This Chapter analyses trends in private climate finance mobilised. It explores the main characteristics in terms of mechanisms to mobilise private finance, climate themes, provider types, sectors as well as based on various recipient country characteristics and groups. It then outlines further insights on these trends, as well as perspectives on opportunities for increasing private finance mobilisation.
Climate Finance Provided and Mobilised by Developed Countries in 2016-2020
Insights from Disaggregated Analysis
Climate Finance and the USD 100 Billion Goal
Mobilised private climate finance: trends, insights and opportunities
Abstract
According to (OECD, 2022[5]), public climate finance provided by developed countries mobilised USD 13.1 billion in private finance in 2020. While this is an increase from 2016 (USD 10.1 billion), it represents a drop compared to the relatively stable levels observed in 2017 (USD 14.5 billion), 2018 (USD 14.7 billion) and 2019 (USD 14.4 billion).
In practice, the ability of developed countries to mobilise private finance for climate action in developing countries is influenced by many factors. These include the composition of bilateral and multilateral providers’ portfolios (mitigation-adaptation, instruments and mechanisms, geography, and sectors), policy and broader enabling environments in developing countries, as well as general macroeconomic conditions.
Characteristics of mobilised private climate finance
Public finance providers mobilise private finance through different types of mechanisms, as summarised in Figure 12. Except for guarantees, these mechanisms are underpinned by the public finance instruments (equity, grants, loans) analysed in the previous Chapter, e.g. shares in collective investment vehicles (CIVs) consist of equity investments, direct investment in companies and special purpose vehicles (SPVs) can take the form of equity or loans, simple co-financing involves grants or loans.
Direct investment in companies or SPVs mobilised nearly half (44%) of private climate finance over 2016-2020. Guarantees (19%), syndicated loans (14%), credit lines (9%), simple co-financing arrangements (8%), and shares in collective investment vehicles (CIVs, 6%) followed (Figure 12). However, there were significant year-on-year variations of private finance mobilised by each mechanism. This variation can relate not only to the volatile nature of private finance flows but also to the availability of project pipelines and investment opportunities that can be spread unevenly over time, as further discussed in later sections of this Chapter.
Figure 12. Private climate finance mobilised by leveraging mechanism in 2016-2020 (%)
Source: Based on OECD DAC statistics and complementary reporting to the OECD.
In terms of provider groups, between 2016 and 2020, the largest share of private climate finance mobilised was attributable to MDBs (57%), followed by bilateral providers (36%) and multilateral climate funds (7%) (Figure 13). For all three provider groups, direct investment in companies or SPVs mobilised the largest share of their private mobilisation totals (half of private finance mobilised by MDB and a third for both donors and climate funds). The role played by other mechanisms differs between provider types. For example, guarantees accounted for 20% of private finance mobilised by both MDBs and bilateral providers but are very seldom used by multilateral climate funds. Credit lines represented 20% of private climate finance mobilised by bilateral providers, while 19% of climate private finance mobilised by MDBs was through syndicated loans.
Figure 13. Private climate finance mobilised by provider group in 2016-2020 (%)
Source: Based on OECD DAC statistics and complementary reporting to the OECD.
Mitigation’s overwhelming share (86%) in total private climate finance mobilised by developed countries over 2016-2020 is in part related to the constraints that commercial investment in adaptation projects faces. This leads to a very uneven spread of mobilised climate finance by sector, with the energy sector accounting for more than half of private climate finance (Figure 14). The remaining half of private climate finance mobilised over 2016-2020 was spread over a range of other sectors, most notably industry, mining and construction (11%); banking and financial services (9%); transport and storage (4%); and agriculture, forestry and fishing (4%). Yet, in 2020 private climate finance mobilised in the energy sector decreased significantly in both relative and absolute terms, dropping by USD 0.9 billion and accounting for only 35% of total climate finance mobilised in that year.
In contrast, over 2016-2020, private climate finance mobilised for adaptation mainly targeted the industry, mining and construction sector (36% of total adaptation private climate finance mobilised), although this was largely influenced by a large-scale energy infrastructure project in East Africa supported by an MDB in 2020.1 Energy and water supply and sanitation followed, both accounting for 14% of the total adaptation finance mobilised over the five-year period. Unsurprisingly, sectors with no or very little shares of mobilised private climate finance for adaptation include health, government and civil society, and education.
Figure 14. Private climate finance mobilised by sector in 2016-2020 (%)
Source: Based on OECD DAC statistics and complementary reporting to the OECD.
