Mind the Gap: Bridging the Climate Financing Gap with Innovative Financial Mechanisms

GGGI launched an Insight Brief titled ‘Mind the Gap: Bridging the Climate Financing Gap with Innovative Financial Mechanisms’. This report aims to advance the public sector’s understanding of innovative financial mechanisms by examining their function, characteristics, and use. Compared with the total investment required over the next fifteen years to meet the goals set by the Paris Agreement, this report estimates that the climate finance gap is USD 2.5 – 4.8 trillion. Phrased another way, bridging this gap would require an additional USD 166 – 322 billion per year based on current investment estimates.

In 2015, the international community committed at COP21 in Paris to limiting global temperature rise to two degrees Celsius. It also pledged to support least developed countries (LDCs) and emerging economies in their efforts to mitigate and adapt to the impacts of climate change while still pursuing economic development. This represents an opportunity to move towards a new model of strong, inclusive, and sustainable economic growth – what we refer to at the Global Green Growth Institute (GGGI) as “green growth”.

Increasingly in developing countries, private investors are attracted to green infrastructure investment deals that blend public and private sources of capital together using innovative finance mechanisms to structure a deal. For public sector actors interested in closing the climate finance gap, these innovative solutions address one of the most important underlying causes of private sector underinvestment: high investment risks. Particularly in LDCs and emerging markets, high investment risks – both real and perceived – are common. Standard investment practices have proven inadequate in mitigating such risks. Thus, accomplishing LDCs’ and emerging economies’ green growth objectives will entail identifying – and scaling – new approaches to project structuring and risk mitigation in order to attract significant funds from commercial and institutional investors.

Taking a project finance perspective, the analysis demonstrates how public sector actors can use innovative financial mechanisms strategically to address specific investment risks as a way to leverage private investment and, ultimately, close the climate finance gap.

Specifically, this report attempts to answer two key questions:
What makes a financial mechanism “innovative”?
How can innovative financial mechanisms be used most effectively to unlock significant private investment?

As part of GGGI’s ongoing efforts to increase green investment flows and improve multi-directional knowledge sharing and learning, this report will be the first in a series of examinations of how to make climate projects bankable. Innovative financial mechanisms are designed to advance climate projects to bankability in LDCs and emerging economies through risk reduction, especially during their earlier stages.