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Bringing innovation to practice in adapting to climate change.

3 key challenges for Green Investment Banks

A recent OECD/New Climate Economy report on Green Investment Banks (GIBs) has found that 12 ‘GIB or GIB-like’ institutions now exist across the world, almost all of which have been created in the past 5 years. While the progress highlighted in the report is promising, my impression is that 3 key challenges remain for these institutions in promoting large-scale, low-carbon resilient development:

  1. Achieving transformational change from a relative niche
  2. Increasing the focus on financing adaptation
  3. Moving away from a reliance on public funds

Transformational change from a relative niche

The finance mobilized by GIBs to date is not enough to ensure the low-carbon vision for the future laid out by the Paris Agreement, nor ensure resilience in our global infrastructure over the coming century. The flagship UK GIB has committed GBP 3.4billion to the UK’s ‘green economy’ since its inception (approximately USD 4.2billion at today’s exchange rates), compared to roughly USD 56billion invested nationally in clean energy and energy efficiency from Germany’s mainstream national development bank, KfW, in 2015 alone.

The OECD/NCE report concludes with an analysis of the merits of creating Green Investment Banks versus mainstreaming green principles across the board in existing National and Multilateral Development Banks. This is essentially a trade-off between the independence and maneuverability of smaller dedicated institutions, and the potential for impact of larger, established entities. One way or another a step change is needed in the current impact of GIBs.

An increased focus on adaptation

Within the objectives of the GIBs studied in this report, most mention tackling harmful greenhouse gas emissions, particularly through clean energy investments. But very few (if any) focus on preparing our current and future infrastructure to withstand the threats of climate change. All 4 of the UK GIB’s ‘investment sectors’, for example, are targeted at emission-reducing schemes in the energy sector, with no mention of climate resilience.

The focus of GIBs on mitigation over adaptation reflects a broader consensus that low-carbon investments offer more viable economic opportunities than projects focused on adaptation. There is some truth to this. The markets for renewable energy and energy efficiency are now well established, and offer short term returns on investments, as well as broader cost-saving opportunities. On the other hand, the market for products and services that offer climate resilience is still emerging, and complicated by the difficulties of defining and measuring adaptation and the long-term rates of return associated with resilience investments.

However, the market for resilience has the potential to be far greater than the market for low-carbon, and given the increasing costs associated with climate impacts, GIBs will need to become much smarter about promoting resilience, to ensure the longevity of the predicted USD 90trillion in infrastructure investments set to be made over the next 15 years.

Transition away from a reliance on public backing

Regardless of the perceived risks associated with the privatisation of UK GIB, this must be the ultimate goal of all such institutions, once initial public support has allowed them to achieve competitive rates of return. Whilst public control of GIBs lends benefits in the shape of transparency, accountability, and the security of investments, the reliance on public capitalization stymies the level of total finance that can be raised. To meet the estimated USD 16.5trillion of investment in mitigation needed to ensure global warming is kept to 2 degrees, let alone challenges of climate-proofing global infrastructure, climate-smart investments must prove themselves to be on a par with conventional investments in terms of rates of return, and tap into the vast well private capital looking for viable investments.

Green Investment Banks have shown solid results in terms of mobilizing private investment for infrastructure, creating jobs, and reducing emissions of harmful greenhouse gases. We wait to see if this new finance can achieve transformational sustainable development.

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