Back to all
March 31, 2021
Gabriela Herculano
Originally from Austria, Barbara lives in San Francisco. She holds a PhD in Economics from the University of Graz and was a visiting scholar at MIT. Before joining CPI, Barbara worked at the International Energy Agency (IEA) as a Senior Energy and Environmental Analyst. Prior to that she did research on climate change and policy modelling at the Fondazione Eni Enrico Mattei (FEEM). Barbara was named one of the 20 most influential women in climate change and one of the 100 most influential people in climate policy. Barbara very often speaks at high profile events worldwide, and that is how I met her – she was the keynote speaker at the 2019 Green Cities event at the European Bank for Reconstruction and Development.
Gabriela: CPI was founded in 2009 to support countries transition to low carbon economies. CPI now has over 90 analysts and advisors with deep expertise in finance & policy working out of six offices across the world. CPI is an independent not-for-profit organisation supported by a broad range of funders. The work you do is tremendously impressive and CPI’s climate finance tracking is a global reference. You started tracking climate finance in 2011 and after the Paris Agreement was adopted in December 2015 it became a fundamental tool to ascertain if investments are falling short of what is needed. As fellow Austrian born Peter Drucker once said, “what gets measured gets managed”.
In the Global Landscape of Climate Finance, issued in November 2019, CPI reported that climate spending has now reached record levels. However, although this is certainly positive progress, it is not as reassuring as it sounds. The Intergovernmental Panel on Climate Change (IPCC) argues that the current rate of spending is nowhere near enough to reduce carbon emissions to a net-zero target and make the 1.5°C scenario a reality. The IPCC estimates the investment required to achieve the low-carbon transition range from US$1.6 trillion to US$3.8 trillion annually until 2050, for supply-side energy system investments alone (IPCC 2018), while the Global Commission on Adaptation (GCA 2019) estimates adaptation costs of US$180 billion annually from 2020 to 2030. At $546 billion, we are less than 1/3 the investment level required. What actors need to do more? Do you expect the sources of capital to increase much faster from now on (by CPI’s calculations, it grew from US$342 billion in 2013 to $546 billion in 2018)?
Barbara: Unfortunately, it is true that the world is spending nowhere near enough on direct action to protect us against climate change and achieve the goals of the Paris Agreement. More effort is required from every group of actors. Corporations should be investing routinely in sustainable practices; banks and investors should look for green projects and companies to build their portfolios; governments and other public institutions must align their efforts with roadmaps towards net zero. The question is how to achieve that. The right approach depends on which sector and technology we’re interested in.
While we see a significant portion of total investment coming from the private sector, it is only in certain areas. The vast majority provided by banks and corporations is concentrated in renewable energy and some low-carbon transport, together with electric vehicle purchases by households. Public actors, especially donor governments and development finance institutions (DFIs), must look to support areas where progress has been slower. Since they cannot close the investment gap alone, these actors should focus on supporting the highest impact projects that demonstrate viability of new technologies and business models – and on creating the enabling environment to unlock other pools of capital.
Some of these resources will have to be redirected from old, carbon-intensive industries. In fact, this year CPI will release analysis of finance flows to fossil fuel and other high-emissions energy sources, which are still far too large for us to see a downward trend in total emissions at the rate of 7.6% per year the UN claims is needed. That investment needs to be redirected into low-carbon alternatives.
While this year will be a very difficult one for climate finance, we have to hope that the aftermath of the crisis and the investments required for the recovery will lead to a change in gear. There are many opportunities for governments to invest heavily in transforming their economies, and to mobilize private industry and finance to do the same. At the moment, there are a few green shoots but for the most part stimulus packages have been carbon-intensive. If governments fail to act now, the missed opportunity will be huge. Another key lever to raise investment across the board is to raise the ambition of national climate plans, which governments should do by the end of the year. It is regrettable (but understandable) that the COP this year has been postponed, but governments can show their intent by committing to keep up the intensity of their efforts.
