Climate change is the greatest global challenge of our time. It undermines our economies and the prosperity of future generations. It threatens our very existence. And we do not know how much time we have got to fix it. There is an added injustice, too. The world’s poorest regions are hit hardest, though they are the least responsible for the problem.
When you look at it as a social or technological issue, the climate challenge is enormous. Put it in financial terms and it becomes truly astounding. Investment of billions of euros isn’t enough. We need trillions to halt climate change, far surpassing current public development and climate action budgets. Triggering such investment requires the right policy framework. But it also means mobilising new, alternative financial resources. Instead of pouring scarce public budgets into grants, we need to combine public investment and private resources effectively. Only if we are able to mobilise private capital on a massive scale, can trillions of euros be raised. But how do we get private investors to put their money into climate action?
After all, it is understandable that investors demand risk-adjusted market returns. If they stand a chance of losing some of their money, they want a high rate of return to compensate them. Climate action investments provide plenty of good opportunities, but financial returns are often low and payback times long. Climate action investments create jobs, as well as environmental and social benefits. But they are still more about public engagement than an attractive asset for private investors.
The way to get private investors into climate action is to “de-risk” the investments by creating risk-sharing financial vehicles where the private investor does not have to absorb potential initial losses, or by reducing the volatility of returns. Next are package climate action investments in standardised financial products that cater to the needs of the capital markets. This requires longstanding experience in the market for climate action investments and expertise in structured finance.
STAMP OF QUALITY
That is where the European Investment Bank comes in. As the long-term financier of the EU, the EIB is uniquely positioned to provide funding for high quality climate action investments, as well as financial and technical advice. When the EU Bank gets involved in a project, private investors see it as a stamp of quality, and soon the EIB’s investment is leveraged many times over by private money. In the last five years, the EU Bank has provided more than €90bn to climate action projects, making the bank one of the largest global climate financiers.
In September, the EIB confirmed its commitment to climate action when its Board of Directors approved the bank’s first full climate action strategy. At least a quarter of EIB’s financing will be earmarked for climate action, notably in projects aimed at lowering carbon emissions and “adaptation”, which is the process of adjusting economic or ecological systems to handle the effects of expected changes in climate. The EU Bank also joined other multilateral development banks in New York on September 25 to support the UN’s Sustainable Development Goals, committing to overcome poverty and protect the planet.
Priorities include investments in green technologies, low carbon manufacturing, clean energy and transport as well as improved urban infrastructure. To ensure maximum impact and high returns, the bank is improving its standards for assessing climate action projects. The new financial products and higher standards demonstrate to the market that investments in climate action are viable and can be replicated on a larger scale.
The EU Bank is expanding its dedicated climate-action instruments along three axes:
Innovative financial tools that combine grants and loans to reduce the risk and improve financing conditions. These include equity funds, funds that “layer” the risk to cut potential losses, and funds that invest in other funds, like the Global Energy Efficient and Renewable Energy Fund. This fund uses EIB assets and private money to invest in other funds that carry out climate action on the ground in Africa and Latin America. The fund’s staff calculate that for every €1 of public money in their fund, €50 is invested on the ground. That is amazing leverage, and it gets the job done.
Joint instruments with the European Commission and other donors. For example, in the area of energy efficiency, the Private Finance for Energy Efficiency program, also known as Deep Green, combines EU grants, EIB loans, techniques for mitigating risk, and hands-on technical assistance, all to encourage banks to make loans to small businesses that want to improve the energy efficiency of their facilities.
Green Bonds to boost the role of capital markets in climate finance. By increasing accountability through higher transparency and better monitoring, these bonds shift the focus of investors towards sustainable and socially responsible investments.
The EU Bank pioneered the Green Bond market in 2007 with its first Climate Awareness Bond. The proceeds were earmarked for EIB lending projects in renewable energy and energy efficiency. By last June, the bonds had raised over €9bn, across 10 currencies.
Private investors will not put their money into climate action projects just to give themselves a warm, fuzzy feeling. They are all about the bottom line, and they do not like red ink. At the EU Bank we are redrawing the bottom line. In green.
Werner Hoyer is president of the EIB