Andrew McDowell, Vice-President of the European Investment Bank, delivered a speech at Climate-KIC's Mission Finance summit in which he outlined some shining examples of blended and innovative finance
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Good morning ladies and gentlemen,
As Irish Vice President of the European Investment Bank (EIB) it is always a great pleasure to be back in Dublin and even better when this provides an opportunity to highlight an area of successful cooperation between the EIB and Irish partners.
Indeed, I have just come from a side event organised by the EIB, European Commission and Irish authorities where I – alongside Minister for Energy and Climate Action Richard Bruton – announced two new areas of climate cooperation between the EIB and leading Irish partners.
The first relates to an initiative with the Sustainable Energy Authority of Ireland (SEAI) to increase use of EIB guarantee programmes to encourage Irish banks to lend for energy efficiency initiatives by SMEs and private residences here in Ireland and I expect that we can announce details in the coming weeks.
The second relates to an initiative with not just the SEAI, but also the Office of Public Works and the Department of Education to enable Irish public sector energy efficiency projects to gain future technical advisory funding under our European Local Energy Assistance (ELENA) programme and we expect to receive formal applications shortly.
Let me say that it's also a great pleasure to be invited to speak today alongside Vice President Maroš Šefčovič (Vice President of the European Commission) and Alexandre Raguet (co-founder of Lumo). I've been a great admirer of the work done by Lumo in tapping into new sources of savings to finance renewable energy projects. Maros and I speak at a lot of events together, although he always gets to speak first and says all the things I want to say. Joking aside, I believe that the partnership that the EIB has built with the European Commission under Vice President Sefkovic, as well as Commissioner Canete, on climate and energy financing stronger than ever, and long may that continue.
Please allow me to firstly say a few words about the EIB, our strengthened role financing climate related investment and the crucial need for innovative approaches to mobilise climate finance essential for slowing global warming.
EIB as the EU Bank
The European Investment Bank is the European Union's bank, owned directly by the 28 European Union Member States.
We are in fact the world's largest international public bank and last year provided more than €78 billion for financing projects across Europe and around the world.
Our mission is to finance – with debt and equity – public and private investment projects delivering solid financial and economic returns and supporting EU policy goals.
EIB commitment to climate action
"Over the last decade we have become the largest multilateral provider of climate finance worldwide"
As the EU bank, the EIB is committed to helping deliver on the goals of the Paris Agreement.
Over the last decade we have become the largest multilateral provider of climate finance worldwide.
Since 2011, we have invested over €130 billion globally in climate action.
Last year alone, the EIB provided €19.4 billion for Climate Action – mostly mitigation projects but also adaptation – worldwide, representing 28% of overall EIB lending. While well known for our support for renewable energy deployment, particularly in Europe, we have broadened our climate action portfolio to include projects in building and industrial energy efficiency, smart grids, urban transport, manufacturing processes, infrastructure resilience and adaptation, as well as new technology development.
This included providing more than €2.5 billion for climate-related investment in developing countries, representing over 40% of EIB financing lending in these regions.
EIB climate finance commitments
Ahead of the Paris climate agreement, the EIB committed to ensuring that more than 25% of our total financing supports climate change adaptation and mitigation.
In addition, for investments in emerging and developing countries, support for climate related investment will rise to 35% of all EIB financing by 2020.
Expected overall EIB climate financing before 2020
The implication of this commitment is that we expect to provide US$100 billion of climate-related projects in the five years from 2016 to 2020, as we support European efforts to turn the ambitious COP21 Paris agreement into reality.
Closing the climate finance gap
These are large sums, but we know they're small beer compared with the overall level of financing needed.
The European Commission estimates that €179 billion of additional investment are required over current levels every year up to 2040 in Europe alone to transition our economies to a Paris-aligned future.
There is no prospect that either governments or public institutions like the EIB alone will be able to find resources of this scale.
How the Juncker Plan is tackling climate change
A key role of public institutions like the EIB must therefore be to mobilise additional finance, from both the public but particularly the private sectors. This is the concept of blending.
Blending means using public funds to catalyse additional private investment through various forms of derisking.
Blending of public and private resources into sustainable finance has long occurred successfully at the EIB in numerous ways.
Firstly, it occurs at the level of our own balance sheet. We have almost €500 billion of investments on our balance sheet, financed mostly by bond sales to the global capital markets, mainly banks and institutional investors.
The EIB pioneered the green bond market in 2007 and remains today – according to Bloomberg - the world's largest issuer of green bonds.
Since issuing the world's first green bonds the EIB has raised €23.5 billion across 11 different currencies.
The EIB's green bonds – or "Climate Awareness Bonds" as they are officially called - have financed investment in 161 renewable energy and energy efficiency projects in 46 countries around the world.
We have also worked closely with other market participants across the world (most recently in China) to develop the so-called Green Bond Principles and other standards that have enabled increased issuance of green bonds under trusted monitoring and reporting frameworks.
Through this international collaboration, the green bond market has grown to €200 billion in 2017, though with a global fixed income market of €80 trillion annually, there is still plenty of room for further growth.