Gabriela: I vividly remember your presentation at the EBRD one year ago. You talked about the importance of improving private-public coordination to resolve financing barriers delaying alternative energy, adaptation and land use projects. One of your key recommendations was that public & private actors must coordinate efforts so that resources can be used in the most transformative ways. Could you please tell us more? Would commercial financial institutions and corporate actors be more impactful if in line with the lending provided by bilateral and multilateral lenders? Or market forces will make private sources of capital flow more rapidly into climate finance?
Barbara: Coordination is important because it is the only way to achieve the necessary scale in the time available. That doesn’t always mean that public and private actors should finance the same things. Renewable energy and low-carbon transport, like urban transit systems, are two examples of markets that have only thrived following significant policy support for innovative technology and business models. In advanced and some emerging economies, commercial banks are becoming much more familiar with financing renewable energy projects and companies, so the challenge for policymakers is to safeguard a flow of deals by encouraging and protecting those companies. Furthermore, as these markets mature, they must tap even greater pools of institutional capital. Market forces will play a role but will be helped along by public frameworks for disclosing sustainability and climate change risks.
However, in other areas where markets are far less well-developed, the case for direct links between private finance and development lenders is stronger. Energy access in developing economies is one such area. In fact, countries where energy access is limited tend to also have limited healthcare access. As the pandemic has exposed, vulnerable communities need support in multiple areas and sectors to build resilience to climate and other shocks. Blended finance initiatives – where investments are structured to allow public and private organizations to invest alongside each other – need to be structured to keep in mind the interlinkages and synergies between various sectors. Sub-Saharan Africa and South and East Asia, where a majority of people lack reliable energy access and healthcare facilities, offer significant potential for such initiatives.
The same approach can achieve progress in energy efficiency (including retrofitting buildings in advanced economies), sustainable agriculture and land use, and adaptation. Public institutions’ involvement secures social and environmental impact while addressing barriers to private investment, including commonly perceived risks or unfamiliarity with a sector. To achieve this at scale, public institutions need to convene and coordinate different stakeholders. Bundling investments, such as programmes that finance smallholder farmers across multiple countries, can help attract much larger volumes of private capital.
Dialogue between investment flows and needs will be crucial, especially for developing countries, which can be supported by the development finance community and technical expertise providers in this goal. That requires understanding low-carbon development pathways for different countries. The international forum is a vital space for cooperation.
Gabriela: The two main categories in relation to use of climate finance are mitigation and adaptation. CPI’s Global Landscape on Climate Finance estimates that mitigation finance accounted for 93% of climate finance in 2018. Mitigation finance is directed towards the reduction of greenhouse gas emissions, and the removal of greenhouse gases already in place in the atmosphere or oceans. This category of spending has long term aims of slowing overall global warming and achieving climate stabilisation.
In contrast the second category, adaptation finance, is concerned with short-term, high-impact issues, having contingency plans in place, and reducing the risk associated, to minimise environmental, economic, and social costs.
The three largest uses of climate finance are all mitigation finance. Renewable energy generation (US$337 billion), low carbon transport (US$141 billion), and energy efficiency (US$34 billion). Commercial financial institutions (US$73 billion), corporate actors (US$183 billion) and households (US$55 billion) are providing a lot of the debt and equity used in funding the three largest categories of mitigation finance.
Most investments flow to the energy sector (renewable energy predominantly). This technology is mature, mainstream, and low risk, with a high adoption rate. What could be the next sector where private finance will flow? Forestry? Or what should be the next sector?
Please comment on how the private sources of capital could participate in more innovative ways, with new structures and financial instruments?
Barbara: Global effort in terms of investment is completely out of proportion with the scientific recommendations for meeting the Paris goals. Sectors outside of renewable energy have long struggled to attract climate finance at the same scale. Low-carbon transport, which grew to $140 billion a year in 2017 and 2018, is one promising exception. On the other hand, agriculture, forestry, land use and natural resource management only received $18 billion in the same time frame. However, that sector is responsible for almost a quarter of global emissions. However, far more so than energy and transport, land use patterns need to be resilient to the effects of severe climate change as well as reducing emissions.
