M01_L2_Presentation_Script.pdf

Module 01Climate Finance EssentialsLesson 2The Landscape of Climate Finance

Presentation Script

Climate Finance Essentials

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Lesson 2 – The Landscape of Climate Finance Presentation Script

1. Home

Welcome to Lesson 2 of the eCourse on Climate Finance. Click Next to begin.

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2. Introduction

In the previous lesson, you learned about the critical role that climate finance

plays in transitioning countries to a low-carbon and climate-resilient growth

trajectory. In this lesson, you will learn in more detail about the current climate

finance lifecycle so that you are more familiar with the multiple sources - both

public and private. You will also learn how climate finance flows and what are

some recent trends and which instruments are being used to mobilize climate

finance.

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3. Key questions addressed in this lesson

Some of the key questions that will be addressed throughout this lesson include:

How much climate finance is being mobilized and delivered? In what forms and

by whom? To which activities? And how do countries mobilize more finance

flows?

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4. Getting familiar with climate finance

Let's first get familiar with climate finance terminology. What are some of the

sources that you can think of which provide climate finance? Well, there are

public sector sources, private sector sources, and public or private

intermediaries that source climate finance. What are some of the instruments

which are used in climate finance? Some examples include policy incentives, risk

management instruments, grants, low-cost debt and capital instruments,

including project-level market rate debt, project-level equity and balance sheet

financing. This terminology makes up a large part of the “climate finance

spaghetti” that you will learn more about now.

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5. The landscape of climate finance

This lessons draws from the analysis completed in 2013 by partner organization

Climate Policy Initiative (CPI) which produces an annual inventory of the climate

finance that is flowing in, to and between countries each year. These inventories

have gained international recognition as the most comprehensive overviews of

global climate finance. The diagram you see here is the well-known “climate

finance spaghetti chart” that CPI has developed to illustrate the landscape of

climate finance flows along their life cycle for the latest year available, 2012.

Throughout this lesson, we will be examining in detail how climate finance flows

by utilizing this diagram as a guide. Public money is noted in bright blue, private

money in red. Public financial intermediaries are noted in purple, and private

financial intermediaries are in dark grey. Finally, capital investment and

incremental costs are noted by the dotted-line grey boxes. The width of the

arrows represents the relative size of the flows.

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To see the full CPI Landscape report from 2013, click on the spaghetti diagram.

6. Climate finance flows

Let us start by addressing a few key questions.

· What sources are providing the largest climate finance flows?

· To where is the majority of climate finance being channeled?

· What is the origin of most green investments?

· And what is the latest estimated volume of global climate finance?

Click on each of the highlighted arrows to learn more.

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7. Sources and intermediaries

Now let’s look at the main climate financial sources and intermediaries.

In the diagram displayed, you can see climate finance contributions from public

sources and intermediaries on the left, and private sources and intermediaries

on the right.

We will continue to learn more about this climate finance contribution.

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7.1 Public sources

Public sector climate finance originates from either public sources or public

intermediaries.

Total public sources represent 3% of total climate finance flows captured in the

CPI Landscape report. Ministries and Government Agencies are the most

important, contributing between 9 and 16 billion US dollars in 2012 to financing

low-carbon and climate-resilient activities. The largest part of this government

finance flowed from developed to developing. Half of this North-to-South flow

was channeled through national governmental bodies via bilateral cooperation

agencies and 7 percent was channeled through UN institutions. Bilateral

cooperation agencies and UN institutions work closely with recipient

governments to develop and implement national strategies and policy

frameworks conducive to investment.

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7.2. Public intermediaries

The other component of public sector sources of climate finance comes from

public intermediaries, including climate funds and also national development

banks, multilateral development banks, bilateral financial institutions - which

taken together are called Development Financial Institutions. Public sector

intermediaries have an array of financial instruments and specialized knowledge,

making them the cornerstone of efforts to manage and distribute global

resources for low-carbon and climate-resilient growth. Click on each public

intermediary in blue for further definitions.

