Climate financing hits $391 billion, solar a key beneficiary

In its Global Landscape of Climate Finance 2015, the Climate Policy Initiative (CPI) has found that climate financing surged in 2014, to reach $391 billion. This represented an 18% increase on 2013, which recorded $331 billion. The report looks at how much was invested, where the funds went and who supplied them. It did acknowledge limitations in the amount of data available, however.

Private investment

At $243 billion, or 62%, private investment comprised the lion’s share of climate financing. YoY, investments in this sector grew by 26%, or nearly $50 billion, thus halting the decline experienced in the previous two years. The increase came on the back of the 98 GW of solar PV and onshore wind installed in 2014, particularly in China.

Project developers invested the most funds – $92 billion or 38% – in the private investor class, followed by corporate actors (non-energy corporations and manufacturers) at $58 billion. Here, funds primarily went to solar PV projects.

Commercial financial institutions, meanwhile, generated $46 billion, which was chiefly channeled into solar PV and wind projects in East Asia and Pacific and the Americas.

Investments from households reached $43 billion, which went to solar PV and thermal projects under 1 MW. "Mostly, such investments took place in China, Japan, and the US, driven by policy support schemes and declines in installation costs," wrote the report’s authors.

Finally, representing a decrease on 2013, around $2.6 billion in climate financing was said to have come from private equity, venture capital, infrastructure funds, and institutional investors last year. "While this is partly due to data limitations, 22 institutional investors’ direct primary investments in renewable energy projects remain small (less than USD 1 billion) compared to the scale of their assets globally and their growing fossil fuel divestment commitments," continued the CPI.

In the private investment sector, the majority of actors relied on their balance sheets to finance renewable energy projects, which totaled $175 billion. Again, solar PV was the main beneficiary, particularly in high- and upper-middle-income countries like China, Japan and the U.S.

Investors are looking to new ways to finance climate projects, including yieldcos and green bonds. "The emergence and rapid growth of some of these instruments highlights that investors have unfulfilled needs for risk diversification and revenue/cost savings certainty," state the report’s authors.

Public sector

Representing an 8% increase on 2013, the public sector was said to have channeled at least $148 billion into climate financing. Of this, Development Finance Institutions (DFIs) contributed $131 billion, or 33%. CPI believes this figure could be even higher than its figures suggest. At $66 billion, national DFIs comprised over half of this, mostly via concessional loans; while multilateral and bilateral DFIs contributed $47 billion and $17 billion, respectively.

An average of $15 billion of direct public contributions was found to have come from governments, ministries and bilateral agencies to climate projects, mostly directed to low- and middle-income countries; multilateral and national Climate Funds, meanwhile, were found to have invested $2 billion in climate financing.

In the public financing sector, grants ($14 billion) and low cost loans ($69 billion) represented the main forms of investment. Specifically, grants represented over half of both governments’ and Climate Funds’ investments. Low cost loans, on the other hand, comprised the majority of financing coming from bilateral and national DFIs.

"Public concessional or lower-than-market-rate finance, including loans with longer tenors and grace periods, play a catalytic role by supporting the establishment of policy frameworks, strengthening technical capacity, lowering investment costs, and reducing investment risks for the first movers in a market. Country macroeconomic and institutional conditions and the existence and level of project-level revenues are key determinants of the appropriate combination of grants versus loans," stated the report.

Where are the funds going?

The CPI again underlined the fact that incomplete information has hindered its analysis of the global climate financing market, meaning it cannot identify the initial recipients of $56 billion of public financing. It found, however, that $61 billion, or 41% went to public-private entities, while at least $31 billion, or 21% of public finances went to private entities, including NGOs.

Overall, the report found mitigation accounted for $361 billion, or 93% of total climate finance in 2014, 81% of which went toward renewable energy. "The heavy bias toward renewable energy reflects the lack of data for private investments beyond this sector," wrote the authors.

With regards to public climate finance, renewables saw $49 billion, or 33%, while $26 billion and $21 billion went to energy efficiency and sustainable transport, respectively.

Looking to private investment, large- and small-scale solar PV ($134 billion) and onshore wind ($66 billion) projects attracted most of the renewable energy investment.

In terms of regions, East Asia and the Pacific remained the largest destination of climate finance flows, accounting for $119 billion, or 31% of the total, up 22% from 2013. See the table below for a complete breakdown:

Growing gap, sufficient support

Despite the fact levels of global climate financing are climbing, CPI has said the gap between the investment required to reduce emissions and what is actually being invested, is growing. "Even greater effort and geographic spread is needed to deliver investments consistent with the 2°C global temperature goal," said the report.

The need for appropriate domestic investment and support policies was further highlighted, in light of the fact that $290 billion, or $290 billion of total climate finance was raised and spent in the same country. "Deficient frameworks can inhibit the incentives for investment by, for instance, sending unclear or uncertain policy signals or by failing to put an adequate price on the risk of inaction on climate change," stated the report’s authors.

As aforementioned, new financial instruments need to be developed, or existing ones tailored, to meet investors’ needs, while climate change considerations must be integrated into the financial system.

CPI explained, "Public actors have the opportunity to drive investment from the wider financial system, by providing other investors and financiers with the needed confidence to participate in climate projects. DFIs, for instance, can enhance private actors’ awareness of and ability to understand, appraise, and manage climate change risks (or opportunities), and thereby engage investors currently still at the sidelines of climate finance."