Here at COP22 in Marrakesh in the blue and green zones where ministers, financiers, climate experts NGOs and multinationals mingle, the talk is all about how to implement the Paris Agreement - and raise the required financing for low-carbon and adaptation projects. That, we all agree, will be in the trillions not the billions, whether you are talking dollars, pounds, euros or Moroccan dirhams.
Meeting that challenge will partly be about using public funds more intelligently to mitigate real or perceived risks to allow investors to finance projects that they would otherwise not be able, or would not be willing, to back.
For the EIB, this is a key issue. It's not just about the volumes that we are committing to climate action. Last year our climate action financing rose to a record €20.7 billion - 27% of the bank's total lending. Going forward we are committed to increase our climate financing in developing countries to at least 35% by 2020 and we expect our financing of climate-friendly projects globally to reach around €100 billion between now and 2020. But we know this isn't enough. We understand that our financing and probably all other public finance won't stretch to bridge the financing gap. The bulk of it clearly will have to come from the private sector.
So, how can we scale-up climate finance and get private investors involved? And how do we design the right kinds of financial products that convince the private sector to invest in low-carbon projects? Part of the answer lies in dealing with risk.
We often see investors reluctant to invest because of the risk they perceive in low carbon projects. This can be due to the location of the project, an untested technology, a lack of the right policy frameworks, or sometimes it's just the lack of a track record.
One starting point is to reduce certain identified risks of a transaction that prevent private investors from investing. Using public funds as a first-loss piece can help to do this. When it comes to perceived, rather than real, risk we need to help demonstrate that a business model or certain projects are viable.
At the EIB, our team dealing with funds and innovative financial instruments are structuring transactions and working with other partners in the public sector to achieve this. We can also increase the impact of public finance through blending or combining public with private capital, which then allows leveraging far greater investments from the private sector. Often this allows us to demonstrate that certain small investments in emerging markets can - with the right kind of management, structuring and due diligence - be commercially viable and indeed profitable. Our hope of course is that – once we've clearly shown this to be the case – we'll no longer be needed in the future!
At the EIB, we have been doing this for some time. One example is the Global Energy Efficiency and Renewable Energy Fund (GEEREF), a fund-of-funds providing global risk capital to unlock needed equity investments in renewable energy and energy efficiency projects in developing countries.
GEEREF used first-loss funding from the European Commission, Germany and Norway to attract more than €100 million from pension funds and other private investors. It's going from strength to strength. In fact this week here in Marrakesh we announced the first projects under the Catalyst MENA Clean Energy Fund. It is GEEREF's newest investment and is encouraging private investors to invest in renewable energy in the MENA region.These are the kinds of mechanisms we'll be supporting more to unlock private finance for low-carbon projects.
Take our new Climate Finance Platform where we are partnering with the Luxembourg government. This could be another kind of model for unlocking private finance and also dealing with the question of risk, whether real or perceived. We presented the new platform here at COP22 where it's already sparking an interest as a possible way that governments and public banks like ours can work together to get those private investors on board.
The Climate Finance Platform is one of a number of initiatives launched by Luxembourg since COP21. The launch of the Luxembourg Green Exchange by the Luxembourg Stock Exchange is another one, which intends to act as a gatekeeper for green bonds and other environmentally-focused financial instruments to help reduce ambiguity in the market.
Under the joint Climate Finance Platform, Luxembourg is planning to make at least €30 million available over the next three years for first loss and other subordinated funding for high impact climate transactions in which we plan to invest and whose investment vehicles are based in Luxembourg. €30 million may sound small but it represents 25% of Luxembourg's climate finance budget until 2020. That kind of financial and political commitment creates a certain confidence that is going to be vital to reassure private investors. Many here at COP22 are looking closely at the model and imagining the effect if more countries were to follow.
Martin Berg is an investment officer at the European Investment Bank