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7.3. Public intermediaries

In 2012, DFIs committed around one third - or USD 121 billion - of total climate

finance flows, more than half in the form of low-cost loans. DFIs also provided

critical support to adaptation measures, contributing about USD 18 billion and by

also managing and implementing some of the relevant adaptation funds.

Multilateral Development Banks alone contributed 31% - USD 38 billion of the

total finance from public intermediaries, 28% of which were in support of

sustainable transport projects.

National Development Banks and Bilateral Finance Institutions distributed the

majority of climate finance from public intermediaries, or about 69% (USD 84

billion) of intermediated climate finance. Renewable energy and energy

efficiency interventions attracted 65% of these flows.

DFIs, mainly National Development Banks, also play a role in distributing third

party resources valued at USD 2 billion from multi-donor climate funds, such as

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the Climate Investment Funds and the Global Environmental Facility. Blending

grants and loans at concessional terms from these climate funds with DFIs'

commercial financing has become a common practice in international climate

finance. DFIs' use of these resources can take the form of technical assistance,

interest rate subsidies, or direct investment grants to buy down the costs of

projects that would not otherwise happen. We just examined how National

Development Banks and climate funds are emerging as significant public

intermediary players in climate finance. We will learn more in the following

slides.

8. National Development Banks

National Development Banks are able to leverage private capital to finance

investment projects. Given their unique position, National Development Banks

can help to promote market development in new sectors and emerging

industries. National Development Banks have long-standing relationships with

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local private financial institutions, and hence understand the risks and barriers

that they confront when financing underserved sectors. Lastly, National

Development Banks can aggregate large numbers of small-scale projects by

adopting a portfolio approach when assessing credit risk, which allows for

streamlining the application process, minimizing transaction costs and

encouraging local financial institutions to participate.

9. Climate Funds

Climate funds are relatively new players on the global landscape and play an

important role via concessional resources, for example as they enable DFIs to

buy down the costs of projects by blending grants and loans at concessional

terms from these funds (or other donors) with DFIs' commercial financing.

Recently, a number of national, bilateral and multilateral organizations have set

up climate-specific funds. They are usually managed “off balance sheet” with

one or more national, bilateral or multilateral organizations providing trustee

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and administrative services. Each fund tends to have a finite lifetime, and a

specific sectoral focus, such as climate change mitigation, adaptation, REDD,

among others. Climate funds can be grouped into the categories displayed. Click

on each image to learn more.

10. Channels and mechanisms

This chart further categorizes the public intermediary channels of climate finance

we just reviewed by their key features, and well as the methods by which they

capitalize their funds and which instruments are mainly used in funding climate

finance flows.

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11. Private Sources and intermediaries

Now that we have learned about the public sources and intermediaries of

climate finance, let us turn to examine the private sources and intermediaries of

climate finance.

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11.1. Private sources

In 2012, the private sector invested $224 billion USD in climate financing, which

represents 63% of total climate finance flows or the lion's share of climate

finance, much of which was enabled by public investments. Just like the public

sector, private contributions to climate finance can also be organized by main

sources and intermediaries, and they range from single households to

multinational corporations. The majority of private climate finance, however,

flows from a few principal sources: project developers, corporate actors and

private households. We will now introduce each in more detail.

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Private sources (not including intermediaries) provided around 56% of the

private sector climate finance. In 2012, project developers contributed the

largest single share of climate finance, approximately USD 102 billion or 28% of

total global climate finance flows. Click for a definition of Project Developers.

While private project developers are big players in climate finance, they also

represent actors still investing in high-emitting technologies, like new fossil fuel

generation. This is important to remember: the challenge remains to shift

project developers' existing financial resources towards low-carbon and climate-

resilient investments.

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Private corporate actors, including manufacturers and corporate end-users,

contributed USD 66 billion or 19% of overall climate finance flows. As corporate

actors will not invest in low-carbon alternatives as long as they have strong

incentives to make business-as-usual decisions, continued prioritization of fossil

fuels represents both an opportunity cost, and more importantly, an opportunity

lost. Different models, such as cleaner production and industrial energy

efficiency, have been tested in many countries to help corporate actors to

reduce their environmental impact without sacrificing their productivity.

