Gareth Thomas, Minister of State with the Department for International Development in the United Kingdom, has urged pension funds to help boost private funding for low carbon investments in the developing world, calling on the group of investors at the P8 Summit to consider potential public financing mechanisms emerging from the private sector, including advanced market commitments, cornerstone funds and challenge funds.
The P8, whose membership includes CalPERS, CalSTRS, New York State, British Columbia, AP7, APG, USS, ACSI, the Korean National Pension Fund and the Norwegian Sovereign Wealth Fund, met for the third time in London in late October to discuss public/private partnerships in public financing mechanisms that will help leverage private finance for low carbon infrastructure and technologies.
In order to create the right incentives to support growing private sector investment in low carbon industries, Thomas suggested three focus areas: ensuring carbon emissions are factored into investment decision making by building carbon markets which have the private sector at their core; putting in place regulatory frameworks which reward businesses that invest in low carbon alternatives with public finance and technical support; and developing public financing mechanisms that can leverage additional private finance.
He said low carbon energy generation and green technologies have the potential to offer millions of the world’s poorest people a route out of poverty but low carbon investment opportunities are currently perceived as too risky by private investors.
Thomas called on the Summit participants to work with the public sector to develop the risk sharing instruments that may help to unlock private finance.
“Between your institutions, you steward in excess of $3 trillion. If some of that financing could be used for climate mitigation and adaptation investments, you could transform the planet’s future.
“This is not about corporate philanthropy, but rather about taking advantage of the new low carbon market opportunities and investing in the sustainable technologies of the future.”
Cornerstone funds have emerged as a private sector proposal for raising private finance for low carbon infrastructure. They would use initial financing from major institutional investors such as pension funds and then leverage further finance with the help of fund managers with a view to investing in low carbon energy, technology and other low carbon sectors in the developing countries. Public support instruments would be required by such funds to share some of the risks associated with the end investments.
Another private sector proposal is for challenge funds to be set up. These would involve offering packages of public support instruments to fund managers, who would then bid for the support by demonstrating how it would be used to leverage significant additional finance for the developing countries.
Low Carbon Advanced Market Commitments (AMCs) will help to guarantee a viable long-term market and price for green technologies, giving the private sector the incentive to invest now.
Thomas said emerging initiatives like these have the potential to revolutionise the market for low carbon energy.
“But we will not be able to develop them without your expertise and cooperation. Together, institutional investors, multilateral banks and governments can take advantage of the new investment opportunities in low carbon growth and support a 21st century green revolution.
“I hope this Summit can produce concrete proposals for us to take forward and stimulate a long-term, productive partnership.”
A recent UNEP report stated that every $1 of public money spent through well-designed mechanisms can leverage between $3 and $15 of private sector investment.