## Public Sector Must Play Major Role in Catalyzing Private Climate Finance

_IMF Blog, August 18, 2022_

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**Canonical URL:** [Public Sector Must Play Major Role in Catalyzing Private Climate Finance](https://www.imf.org/en/blogs/articles/2022/08/18/public-sector-must-play-major-role-in-catalyzing-private-climate-finance)

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## Bibliographic details
- Authors: Kristalina Georgieva, Tobias Adrian
- Published: August 18, 2022

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### Scale of the challenge and key findings
- Climate change is "one of the most critical macroeconomic and financial policy challenges that IMF members face in coming decades."
- Investment needs:
  - Estimates range from $3 trillion to $6 trillion per year until 2050.
  - Current level at about $630 billion is "just a fraction" of what’s needed, with "very little" going to developing countries.
- Financial resources available:
  - $210 trillion in financial assets across firms, or roughly twice the gross domestic product of the entire world—implying potential to redirect large shares to climate mitigation and adaptation.
- Recent shocks (spikes in the cost of fuel and food) underline the urgency of investing in green energy and resilience to shocks.

### Constraints limiting private climate finance (findings)
- Core problem: incentives. Investors have alternative return opportunities, including fossil fuels in the absence of robust carbon pricing.
- Specific barriers for climate projects, especially in emerging market and developing economies:
  - High upfront costs.
  - Multiple technical challenges and unproven business models.
  - Long time horizons.
  - Poor data and climate information gaps.
  - Currency fluctuation risks and adverse macroeconomic conditions.
  - Unpredictable business environments and perceived political instability.
- Market structure and investor behavior:
  - Many climate opportunities cannot secure sufficient financing; those that do tend to attract a small pool of specialized investors demanding high returns in a relatively illiquid asset class.
  - Debt is the main instrument for financed climate projects.
  - Evidence that large investors screen out companies with a market capitalization of below $200 million, a threshold few renewable energy companies clear.
  - Cost of equity for climate investments for impact investors is in the 12-15 percent range in frontier emerging market and developing economies—likely higher for commercial investors.

### Unleashing private sector financing (policy and instrument recommendations)
- Principle: change incentives for domestic and foreign investors through coordinated action across public and private sectors.
- Public sector roles and instruments:
  - Blending public and private finance to de-risk investments (examples: first loss investments, performance guarantees).
  - Public equity investments to absorb downside risk and share upside when projects succeed.
  - Credit enhancements to improve project creditworthiness and lower private costs.
- Role of multilateral development banks:
  - Already major providers of climate finance, especially debt which makes up more than two-thirds of the $32 billion disbursed in 2020.
  - More innovative use of equity could help leverage additional private capital and assist heavily indebted emerging markets and developing economies.
- Other instruments and mechanisms:
  - Public-private partnerships.
  - Multi-sovereign guarantees to achieve higher leverage ratios.
  - Underwriting specific risks (project completion, political instability) to reduce high-risk premia that impede private capital.
- Caution and limits:
  - Risks of large public debt increases through crystallization of contingent liabilities.
  - Suggestion: hard limits on state exposure should be appropriately judged.
  - Example: Uruguay law caps the state’s total public-private-partnership liabilities and fiscal transfers to private operators to 7 percent and 0.5 percent, respectively, of the preceding year’s GDP.

### Role of policy beyond financing (recommendations)
- Implement robust and predictable carbon pricing to:
  - Generate incentives for private investment in low-carbon projects.
  - Promote a more transparent market and enable informed investor decisions.
- Build a strong climate information architecture to improve decision-making and risk pricing and to prevent "greenwashing":
  - High-quality, reliable, and comparable data and statistics.
  - A globally harmonized and consistent set of climate disclosure standards.
  - Globally agreed principles for climate finance taxonomies.
- The IMF engaged in discussions and co-authored a report for the Network for Greening the Financial System on urgent steps to bridge climate finance data gaps.

### What the IMF is doing (actions and tools)
- Modes of IMF contribution:
  - Surveillance.
  - Capacity development.
  - Financial sector risk assessments.
  - Climate data and diagnostic tools.
- Programs to promote climate-friendly management of public finances and public investments:
  - Promote accountability, transparency, and more effective spending.
  - Increase domestic revenues and mobilize external funding from donors and the private sector.
- Support for fiscally constrained countries:
  - The new IMF Resilience and Sustainability Trust could help, with a focus on longer-term structural changes such as climate change, and is expected to play a catalytic role to create a conducive investment environment.
- Analytical work:
  - A forthcoming analytical chapter of the October Global Financial Stability Report will examine financial markets and instruments for scaling up private climate finance in emerging market and developing economies.

*Source: Kristalina Georgieva and Tobias Adrian, August 18, 2022. Public Sector Must Play Major Role in Catalyzing Private Climate Finance, IMFBlog.*

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## Content in this bundle

- **final_report_on_bridging_data_gaps**
  - [final_report_on_bridging_data_gaps (Markdown version)](/sites/default/files/medias/documents/final_report_on_bridging_data_gaps.pdf.md){rel="alternate" type="text/markdown"}
  - [final_report_on_bridging_data_gaps (PDF)](/sites/default/files/medias/documents/final_report_on_bridging_data_gaps.pdf){rel="external" type="application/pdf"}

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## References

- [https://www.imf.org/wp-content/uploads/2022/08/MD-Climate-Finance-Needs-Chart-1.jpg](https://www.imf.org/wp-content/uploads/2022/08/MD-Climate-Finance-Needs-Chart-1.jpg)
- [IMF Staff Climate Note](https://www.imf.org/en/Publications/staff-climate-notes/Issues/2022/07/26/Mobilizing-Private-Climate-Financing-in-Emerging-Market-and-Developing-Economies-520585)
- [statistical forum in November](https://www.imf.org/en/News/Seminars/Conferences/2021/11/17/9th-statistical-forum-measuring-climate-change)
- [Resilience and Sustainability Trust](https://www.imf.org/en/News/Articles/2022/04/18/pr22119-imf-executive-board-approves-establishment-of-the-rst)

_Source: https://www.imf.org/en/blogs/articles/2022/08/18/public-sector-must-play-major-role-in-catalyzing-private-climate-finance_