In 2012, private households contributed a significant share of global climate

finance, or approximately USD 33 billion or 9% of climate finance, investing in

distributed energy and heat for their own use. Click for a definition of Private

households.

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12. Mechanisms supporting households investments in renewables

To further illustrate the CPI landscape findings on household investments, the

following are examples of innovative climate finance mechanisms that support

private household investments in renewables, like microfinance for energy,

property assessed clean energy and Pay As You Save programs. Households can

also act as retail investors of renewable energy, thanks to the emergence of new

renewable energy investment vehicles and business models, like publicly-traded

investment funds and the cutting-edge crowdfunding for pooling private

resources for green investments. Take a moment to read these descriptions, and

click on the icons on the right to learn more.

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13. Private intermediaries

The remaining private resources for climate finance are comprised of

contributions from private intermediaries. Commercial financial institutions,

venture capital, private equity and infrastructure funds together intermediated

about 6% of global climate finance in 2012, and played an important role by

providing financial structures to address specific investor needs.

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14. Barriers for institutional investors

A recent report by the International Finance Corporation of the World Bank

Group looks further at barriers to institutional investors' climate finance activity.

As part of in-depth interviews with institutional investors, these six types of

barriers surfaced which prevent these institutional investors to scale up green

investment. Please take a moment to consider them, and click on the report icon

on the left to read the full report.

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15. Instruments

Now that you are familiar with the various actors from public and private sources

and their intermediaries, let us take a closer look at the various instruments

these actors use in climate finance. Private and public investors channel

investments to low-carbon and climate-resilient projects via a range of policy

and financial instruments.

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16. Instruments

There are five major categories of instruments utilized in climate finance: policy

incentives, risk management, grants, low-cost debt and capital instruments,

including project-level market rate debt, project-level equity and balance sheet

financing. In general, mitigation projects tend to be financed with a mix of equity

and loan instruments (both concessional and non-concessional) supported by

various types of policy incentives. Click on the light bulb to read more.

On the other hand, investments in climate resilience tend to be supported with

grants and low-cost loans due to the generally higher incremental cost

component.

Let us take a closer look at each instrument's definition and examples.

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17. Instruments by actors

How do climate finance actors select which instruments to use? For public

actors, the choice of instruments used reflects the goals, strategies and risk

appetite of different institutions. For example, DFIs provide mainly loans, around

96% of their overall climate finance funding, while governments and climate

funds use a mix of grants, concessional loans and equity for capacity building,

reducing financing costs, and promoting early stage technologies. Policy

incentives and risk management instruments are provided by public actors to

incentivize private investments.

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17.1. Examples of Instruments

Here are examples of the five important climate finance instruments and

accompanying case studies featured to learn more.

Examples of policy incentives include: Feed-in tariffs are policy mechanisms

designed to accelerate investment in renewable energy technologies by offering

long-term contracts to renewable energy producers, typically based on the cost

of generation of each technology. Government agencies, utilities and others

offer a variety of tax incentives such as tax credits or rebates to support energy

efficiency, encourage the use of renewable energy sources, and support efforts

to conserve energy and lessen pollution. Renewable Energy Certificates (RECs)

are tradable, non-tangible energy commodities in the United States that

represent proof that 1 megawatt-hour (MWh) of electricity was generated from

an eligible renewable energy resource (renewable electricity). Generation

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technologies that qualify as producers of RECs include solar photovoltaic or

thermal, wind, geothermal, hydropower and biomass.]

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18. Role of instruments in mobilizing funds

Instruments not only help to channel investments to low-carbon and climate-

resilient projects, but serve an important function for public climate finance

actors in mobilizing climate finance and achieving climate investments at scale.

There are various examples of instruments that can address investor-specific

needs, align public and private interests and enable scaled-up low-carbon and

climate-resilient investments, the magnitude of critical mass needed to achieve

transformational shifts toward climate-friendly investment decisions. National

and international public actors can utilize these options to help increase climate

finance.

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19. Where does climate finance flow?

So who gets all this climate finance? We've covered how much climate finance is

flowing, and who's behind it in the public and private sectors. Let's explore to

whom, to where, and to which activities climate finance is flowing.

