The private sector's role in climate change: 3 questions with IFC

Climate change mitigation has become a larger part of the International Finance Corp.’s portfolio, but it is also a priority for the private sector and, increasingly, institutional investors.

The private sector’s perspective on the international development agenda on the eve of the first of three high-level summits this year related to the post-2015 sustainable development goals is different, according to the IFC.

The private sector is expected to play a prominent role in the implementation of the new development agenda, whether through financial assistance, technological innovations or investments that are in partnership with public entities. The business community is ready to embrace that role and appears more willing to shape the agenda than at any point in the past, according to Christian Grossmann, the IFC’s director for climate change.

As the private sector arm of the World Bank Group, the IFC has made climate change mitigation and adaption a core priority to achieving the World Bank’s wider mandate of eliminating extreme poverty. Recognizing that the most adverse effects of climate change will be most prominently felt by the world’s poor, the IFC has set to an annual goal of investing 20 percent of its long-term portfolio in climate-related initiatives such as renewable power, resource efficiency, green buildings and clean technology.

In the 2014 fiscal year those investments totaled $2.5 billion and went towards 117 projects in 35 countries. Official 2015 fiscal year figures will be published in mid-July but IFC officials say that they expect to comfortably exceed its 20 percent target.

As discussions about development finance and sustainability move forward, Devex sat down with the IFC to discuss the changing role and growing opportunities for the private sector in combatting climate change. Here is an excerpt from Devex’s conversation with Christian Grossmann:

The World Bank Group has made confronting climate change a top priority in its push to eradicate extreme poverty and boost shared prosperity. How is the IFC carrying out this mission and where do its efforts currently stand?

We at the IFC recognize the importance of climate change to achieve our goals, but also as an opportunity for the private sector. We have therefore set a target of putting 20 percent of our long-term financing every year into climate-related investments. I’m pleased to inform that we will exceed that 20 percent target this year. Total commitments will probably be around $3.5 billion, which includes the capital what we mobilize with external investors. Of that, $2 billion is directly from the IFC. The biggest volume comes from infrastructure investments in renewable energy. There are usually a few big hydropower projects that we invest in, but the bulk is in solar and wind projects which have seen a tremendous increase all over the world and in our portfolio. Last year we invested about $240 million in wind projects and $340 million in solar alone. Those numbers are mainly driven by cost reductions that we have seen in solar panels. But it is also an awareness in our client countries that they are smart investments. With the right policy framework and proper tariffs, renewable energies can be very profitable and a long-term sustainable business.

Installed capacity for solar and wind has grown exponentially, but is still projected to have a modest share of the global energy matrix over the medium-term. What more can be done to advance their uptake?

It’s clear that market-based mechanisms could have a big impact. Will this happen globally overnight as was tried with Kyoto? Probably not. We currently see 60 jurisdictions, both national and subnational, which have installed various carbon pricing mechanisms without any negative impact on their growth prospects. We also work very closely with China on our Partnership for Market Readiness program along with 35 other developing countries to help them think about market based mechanisms for carbon pricing. China in particular has eight pilot programs for emissions trading schemes which, if they went live, would certainly change the game for one of the biggest economies and emitters in the world. It’s clear based on current projections that by sticking to business as usual we will not stay within the two degree Celsius range. So we have to do everything we can to change the trajectory. On one hand that can be done with new or improved technologies. But it can also be achieved through a policy framework. Since it’s impossible to have one global fits all solution, we should differentiate between certain countries. But that will require some compromise and solutions among the biggest emitters.

What are the next trends in climate-related investments that you see generating attention from private financiers? And as you look ahead, what are your expectations for the role that the private sector will be asked to play in a post-Paris, low carbon environment?

The key message is that climate-related investments are financially sustainable and make good, long-term sense. There’s a whole new dynamic which is working from this angle. We have discussions with institutional investors who have decades long investment horizons and we notice shifts in their priorities. Some of them are really trying to move out of highly carbon intensive industries and are seeking renewables as a viable long-term investment proposal. In the old days if you were a German insurance company a must-have investment for your portfolio would be big utilities involved in nuclear and coal. That’s not the case anymore. There is a shifting preference among western institutional investors towards emerging markets that preceded the climate debate because that is where the growth is. For purely financial risk purposes you cannot at this point leave renewables aside. Renewables and emerging markets are a match made in heaven if I were an institutional investor.

Then there’s the subject of cities. Urbanization is ongoing and will continue, which raises the challenge of how we build cities sustainably. At the World Bank we think about housing and building codes but it’s also about smaller and smarter technologies. Given that urbanization is such an important development anything that has to do with cities is certainly a big area.

And unfortunately, disaster risk mitigation will be a pressing need. Although financing will most likely be from the public sector there is also an opportunity for private capital to do it in a smarter way — there’s forecasting, satellite technologies and smart agriculture. The biggest consumer of water globally is still agriculture. If we can reduce that then we are dealing with adaptation to climate change.

Regarding Paris, the private sector wants to participate. The private sector is much more engaged in the preparation to Paris than I have ever seen before on climate change. The letter last month from six European oil majors to the UN calling for a price on carbon shows you that the private sector senses something is going on and they want to be part of the solution.

My hope is that Paris will send out a very strong signal, but we must also remember that life does not end after Paris. We at the IFC and World Bank have to continually make the case and raise finance for climate development.

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