The Role of International Organizations in De-risking Climate Investments

• In Event: Climate Change and Global Governance

Abstract

The contemporary climate finance landscape is constrained. Public climate finance provided through international organizations (IOs) by wealthy industrialized states has plateaued. Few believe that capital sufficient to accelerate decarbonization can be mobilized from primarily public sources. At the same time, although private climate finance holds great promise, it remains inaccessible to most low-income countries. Private investors, and institutional investors in particular, make decisions on a risk-return ratio. So long as green energy investments in the developing world are perceived as high-risk, the cost of debt for developing states is prohibitively high, and private capital remains out of reach.

To escape these twin constraints, international organizations are increasingly pursuing the following solution: use public funds delivered through IOs to de-risk investments with the aim of unlocking private capital. The basic logic is that IO expertise and capital can be used to sufficiently reduce the regulatory, political, and financial risks necessary to entice private investment and reduce the cost of debt. In this paper, we argue that the de-risking trend represents a reorientation of the role of international organizations in climate finance. In their traditional role, IOs fund discrete projects with associated mitigation or adaptation goals. Project success hinges on whether the expected emissions reductions or adaptations are achieved. In their new financial role, IO funds are used primarily to entice private capital. Project success hinges on whether de-risking strategies mobilize private investors. Within their financial role, IOs serve as financial advisors and analysts, insurance providers, and investors.

We begin by articulating the growing financial role of international organizations delivering climate finance in the context of financialization and the Wall Street consensus. We then track the rise of de-risking rhetoric across IOs that deliver climate finance, including the financial mechanisms of the UNFCCC, development banks, and UN agencies. We then identify and map the distinct activities of IOs engaged in de-risking climate investments, providing a first look at how IOs attempt to de-risk. Finally, using examples from the project data, we identify several challenges posed by the de-risking trend with regard to accountability, transparency, and measuring effects.

Authors

• Erin R. Graham, University of Notre Dame

• Jiayi (Sonia) Zhang, University of Notre Dame