevelopment banks, and domestic governments havesuccessully leveraged signicant private investment throughtargeted support.

Insurance and guarantees

De-risking green investments to levels that are palatable toinvestors can be partially achieved by smoothing the investmentlandscape using guarantees and innovative insurance products.Political-risk guarantees are particularly useul in developingand emerging markets. The World Bank Groups MultilateralInsurance Guarantee Agency (MIGA) is one example o apolitical-risk insurance guarantee provider, having provided more

than US$ 24 billion in insurance coverage since 1988. Between2005 and 2011, however, MIGA provided ewer than 10guarantees or projects in green sectors;64 and MIGAguarantees are not available or smaller and medium-sizedinvestments.

Policy-related risks can be mitigated through regulatory riskinsurance or guarantees. The US Overseas Private InvestmentCorporation (OPIC), or example, provides investors withnancing, guarantees, political-risk insurance and support orprivate equity investment unds to help mobilize private capital.OPIC also oers regulatory risk coverage specic to renewableenergy projects. The aim o this type o insurance/guarantee is toreduce the risk inherent in investing in non-conventional

technologies, in non-conventional regions, and to create a levelplaying eld or alternative investment choices65. Examples orisks covered could include material changes to eed-in taris, orrevoking licences and permits necessary to operate a project. Toscale up insurance solutions or green investment, it will benecessary to align interests, most likely with a public-privatepartnership between the insurance industry and variousgovernments and regulators.

Loan guarantees and partial risk/credit guarantees arecommonly provided by development nance institutions andhave also proven useul in on-lending arrangements wheregovernments underwrite loans provided through intermediaries,such as commercial banks or state utility companies. In cases o

deault, the government agency or development nanceinstitution can absorb some or all o the risk. This is particularlybenecial or new markets where private lenders are not initiallycomortable or amiliar with the technology in question.

Tunisias Prosol Programme (see Appendix 2) is an example odebt deault risk being removed rom suppliers o solar waterheaters. Commercial banks provided loans to customersthrough accredited suppliers, which were repaid throughcustomers electricity bills. Customers services were withheldwhen they did not pay. The state utility acted as debt collector,enorcer and loan guarantor, shiting the credit risks rom lendersto borrowers. This has improved awareness and expertise ocommercial banks or renewable energy lending.

Work completed by the Green Growth Action Alliance highlightsthe potential role o partial credit guarantees in India to mobilizenance at scale, while in Kenya, the Alliance and the UNEPFinance Initiative are looking to design a Takeout Finance Facilityto address the perceived asset-liability mismatch that has beenidentied as a bottleneck or private nance or renewableenergy lending; local lenders oten seem unable to lend beyondseven years while project developers seek 15-year loans.

There is signicant potential or public sector and public nancialinstitutions to provide more guarantees or higher-riskinvestments but guarantees alone cannot improve thecommercial viability o all investment types. A combination o

de-risking instruments is needed to bring investment risk downto acceptable levels.


20/40


Interest rate and currency acilities

Where project developers need protection againstmacroeconomic risk and/or political volatility (or example, inemerging markets) interest rate and currency derivatives andacilities can reduce perceived risk. These are typically cross-border loans provided in the local currency that can protectthe borrower rom volatile fuctuations in the exchange rate,thereby avoiding repayments in oreign currency, and liquidity

acilities, such as lines o credit that can inject short-term cashfow into projects, allowing the borrower to manage exchange-rate fuctuations. Fees are usually required or interest rate andcurrency acilities, which reduce the overall economic viability othe investment. As a result, this mechanism is not oten used ingreen investing. Government and nancial institutions need tocooperate to provide these acilities at a lower rate or with nocharge to encourage private-sector investment in countrieswhere green growth is critically required but volatility in the localcurrency is high.

The private-sector acility o the United Nations FrameworkConvention on Climate Change (UNFCCC) Green Climate Fund(GCF), ormally established as part o the Cancun Agreements in

2010, is one contender or providing interest rate acilities andguarantees to increase the capacity o banks and encourageincreased lending or green projects. The GCFs mandate is tohelp developing nations limit or reduce their greenhouse gasemissions and adapt to the impacts o climate change. Its mainrole is to channel new, additional public nancial resources romdeveloped nations to aect private and public nance ormitigation and adaptation in developing countries. The private-sector acility o the Fund enables it to directly and indirectlynance private-sector mitigation and adaptation activities atinternational levels. The mandate is broad and could include arange o de-risking instruments to bridge the green technologycost gap, instruments such as subordinated debt (described

below), risk guarantees and even equity66

among others.Development nancial institutions (DFIs) play an important role inunderwriting loans and oering liquidity acilities at concessionalrates to reduce macroeconomic risk. The Japan Bank orInternational Cooperation (JBIC) provides loan guarantees orthe co-nanced portion o green projects. In 2010 and 2011,JBICs Green Initiative provided an estimated US$ 300 million inloan guarantees to local development banks or our renewableenergy projects in Asia and South America67. Developmentbanks are typically more amiliar with political risk andmacroeconomic conditions in developing countries and as suchare well-placed to increase access to underwriting acilities toscale up private-sector investment in these regions68.

Public action and support can attract private investment byreducing the cost o capital o green growth

Green technologies are oten earlier in the development stageand not always commercially viable, making them moreexpensive and riskier ventures. The incremental cost gapbetween conventional and green investments needs to bejustied and lled, especially at the earlier stages in technologydevelopment. The private sector will continue to be an increasingsource o green nance while the public sector has tended to llthe incremental green cost gap through policy-supportmechanisms, such as eed-in taris and subsidies. In the longer

term, sustaining such public-sector subsidies is questionablegiven the current economic climate.

Optimal nancing structures on a sectoral basis will ultimatelydepend on the context. For example, or energy investment,debt provision rom banks will play a larger role, while ortransport-sector investment, the public sector will need toprovide loss-absorbing equity. As such, the public sector canreduce the cost o capital and provide incentives to investthrough proven interventions.

LendingReducing the cost o capital by providing loans (debt) is the mostcommon source o nance or up-ront and on-going projectcosts. Low-cost debt (concessional nance) rom DFIs canprovide debt at lower interest rates over a longer term comparedwith commercial bank loans and will play a signicant role indistributing long-term green nance, particularly in developingcountriesu. Examples include the European Bank orReconstruction and Development (Box 2.3) and the EuropeanInvestment Bank. The European Investment Bank hasdramatically increased its lending or wind and solar energy inparticular in recent years and delivered 5.5 billion euros (aboutUS$ 7.25 billion) in 2011. Energy eciency is also a critical sector,attracting 1.3 billion euros (US$ 1.7 billion) o EIBs lending in2011. DFIs are also prominent in dispersing money rom theClimate Investment Funds, which have been shown to mobilizesignicant amounts o co-nancing rom other sources (see Box2.1), highlighting potential or scale-up.

The public sector has also provided loans through nancialintermediaries such as commercial banks. This approach cani

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