Closing the green investment gap

In an era of compressed public budgets, we must ensure that public resources have the strongest possible impact in terms of making investments in the economy to stimulate economic growth and reduce negative environmental impact. In many countries, investors are somewhat reluctant to invest significantly in green infrastructure, due to perceived and actual policy and technological risks. This is why cooperation between governments, development banks and the private sector is so important. Some of this is already happening, but the benefits of more cooperation and risk sharing are significant.

One example of what this cooperation can mean is Deutsche Bank managing the Global Climate Partnership Fund on behalf of KfW, the German Ministry of the Environment and several other European public investors. This structured fund finances energy-efficiency and renewable energy investment in developing and emerging economies and works with local financial institutions, helping to build capacity. This is one of the most promising structures for reducing investment risk due to its tiered risk-sharing structure. Private investors invest in less risky senior tranches while public sector investors invest in more risky junior tranches. This structure reduces risk and leverages private capital for what may be considered excessively high-risk investment without the public sector risk-sharing mechanism.

Other organizations are using or proposing different public-private finance mechanisms such as guarantees, co-investments, debt enhancement, risk insurance and subsidized feed-in tariffs for renewable energy in developing countries. Such mechanisms have good success. The OECD estimates that US$ 70 billion to US$ 120 billion per year are already flowing as international North-South finance for green investments. Of this, approximately 15% is mobilized by members of the International Development Finance Club (an association of 19 national development banks), whereas more than half is coming from the private sector. These figures alone convince us of further developing measures to leverage private capital into green growth through intelligent use of public funding, and hereby to achieve change towards a greener future at scale.

This is why the B20 is asking the G20 to make the leveraging of private investment a priority for public funding and national/multilateral banks, and to expand the number and scale of public-private risk sharing mechanisms – in the long run, to leverage an even higher amount of private capital adding to the public share. However, policy changes recommended by the B20 in the fields of green free trade, reduction in fossil fuel subsidies and in setting a price on carbon remain a prerequisite to help achieve an inclusive green economy.

We are announcing the formation of a Green Growth Action Alliance to drive investment in clean energy, transport, agriculture and other green growth areas in cooperation with governments. This alliance of companies, development finance institutions and other vital economic players will report on progress to subsequent G20 summits.

Our Alliance also sends a positive signal to discussions at the Rio+20 summit as we will support efforts to achieve government objectives for Sustainable Energy for All.

Find out more about the Green Growth Action Alliance and read further blog posts on the Forum website.

Authors: Caio Koch-Weser is Vice Chairman of Deutsche Bank. Dr. Ulrich Schröder is the Chief Executive Officer of KfW, Germany’s promotional bank.

Pictured: An old style windmill is pictured with the newer and larger wind turbines from a recent investment in a wind farm near Milford, Utah May. REUTERS/George Frey