Moving from “billions to trillions;” tapping private-sector finance for climate-resilient, developing country infrastructure
The transition to a global, low carbon, and climate resilient energy future may require an investment of nearly $7 trillion per year, over the next 15 years. About $3.9 trillion of this total arises from developing countries, which are currently spending $1.4 trillion annually, leaving an “investment gap” of $2.5 trillion. Private sector financing is often touted as the only viable source of capital to fill that gap. As a result, development finance institutions (DFIs) are committed to increasing private sector financial participation to meet climate-related energy and infrastructure goals. The most likely sources at this scale are called institutional investors - insurance companies, pension funds and sovereign wealth funds. But these investors have been relatively disengaged from this type of investment.
One motive to engage these investors is their size. Institutional investors in OECD countries alone control about $92 trillion in assets. To put this in context, official development assistance (ODA) from traditional multilateral and bilateral sources is about $147 billion annually. This is less than 1% of the assets on the balance sheets of institutional funds, and just 5% of the developing country investment gap mentioned above. According to a recent OECD publication, Mobilizing Institutional Investor Capital for Climate Aligned Development, DFIs now face an excellent opportunity to engage institutional investors, if they take the right approach.
Institutional investors appear ready for partnerships with DFIs. Large investors are collaborating more with like-minded partners, and several priorities behind the collaboration fit DFI strengths: to get closer to investments (to better assess and manage risks), to increase deal flow, and to reduce expenses from intermediaries, due diligence and monitoring. These priorities could be met by DFIs, which would open the door to a mutually helpful arrangement. The big investors do not appear too exclusive about their partnerships, meaning synergies with DFIs are certainly possible.
Richard Swanson, Ph.D.
Asset valuation and project finance expert, specializing in financial and economic analysis of civil infrastructure assets.