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Abstract: Combating climate change at a global scale requires dramatic mobilization of capital markets. By 2035, more than $53 trillion will need to be invested in energy supply and efficiency in order to achieve climate targets laid out in the 2015 Paris Agreement. Interest and participation in sustainable finance continues to grow: environmental, social, and governance (ESG) investing assets under management totaled $30.7 trillion (of which $1 trillion is specifically classified as sustainability-themed) at the start of 2018, representing a 34% increase over the preceding two years. Yet, the capital that is available for investment in sustainable assets may not be well-matched with the pipeline of projects in search of financing. Green asset classes, including renewable generation, infrastructure, energy efficiency, and clean transport, are often inherently novel, small, and/or disaggregated. This makes them difficult and expensive to combine into investment-ready formats, preventing capital from being deployed on the timescale required to enable a quick energy transition. Moreover, market barriers exist with respect to early-stage financing and proving the viability of new markets and business models. In this article, we explore the hurdles and barriers that financial actors must overcome to ensure efficient capital matching that bridges the gap between climate awareness and meaningful climate investment.
Introduction
Combating climate change at a global scale requires dramatic mobilization of capital markets. The International Panel on Climate Change (IPCC) estimates that $2.4 trillion-approximately 2.5% of global GDP-would need to be invested in the energy system every year through 2035 in order to limit climate change to 1,5°C.1 The International Energy Agency (IEA) estimates that more than $3.5 trillion must be invested annually in energy supply and efficiency to achieve 2050 climate targets laid out in the Paris Agreement.2 Abroad suite of financial strategies-including debt instruments, derivatives for risk mitigation, and asset securitization strategies-will be critical to facilitating the transition of clean energy infrastructure.
This paper focuses on hurdles to financing green infrastructure projects and considers financial solutions developed by the private sector as well as ways in which public intervention can serve as a catalyst for unlocking or scaling private funds. We examine financial solutions in two major categories: strategies for risk management that enable growth of the project pipeline, and strategies for aggregation and securitization for...