Private climate finance crucial, but frameworks needed

Private finance will play a key role in funding the energy transition, but governments must provide the regulatory frameworks to give the private sector the confidence to invest, delegates heard today at the World Bank's Innovate for Climate conference in Bilbao, Spain.

"We must mobilise private finance", Nicole Wilke, from the German ministry of economic affairs and climate action, said. Wilke is head of division of international financing of the transition and international market mechanisms. "It's a matter of shifting… trillions", Wilke added.

Global investments required to achieve Paris climate agreement goals range between $3 trillion and $6 trillion annually to 2050, though the amount of annual climate finance stood at around $630bn in 2020, according to the IMF. Recent early analysis from non-profit Climate Policy Initiative suggests that figures for 2021 could reach around $900bn, delegates heard today. The estimated range for investment needed is wide because of large gaps in climate finance data.

It is crucial to maximise resources from the public and private sectors, vice president for Europe, Latin America and the Caribbean at the International Finance Corporation (IFC) Alfonso Garcia Mora said. The IFC is part of the World Bank group, focused on the private sector in developing countries. Institutional investors have amounts of capital that outweighs that of multilateral development banks (MDBs) by hundreds, Garcia Mora said. But this means "removing all the barriers that exist for the private sector to come in", Garcia Mora added.

The private sector needs "government to set a framework that allows [them] to invest", chief financial officer at Spanish utility Iberdrola Jose Sainz Armada said. And standards must be set to give markets confidence, chief sustainability officer at bank Standard Chartered Marisa Drew said.

"Predictability is really important" to encourage more private sector finance, under-secretary at Spain's ministry for ecological transition and demographic challenge Miguel Gonzalez Suela said.

But in order to develop policy, "we need better data" on private finance mobilised, senior adviser at Finland's foreign affairs ministry Saana Ahonen said.

Blended finance models

Both the public and private sectors often point to a blended finance model — a mixture of concessional finance and commercial funds, usually led by MDBs — as a way to de-risk commercial investment and bring in more private capital for climate finance.

But there is still work needed in this space, delegates heard. Blended finance for climate solutions tends to focus on mitigation projects, although Finland and others are working to increase their funding of adaptation projects, Ahonen said today. It is difficult to find "bankable" adaptation solutions, though that is starting to change, Ahonen added.

A lack of a common standard is part of the reason, IFC director of blended finance and corporate strategy Aisha Williams said. "Part of the issue we're encountering with adaptation is that of definition", she added.

By Georgia Gratton