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Disrupting Multilateral Climate Finance

If the world is to avert climate calamity, multilateral finance institutions must begin looking to large institutional investors as their partners and clients. The creation of a new global climate finance facility, appropriately ring-fenced from current financing initiatives, could help.

BEIJING – A recent report by the United Nations Intergovernmental Panel on Climate Change warns that to avoid the direst consequences of global warming, societies must make social and economic changes on a scale with “no documented historic precedent.” As we have noted previously, only institutional investors – like pension funds, sovereign wealth funds, and insurance companies – hold enough financial firepower to address climate change.

However, to minimize risk, institutional investors generally prefer to allocate their capital to operational infrastructure that is already generating stable revenue, rather than to new projects. For the same reason, their investments are focused in advanced economies, which in recent decades have received more than 70% of private-sector investment in infrastructure. Climate change requires institutional investors to move beyond these boundaries. But they need help to mitigate the associated risks, which is why we believe the world needs a new global climate finance facility (GCFF), exclusively targeted at mobilizing institutional investor capital, and designed to address the shortcomings of current multilateral initiatives.

Aside from several promising enterprises, governments and multilateral finance institutions are struggling to mobilize private capital at a scale relevant to climate change. Crucially, institutional investors have been largely absent from such initiatives, for several reasons. First, MFIs and institutional investors have different priorities. The activities of MFIs are based on member countries’ policy goals and client countries’ needs, and do not always reflect investor demand. By contrast, institutional investors, as commercial actors beholden to pensioners and other stakeholders, will not invest in projects that are deemed too risky or unlikely to yield adequate financial returns. To attract their interest, MFIs’ terms must be competitive with those offered by the private asset-management companies used by institutional investors. Moreover, many institutional investors are unfamiliar with infrastructure investment in general, let alone in emerging markets. Consequently, MFIs must also build capacity to address these investors’ concerns about engaging in unfamiliar sectors and regions.

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