We do need to see much greater private finance for adaptive and sustainable land use activities, which currently is provided almost entirely by public institutions – at least based on the available data. Blended finance can go some of the way, but effort from large corporations to take action along their supply chains is also needed. Here we can see the importance of strong frameworks and regulations to influence the private sector through capital markets. Transparency over the investments made by large businesses should reward those who support sustainability.
Another critical but still lagging area for investment is energy efficiency. In some countries, governments are seizing on the crisis created by the pandemic to launch major programmes to improve energy efficiency in the building stock. But heavy industry and road transport are also areas where the huge cost of financing improved energy efficiency has yet to be reckoned with.
Private capital can and should play a role in each of these, but many sectors struggle to attract commercial investment for a variety of reasons – the transactions may be too small, the industry may lack a track record, or the financial return might be too low for the amount of risk taken. Innovative structures can address some of these barriers but there is often still a need for concessional finance to crowd-in private investment. For example, Solar Securitization for Rwanda pools loans from multiple solar developers into a tradeable asset-backed security, which improves transaction size, risk, and return for investors. But it’s still an untested idea so the financial instrument requires grants to continue developing the pilot as well as concessional debt to take a first loss position. So while innovative structures are a promising way to attract more mainstream investment, often it’s also the collaboration with public and other impact-first investors that really enables private capital to play a role.
Gabriela: Innovation is key. CPI runs the Global Innovation Lab for Climate Finance. The Lab’s goal is to steer billions of dollars of private investment into the segments needed in a climate resilient economy, such as climate smart agriculture, energy efficiency, curbing deforestation, and sustainable transport. An incredible example is a facility to deploy more electric auto-rickshaws in Indian cities, allowing better livelihoods for auto-rickshaw drivers, via a structure that provides up to 100% debt financing at competitive rates, and opportunities for driver ownership. India has nine of the ten most polluted cities in the world and this initiative alone can decrease carbon emissions by 22 million tonnes annually. The Lab facilitated the operations of Three Wheels United and 3,000 vehicles have already been financed under this structure. Do you expect pools of capital from private equity and venture capital to start pouring over these innovations? What would trigger more inflow?
Barbara: Three Wheels United is an excellent case study as they are fundraising for a Series A round from venture capital investors as we speak. In general, we do see more and more interest in values-based investing but I haven’t seen it trickle down as much in the PE and VC communities as it has for other private investor groups. Unless it’s an impact PE firm (like the CRAFT instrument from Lightsmith Group), private equity is generally not very interested in early-stage climate-related start-ups. And given the way the PE market operates and how they are incentivized, there are good reasons to question whether they should be.
I think VC is more promising from a climate finance perspective, as the business model is more conducive to early stage, innovative, higher risk ideas. There is often some inherent scepticism, though, about whether an impact investment can deliver on financial returns and too often that scepticism prevents investment opportunities like Three Wheels United from getting serious consideration. Many investors also strongly prefer experienced entrepreneurs and fund managers, which makes it even harder for people with new, innovative ideas.
In general, I think there are two very achievable changes from private investors could trigger more inflow to climate finance. First, the industry should try to give impact entrepreneurs the benefit of the doubt. We’re seeing more and more evidence that creating positive environmental and social impact is financially material, and not just in the very long-run. Second, there should be more support for first time fund managers, which are usually the organizations trying to push the envelope and do things differently. These are pretty minor changes to investors’ business as usual but could make a huge impact on capital availability for the sector.
Gabriela: Thank you so much for making the time to talk to us about your views on how to increase capital inflow into climate change financing. CPI does extraordinary work, and we look forward to following your research and the innovation that comes out of the Lab. I personally hope to see you again soon!
For more information about CPI’s work tracking climate-related finance flows or developing innovative climate finance solutions, contact:
We strongly recommend further research on the following topics: