What does a ‘green transformation’ entail?

Development Policy13 Aug 2013Nannette Lindenberg

The High-level Panel (HLP) report proposes a green transformation. However, the knowledge needed to achieve this is not yet available. We must therefore implement a universal agenda to create knowledge about mobilizing green finance – now, not only for 2015 and beyond.

What does a ‘green transformation’ entail? First, huge investments in green infrastructure are necessary. Estimations of actual financing needs vary, but in most cases, amount to an annual USD 1 to 2 trillion for the upcoming years. As industrialized countries are confronted with depressing budget constraints, it seems clear that public budgets alone will not meet the challenge.

Public interest has therefore concentrated on private investors who might have the capacity to close the financing gap. Institutional investors in particular, like pension funds, insurance companies and sovereign wealth funds, seem to be adequate sources as they have assets of over USD 70 trillion under their management. Unfortunately, the relevance of this group of investors for green projects is remote and private investors are reluctant to engage in green investments. The reason for this is economically straightforward: the risk-return calculus of investments is not attractive due to two problems. First, due to high fossil fuel subsidies, the return on green investments is limited. Second, investment risks are too high, or are perceived to be. One solution would be for public donors, development banks and development finance institutions to provide incentives for private investors to engage in green investments. This is of particular relevance if they intend to invest in developing countries or emerging economies, as additional country risks contribute to the regulatory and technological risks of renewable energy and energy efficiency investments. The key to a green transformation is therefore the mobilization of private capital to finance much-needed investments.

So far, this is nothing new. However, there is a tiny (or huge?) problem: knowledge about best practices to mobilize capital for green investments – especially in developing countries and emerging economies – is limited. While international forums are discussing green or long-term finance, and various researchers are mapping green finance flows or conducting case studies on green investments, there is still no common knowledge basis for these studies and discussions to build on. Definitions of key terms are unclear and data to assess experiences is either not comprehensive or unavailable. Though many case studies and mappings have been published, a quantitative assessment of public spending aimed at mobilizing private funds for green investments in developing countries has not yet been conducted. Such an assessment would be important for determining best practices, as quantitative analysis seems to be the best method to provide general conclusions and comparisons, and both are needed to better understand green financing and design targeted policies.

Therefore, if the shift towards a green economy – as proposed by the HLP – is taken seriously, we need a universal agenda now, not only for the time after 2015. Three aspects for the successful achievement of a green post-2015 agenda are crucial:

  1. Governments and other stakeholders should cooperate more closely and exchange international discussion strands on green investments on the one hand and long-term investments on the other hand. Due to path dependencies, and to avoid lock-in effects, long-term investments should also be ‘green’. The differences between discussion strands are therefore less important.
  2. Development banks should provide researchers with data on the financing details of green projects, as data transparency and availability are the key to increasing knowledge about effective use of green finance.
  3. Researchers can then conduct quantitative research on green finance and assess the implications of the use of public leveraging instruments. These inputs would provide the basis for policy recommendations for a green transformation.

In short, a green transformation should be a core element of the post-2015 agenda and achieving it will depend on whether we will be able to create the knowledge needed. We therefore need to lay more emphasis on cooperation, exchange and transparency on green finance – starting today!