We also blend public EIB capital with private finance at the level of individual projects. The EIB finances an average of a third of the eligible investment costs of the projects we support, and up to a maximum of half in most sectors. The structure of our financing – the price, tenor and degree of security – and the signal sent by EIB financing approval – following intensive due diligence - is intended to reduce risk perception by private sector financiers in order to allow the projects to raise the remaining finance.
We also blend our capital from with other public resources to increase our capacity to leverage private sector investment.
Probably the best known example of this approach is the Juncker plan and the European Fund for Strategic Investment (EFSI).
EFSI is a €26 billion guarantee from the EU budget to the EIB that – combined with a €7.5 billion allocation from EIB's own capital – has allowed the Bank to dramatically increase the levels of higher-risk financing in recent years, including for climate action.
The aim is to use this mobilise a total of €500 billion of additional investment and working capital for SMEs.
Over the last three years EFSI has mobilised investments of about €100 billion per year, two-thirds of which come from private sources.
And 40% of financing under EFSI from here to the end of 2020 must be for climate action.
While EFSI has significantly expanded the EIB's risk appetite, the projects under EFSI must still be consistent with the Bank's rigorous credit risk policy guidelines.
This is not always possible for projects involving new technologies with significant commercialisation risk.
That is why the EIB and the European Commission have also come together to create the InnovFin Energy Demonstration Project facility for innovative first-of-a-kind energy projects, again using EU budget guarantees to underpin EIB project financing.
Last month, for example, the EIB agreed to provide €60 million to Windplus to build and operate a 25MW floating wind farm in the Atlantic 20km off the coast of Portugal in 100m-deep water. Demonstrating the commercial potential of wind energy is crucial to expanding use of renewable energy in regions next to deeper coastal waters.
We have also used this facility to support the establishment by Swedish start-up Northvolt of a new battery demonstration plant that will use innovative, environmentally sustainable chemistries and production processes to produce the batteries needed to electrify European transport and power systems.
This type of financing has sometimes included use of royalty sharing that only remunerates the EIB when the projects work.
In other parts of the world, climate financing is held back due to political rather than technological risk.
Earlier this year the EIB and Munich Re launched the first dedicated reinsurance for sustainable energy projects across Africa, the Africa Energy Guarantee Facility.
This is supporting US$1.4 billion of new private sector clean energy investment across Africa including renewable energy, energy efficiency and energy access projects in 25 sub-Saharan African countries.
This initiative will not only provide a blueprint for risk-sharing between insurers, reinsurers and international financial institutions in Africa but also help to address impediments to the development of clean energy in other emerging economies.
In this case the high level of risk being taken by the EIB would not have been possible were it not for the support of EU Member State contributions to the so-called ACP Investment Facility.
Scaling up investment in smaller projects
We also blend our capital and public and private funding within EU Member States at the local level to support smaller projects, particularly investments in energy efficiency.
"The €130 billion that the EIB has invested in climate action since 2011 has – we estimate - supported the delivery of over €600 billion in climate action investment"
For example, Smart Finance for Smart Buildings is a joint EIB-European Commission initiative to mobilise an additional €10 billion of energy efficiency investments in the EU building stock, by blending national funds with EIB capital to offer generous credit guarantees (up to 80%) to banks that generate energy efficiency loan portfolios.
These various approaches to blending our capital with other public and private funding is working.
The €130 billion that the EIB has invested in climate action since 2011 has – we estimate - supported the delivery of over €600 billion in climate action investment.
Advisory
What we often hear is that finance is not in short supply, but good investment opportunities are.
One side of this is indeed the limited bankability of some projects and creditworthiness of some of the actors that need to invest in climate action, for example city authorities.
That is why capacity building and technical advisory support remain crucial for climate financing. The EIB has a range of advisory programmes for promoters of climate action projects, depending on their needs.
For example, the EIB cooperates with the German technical assistance agency GIZ to support urban projects expected to reduce greenhouse gas emissions.
The first projects for technical assistance have also been selected in Latin America, including: solid waste treatment in Naucalpan; energy efficiency and renewable energy in public buildings in Mexico City and Porto Alegre; integrating public transport and bus fleet renewal in Florianópolis and energy efficient public lighting in Curitiba.
Key considerations to unlock climate finance innovation
Ladies and gentlemen, climate change is one of the greatest global challenges of our time.
The recent IPCC Report highlighting the risks of going beyond 1.5°C global warming, has shown how we must accelerate and innovate our climate action finance.
Despite a few setbacks, the collective ambition towards achieving the Paris Agreement goals has not lost momentum.
The EIB remains committed to supporting European leadership in the global efforts to tackle climate change.
But we are more effective when we work with others.
I have today set out some examples of how we are using our expertise and risk capital to leverage greater levels of public and private investment.
I hope as a result of this, we will find new partners in this great challenge.
Environmental Finance has written a series of articles in partnership with EIT Climate-KIC for the Climate Innovation Summit, which can be found here: https://www.environmental-finance.com/content/sections/climate-kic.html