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19.1. Where does climate finance flow?

This diagram clearly shows that the majority of climate finance in 2012 went to

mitigation uses: USD 337 billion out of the total USD 359 billion was invested in

mitigation. In comparison, on average, USD 22 billion went toward adaptation

interventions. Let us take a closer look at both mitigation and adaptation

activities receiving climate finance.

With mitigation receiving 94% of climate finance, the largest investments were in

renewable energy generation alone attracted 74% of the total climate finance

flows with USD 137 billion going toward solar (including PV, thermal and

households' investments). USD 85 billion was distributed to wind energy, both

onshore and offshore.

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19.2. Where does climate finance flow?

Energy efficiency attracted USD 32 billion or 9% of the total amount of climate

finance. Note that the CPI Landscape report does not capture energy efficiency

finance from private actors. Other mitigation measures receiving climate finance

in the amount of USD 40 billion total included sustainable transport, and

agriculture, forestry, land-use and livestock management.

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20. Finance sources to mitigation and adaptation

This chart presents a breakdown of finance to mitigation and adaptation uses

based on which source funded the activities. As you can see, the significant

investment in mitigation was sourced from private actors: project developers,

corporate actors, and households. From the public sector, Development Finance

Institutions contributed over 90% of the overall public sector finance sourced to

mitigation. Let us take a closer look at the breakdown of DFIs' contributions to

mitigation.

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20.1. Finance sources to mitigation and adaptation

Development Finance Institutions in 2012 allocated USD 36 billion to renewable

energy, USD 31 billion to energy efficiency and USD 37 billion to other mitigation

investments. The investments in energy efficiency and other mitigation activities

are significant because they represent 66% of DFIs' overall mitigation support,

and also around 94% of total public investments in energy efficiency and other

measures.

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20.2. Finance sources to mitigation and adaptation

According to the CPI Landscape report, in 2012, only 6% of total climate finance -

or just USD 22 billion on average - was invested in activities with adaptation

objectives, mostly through international finance invested in developing

countries. Out of that 22 billion dollars, 10 billion went to activities related to

water supply and management and 3 billion to agriculture. As noted before,

there are large knowledge gaps about adaptation finance. Agreement on the

sectoral boundaries for defining adaptation would improve the ability to mark,

track, and monitor the effectiveness of these flows.

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21. Geographic distribution/dispersion

Examining climate finance trends from a geographical perspective, we see that in

2012, roughly 50% of total international climate finance, or 182 billion, flowed to

developing countries. Of that amount, there was also a strong domestic

preference, for over 70% or USD 131 billion stemmed from domestic sources.

Examining the North-South flow of climate finance, developed country

governments committed between USD 4-11 billion in climate marked flows to

developing countries, 45-56% of which was channeled through government

bodies such as bilateral aid agencies or UN organizations. In total, public sector

finance committed by developed countries to developing countries reached

about USD 39-62 billion.

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22. Summary

Let us summarize the key points from what we have learned about the current

landscape of international climate finance. First, global climate finance flows

have plateaued at USD 359 billion in 2012. Significant investments are needed -

above and beyond the status quo - to support the global transition to a low-

carbon and climate-resilient future. There are opportunities to scale-up climate

finance - incentivizing both the public and private actors' participation. New

instruments and enabling environments can tap into private sources of finance.

Both public and private flows are critical to mobilize. In the next lesson, you will

learn how countries can get ready to effectively use climate finance from both

public and private contributions.

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23. Climate finance tracking and data availability issues

The task of tracking climate finance is quite challenging, and due to some

important information gaps, there is a limitation on what can be tracked and

captured annually in the Landscape report. Climate finance tracking, although

improving, remains imperfect. This is all the more important on the private

finance tracking side where tracking ultimately relies on voluntarily-disclosed

data (press releases, financial statements, presentations, etc.) or the existence of

public support mechanism that require disclosure of project details (clean

development mechanism, renewables tender, etc.). Click to learn more about

CPI's climate finance tracking methodology.

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24. References and resources

This is the end of Lesson 2. Visit these links for additional information.

M01_L2_Presentation_Script.pdf

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