As developed nations look to rope in the private sector to the new finance goal at the UN Cop 29 climate summit, investors in turn are calling on governments to raise policy ambitions to unlock financial flows for the energy transition.
Parties must agree at Cop 29 on the new collective quantified goal (NCQG). And developed nations are pushing to include private finance as part of a "multi-layered goal". Around $1.9 trillion/yr is invested in clean energy, but this needs to more than double by 2030 to reach net zero emissions by 2050, according to the IEA.
The Institute of International Finance (IFF) says it is for governments to create the conditions to mobilise private capital. This was echoed in two open letters by more than 500 institutional investors — holding a combined $29 trillion in assets — and 100 chief executives, representing $4 trillion in revenues. They called on governments to upgrade their nationally determined contributions — climate plans — to provide "the transparency businesses need for investment". And they called for policies to be economy-wide and sectoral, with derisking mechanisms, and obstacles such as lengthy permitting processes for renewables removed.
To ensure private finance flows into green industrial technologies, "governments need to do what has been done for renewables 20 years ago, that is prime the pump", pension fund CDPQ's head of sustainability Bertrand Millot says. "We are prepared to finance but we need a stable policy environment for that."
In the US and the EU, the Inflation Reduction Act and REPowerEU have been critical in unlocking private flows — even though some investors find navigating EU regulation cumbersome. "It is not just about policies setting limits on carbon emissions or incentives, but an industrial policy that is designed to create good jobs," non-profit group Ceres' vice-president Kirsten Spalding says.
Derisking business
But some debt-laden developing economies lack the budget to implement these policies, and can be perceived as too risky. "That's where we have to have developed nations and multilateral development banks [MDBs] step up with blended finance," Macquarie Asset Management Group head Ben Way says. At least $1 trillion/yr of private capital will be needed in developing countries excluding China by 2030 to meet climate and development goals, according to the high-level expert group on climate finance mandated by the UN. MDBs have a crucial role to play to derisk investments and leverage private finance.
The reform of global governance institutions is one of the priorities of Brazil's G20. But it is progressing too slowly. Although the World Bank and IMF have taken some steps, they still need to do much more, UN climate body UNFCCC chief Simon Stiell said ahead of the bank's annual meetings in Washington taking place this week. He also called for more honesty on the role of the private sector.
One of the main barriers to scaling up private investments is making sure that public finance is being used effectively to derisk new areas, according to think-tank E3G's sustainable finance senior policy adviser Heather McKay. National transition planning and country platforms building on the Just Energy Transition Partnerships, whereby governments will strive to offer long-term policy clarity, could gain traction at G20 or Cop 29. This could help increase confidence, she says.
Another obstacle is that a lot of projects in developing nations are not yet at the investment stage. MDBs can work with countries to unlock these and support investment in energy transition sectors, think-tank ODI managing director Hans Peter Lankes says. But institutional investors do not tend to invest in developing economies because of regulations, such as Basel III, and "long-standing habits", so there are huge gaps still to be bridged, he says.
