Engaging the Private Sector in Climate Finance Mobilization
The mobilization of private capital is critical to funding the large-scale transformational changes needed for countries to achieve their NDC mitigation and adaptation targets. Yet while there are announcements that trillions of dollars in funding is available for climate investments, developing countries continue to face challenges in effectively mobilizing private capital. Public sources of finance can be an important tool to help unlock the potential of the private sector. However, these funds have yet to reach the USD 100 billion annual target countries set over a decade ago and face increased constraints.
To address these challenges, the NDC Partnership launched its Finance Strategy in April of this year that prioritizes private sector engagement. In line with the Finance Strategy, the NDC Partnership Support Unit launched a series of private sector consultations with a selection of the largest investors and financiers in the world, including institutional investors, commercial banks, philanthropies, developers and impact investors.
These consultations are informing the private sector on the ongoing and planned finance work of the Partnership across more than 80 developing country members, providing valuable feedback on how this work can be used to optimize private capital mobilization for NDC implementation. From these consultations, five key insights have emerged:
- A coherent NDC investment-planning process in countries is important to generate a pipeline of priority NDC-aligned projects across sectors. Investment planning is also important for aligning relevant stakeholders' work in a country (sectoral ministries, implementing partners, private sector, civil society), identifying gaps, and leveraging more targeted technical assistance to fill in gaps, and establishing timeframes. To support countries in these efforts, the Support Unit has developed two tools:
- An NDC Investment Planning Guide and Checklist that details guidance and best practices for countries to consider, including developing institutional arrangements, identifying and prioritizing investment needs, and mobilizing finance.
- Project Information Notes (PINs) that describe projects identified through countries’ NDC Action Plans, providing increased visibility and exposure to priority projects. Further efforts are underway to further roll out PINs and more systematically collect and share project details.
- Multi-stakeholder partnerships and financing models, such as blended finance platforms, are important opportunities to improve efficiency. Most of the investors consulted participate in one or more multi-stakeholder partnerships. Yet investors are hesitant to put structures in place that are not sustainable for governments in the long term. Currently, most financing is done project-by-project, and de-risking tools are still project-based. Blended finance can mobilize private capital at scale by de-risking opportunities, absorbing "first loss" and offering a single facility that can develop and finance a portfolio of projects across countries. To do this, easier access to concessional and catalytic capital and long-term donor support is critical. The Partnership can facilitate bringing together members and other stakeholders in developing and supporting multi-country blended finance platforms.
- Enabling environments need to be strengthened to unlock investment. Many investment risks cited by investors (e.g., political, legal/fiscal stability, currency, credit/payment, and project development) are not project-specific and stem from the overall investment environment in the country. Addressing these risks requires comprehensive and coherent solutions, appropriate risk allocation, and multi-stakeholder engagement and support. In addition, limited conversations are taking place between countries and the private sector on investment barriers. The Partnership already provides support to countries in strengthening their enabling environments and can further act as a neutral broker through which private sector requirements and expectations can be shared with countries.
- Climate impact metrics, particularly for adaptation, are important in identifying and prioritizing NDC-aligned projects. Methodologies and metrics to determine climate impact are still underdeveloped, and the necessary data is often lacking. Facilitating data collection, establishing Monitoring, Reporting, and Verification (MRV) systems and other processes, and developing capacity - for measuring, monitoring, and reporting climate impact are critical. Investors require independent third-party reviews of project results, using science-based key performance indicators, to ensure their investments achieve specific targets. In addition, consistent methodologies across countries can help facilitate the financing of projects through multi-country blended finance platforms.
- Upstream support during the initial stages of the project-development cycle is important to ensure that projects receive the necessary support to move forward. This includes early-stage project preparation, improving enabling conditions, and undertaking prefeasibility studies, as well as in-country coordination of relevant government and non-government stakeholders. Technical and financial support from the Partnership and other key stakeholders can be leveraged to provide support for early stages of project development. The Partnership can also facilitate collaboration for relevant stakeholders when preparing projects, strengthening enabling conditions, and building related local capacity to scale up work.
The insights gathered from these private-sector consultations better inform the ongoing and planned work of the Partnership as it supports countries through finance-related requests, including engagement of the private sector, to develop and finance the NDC-aligned projects and achieve the objectives of the Paris Agreement.