Blending Climate Funds to Finance Low-Carbon, Climate-Resilient Infrastructure

Abstract

The world’s core infrastructure—including our transport and energy systems, buildings, industry, and land-related activities—produce more than 60 percent of all greenhouse gas (GHG) emissions globally. By 2030 the world will need to build approximately $85 trillion in low-carbon climate-resilient (LCR) infrastructure in order to meet the Paris climate change agreement’s goal of keeping the global average temperature increase well below 2 degrees Celsius by 2050. Meeting this infrastructure investment need will require doubling today’s global capital stock. This paper defines LCR infrastructure as including renewable energy, more compact cities, and suitable mass transit as well as energy efficiency measures. Whether the world builds LCR infrastructure will also determine whether the Sustainable Development Goals (SDGs) are achieved. Around 60 percent of LCR infrastructure needs are in developing countries. Because public finances are constrained, private capital will be required to meet these LCR infrastructure needs. Increasing private investment into infrastructure can also deliver efficiency gains. Fortunately, there is no shortage of private capital globally. In particular, institutional investors have assets under management of $85 trillion and this is expected to be over $110 trillion by 2020. However, current allocations from institutional investors into infrastructure are low—approximately 1 percent of total asset allocations. Moreover, there is a shortage of other private capital for infrastructure, particularly LCR infrastructure in developing countries. Risks to financing LCR infrastructure raises the cost of capital. The lack of investment in infrastructure by institutional investors as well as the private sector more broadly is due to infrastructure risks and other barriers. Moreover, LCR infrastructure carries additional risks. Combining sources of public finance—such as from multilateral development banks (MDBs) and climate funds is a form of blended finance that can reduce risk, lower the cost of capital, and crowd-in private sector capital into LCR projects. The CTF is the largest provider of blended financing amongst the MCF to date. Outcomes from CTF blending with MDBs and the private sector provides insights into the success of blending to achieve climate and development goals. Using data provided by the Climate Investment Funds’ Administrative unit, supplemented with desk research, this paper analyzes investments blending CTF and other public finance and its capacity to crowd-in private capital.