Mechanisms for promoting green investment

• Pages: 26-27

In certain markets, such as the U.S. and China, private companies are beginning to recognize the commercial potential of in-

vesting in “green” technologies. In the first half of 2010, U.S. corporations invested US$5.1 billion in green technology com-

panies – a 325 percent increase over investment levels for the same period in 2009. General Electric, for example, plans to in-

vest an additional US$10 billion in green technology projects over the next five years. Investors in the expanding Chinese

green technology market have also increased private investment, sinking some US$1.73 billion into initial public offerings

(IPOs) of green technology-focused companies in the second quarter of 2010 alone.

OCTOBER 2010

26

Faced with the complex challenges of climate

change, technological innovation offers the best

hope of delivering solutions that are good for the

planet, good for development and good for busi-

ness. While the importance of innovation is widely

recognized, how to actually stimulate it is less well

understood. This article focuses on the role of in-

vestment in fostering innovation – from research

and development (R&D) through to implementa-

tion and diffusion. Creating a favorable investment

environment is critical in determining the pace at

which technologies that support a sustainable

planet become available in the marketplace.

Institutional funding

Institutional funding by the Global Environment

Facility GEF1and Multilateral Development Banks

(MDBs), and their finance arms, is playing a key

role in cultivating demand for clean technologies,

particularly in developing and least developed

countries where the impacts of climate change

are often most acute. They offer the governments

of many countries affordable access to loans and

grants for clean technology projects.

The GEF – a partnership for mainstreaming global

environmental concerns into national sustainable

development strategies – supports projects related

to a range of environmental issues.2GEF has so far

allocated US$8.8 billion and some US$ 38.7 billion

in co-financing arrangements, to 2,400 climate

change-related projects in over 165 countries.

Rather than funding R&D directly, MDBs focus on

underwriting projects that use clean technology to

mitigate or adapt to climate change in developing

countries. In creating and building demand for

clean technologies in this way, they are helping to

make investment in R&D and innovation in these

technologies more attractive and generating signif-

icant spillover effects for home-grown innovation.

This positive impact has prompted MDBs to scale-

up their lending in recent years. In 2005, annual

bank lending rose to a total of US$66.162 billion,

with an average lending rate over the past 10

years of over US$40 billion per year. The World

Bank alone – through the International Bank of

Reconstruction and Development3(IBRD) and the

International Development Association – in-

creased funding for clean energy by 20 percent

each year from 2004 to 2009.

While creating demand for clean technologies is

crucial, risk and return are key factors in deter-

mining investment decisions.

On the face of it, investing in the development of

climate change-related technologies is economi-

cally sound, because the social benefits signifi-

cantly outweigh the costs of developing and im-

plementing these technologies. Advantages

could be curbed climate change impacts, mod-

ernized infrastructure, lower energy costs, im-

proved manufacturing efficiencies and new jobs.

However, from the private investor’s perspective in-

vesting in such high-risk ventures – particularly in

an under-regulated market – is not necessarily such

an attractive option. Commercial survival hinges on

generating a return on investment and increasing

profit margins to allow for further investment. This

underlines the need for an effective regulatory en-

vironment to encourage investment in environ-

mentally-supportive technologies. Consider, for ex-

ample, the positive impact of stronger pollution

controls on the development of cleaner, more fuel-

efficient engines.

MECHANISMS

FOR PROMOTING

GREEN INVESTMENT

1 GEF, an independent

financial organization

active since 1991,

provides funds to

developing countries

and countries with

emerging markets for

projects relating to,

among others,

climate change and

biodiversity.

www.thegef.org/

gef/whatisgef

2 These include

biodiversity, climate

change, international

waters, land

degradation, the ozone

layer, and persistent

organic pollutants.

3 To qualify for an IBRD

loan, a country’s per

capita income must be

between U$875 and

US$10,276.