What is Climate Finance?

Finding Opportunities at the intersection of Climate Change and Finance

Finance

What is Climate Finance?

Climate finance refers to local, national or transnational financing—drawn from public, private and alternative sources of financing—that seeks to support mitigation and adaptation actions that will address climate change. This encompasses schemes anywhere from large and small scale renewable energy projects that offset fossil-fuel power generation, to land-reclamation projects that reduce the risk of flooding or forest fires. 

 

Addressing climate change requires significant investment

The planet’s carbon budget is approximately 420 gigatons (GT) – this is the amount of carbon emissions we can emit while having a chance to limit temperature rise to 1.5°C. Unfortunately, at current rates of carbon emissions, we will exhaust our carbon budget in the next 10 years.

Slowing down our emissions rate and the impacts of climate change will require a significant amount of investment in climate mitigation and climate adaptation projects. In 2017, global climate finance flows surpassed $500 billion, however, the latest IPCC report estimated that the investment required to remain within the 1.5°C to 2°C scenario should be between $1.6 to $3.8 trillion per year.

 

New business models, financial innovations and new sources of capital are creating opportunities

The battle against climate change is one of the greatest challenges of our time – but it is also a chance to capitalise opportunities at the intersection of finance and climate change. New technologies, business models, policies and regulations are creating investment opportunities and transforming the ways projects are financed. Innovation will play a crucial role mobilising capital, scaling-up private investment and making currently un-bankable projects bankable.

The transition to a low-carbon economy requires new mechanisms to increase the universe of attractive projects. At the same time, climate-related projects are gaining traction and growing interest from investments banks, hedge funds, infrastructure funds and pension funds.

What are some example climate finance ideas?

If your team’s idea is an innovative financial solution, tackles climate challenges, or highlights new climate opportunities, we want to hear from you!

Your idea can span any, or all, of the following sectors: energy, agriculture, industry, healthcare, infrastructure, transportation, among others

Energy & Power
Micro-Financing Electricity Connection Charges | Micro-loans for community co-operatives living in close proximity to the electricity grid but unconnected due to high grid-connection costs. A variation of this mechanism has been offered by Kenya’s national electric utility as a pilot.
Energy Efficiency Pay-for-Performance (P4P) Contracting | California’s largest utility, PG&E, created a P4P scheme to scale up private-sector investments in energy efficiency. The P4P contract encouraged innovative energy efficiency projects, project-aggregation and competition across the Energy Services Company (ESCO) market by offering a fixed rate for energy savings.
Agriculture

Climate-Related Agricultural Risk Insurance | Peru’s agricultural sector is highly susceptible to climate impacts, such as ‘El Nino’. Germany’s GIZ supported the development of a framework to transfer climate risk from the agricultural sector to private / public institutions. The framework acted as an instrument to partially insured against risks such as weather extremes, water supply, or feedstock price volatility.

Climate Adaptation Co-Financing Facility | This financing facility would encourage adaptation investments from large corporates susceptible to production and supply chain disruptions from climate impacts (e.g., precipitation extremes affecting coffee yields, typhoons impacting global high-tech supply chains, etc). Concessional capital would fund this facility, which would in turn provide debt or equity financing to adaptation projects.
Infrastructure
Land Value Capture (LVC) Financing of Adaptation Projects | In the past, LVC has been widely used to finance public infrastructure projects like highways. The Asian Development Bank has proposed using LVC to finance infrastructure projects in Asian cities, including various climate adaptation measures.
Hydropower Rainfall Insurance | A 2013 drought in Uruguay drastically lowered hydropower output, requiring expensive electricity imports from Brazil. To mitigate the impact of future droughts, the Uruguayan Gov. arranged a USD $450M weather coverage deal with the World Bank and insurance-giant Swiss Re.Hydropower Rainfall Insurance | A 2013 drought in Uruguay drastically lowered hydropower output, requiring expensive electricity imports from Brazil. To mitigate the impact of future droughts, the Uruguayan Gov. arranged a USD $450M weather coverage deal with the World Bank and insurance-giant Swiss Re.
Transportation
YieldCo Model for Electric Transit Infrastructure | The YieldCo financing model has been successful at driving down the cost of capital by aggregating largely de-risked power generation projects, contracted under long-term agreements, and backed by creditworthy counter-parties. YieldCo’s are replicable and scalable to electric transit infrastructure with predictable schedules and demand delivering stable, long term, predictable cashflows.

 

Financial Solutions
Loan & Equity Syndication for Institutional Investors | Multilateral Development Banks (MDBs) can increase the pool of financing available to borrowers by offering select private investors participation in their portfolio of projects. This facilitates private sector investment into equity funds, A/B loan syndications, trust-funds, etc.
Water Infrastructure Finance Facility | Water infrastructure in Kenya has long been underinvested and water utilities have struggled to gain access to financing. The Kenya Pooled Water Fund (KPWF), supported by international financial institutions, was created to facilitate access for utilities to long-term domestic capital markets to finance water and sanitation infrastructure.

 

Need more inspiration and climate finance resources?

Final report of the High-Level Expert Group on Sustainable Finance

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Global Climate Finance Landscape

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The EBRD’s Green Economy Transition

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Global Innovation Lab for Climate Finance

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