Between 2016 and 2020, private climate finance for sectors that often involve infrastructure projects, such as energy, transport and industry, mining and construction or communications, was mainly mobilised through mechanisms typically used in the context of project finance, i.e. guarantees, syndicated loans and direct investment in companies or SPVs. These three mechanisms accounted for more than 80% of mobilised private climate finance in these sectors. In contrast, in banking and financial services, credit lines, which are frequently employed in the context of local SME development, played a significant role.
Mobilised private climate finance by recipient country grouping
Between 2016 and 2020, Asia was the main beneficiary region of private climate finance mobilised, representing 38% of the total. The Americas (26%) and Africa (21%) followed while Europe (5%) and even more so Oceania (0.1%) accounted for much smaller shares (Figure 15). The regional distribution of private finance mobilisation was relatively similar to that of total climate finance over the five years, except for a slightly greater focus on the Americas and somewhat lower on Asia and Africa.
At an aggregate level, significantly larger shares of private climate finance were mobilised in MICs (notably UMICs) compared to other income groups: MICs represented 67% of private climate finance mobilised for individual countries in 2016-2020, compared to 7% for HICs, and only 5% for LICs, with the remaining 21% being unallocated by country. Mitigation represented 91% of private climate finance mobilised in MICs while adaptation represented over 50% of private climate finance mobilised in LICs.
Between 2016 and 2020, mobilised private climate finance showed a high degree of concentration with 10 recipient countries benefitting from more than half (55%) of total private climate finance that was allocated to individual countries. The concentration is even more significant when looking at the top-10 countries in terms of private adaptation finance, for which the share was 81%. The top 10 UMICs and the top 10 LICs benefitted respectively from 97% and 99.7% of private climate finance mobilised for adaptation within each income group. The high concentration of private climate finance for the LICs and adaptation is, however, mainly due to the aforementioned large-scale energy infrastructure project in an LDC.
Figure 15. Concentration of private climate finance mobilised across developing country regions and income groups in 2016-2020
Note: Note: This figure does not fully reflect developing countries’ differences in terms of size, population, and other socio-economic conditions. The regions included cover developing countries only, as defined in Annex B. This figure does not fully reflect developing countries’ differences in terms of size, population, and other socio-economic conditions.
Source: Based on OECD DAC statistics and complementary reporting to the OECD.
Private climate finance mobilised in SIDS, LDCs and fragile states
In 2016-2020, SIDS, LDCs and fragile states accounted for 1%, 8% and 16% of total private climate finance mobilised, which corresponds to a yearly average of USD 0.1 billion, USD 1.1 billion and USD 1.7 billion respectively. Over the period, adaptation represented 38% of total private climate finance mobilised in LDCs (15% without the aforementioned large-scale energy infrastructure project) and only 6% in SIDS.
Private climate finance mobilised in both SIDS and LDCs was concentrated in a small number of countries. In 2016-2020, 62% of total climate finance mobilised in LDCs benefitted only five of the least developed countries, and as much as 87% of total private climate finance mobilised in SIDS benefitted only five of the island states. Almost two-thirds (64%) of private climate finance mobilised for the SIDS was allocated to the countries and territories in the Caribbean region. For fragile states, the picture is slightly more nuanced, as 54% of total private climate finance for fragile states benefitted only five countries.
Trends of mobilised private climate finance based on a selection of country risk ratings
Risk can deter private investment if perceived as too high and/or if not reduced by public interventions. In addition to project-specific impediments for private investments, other risks relate to more general aspects of political and regulatory as well as macroeconomic, legal or business conditions of specific countries and regions, as further discussed in later sections of this Chapter (see page 39). This section makes use of two readily-available complementary composite indicators to analyse private finance mobilised by developed countries in different country risk contexts and levels: the Allianz Medium-Term Country Risk Rating (which captures a wide spectrum of different types of risks), and the Coface Business Climate Assessment, which focuses on the business environment and risk of default (Allianz, 2022[31]; Coface, 2022[32]).
The main conclusion is that over 2016-2020 public climate finance providers mostly mobilised private climate finance for projects in countries with medium or relatively low-risk profiles (Figure 16):
Based on the Allianz Medium-Term Country Risk Ratings, mobilised private climate finance predominantly benefited countries with a lower risk rating (B/BB), accounting for 45% of the total.
Using the Coface Business Climate Assessment, approximately 52% of private climate finance was mobilised for projects in countries with the lowest risk rating (A).
Private climate finance mobilised for countries with the riskiest ratings, i.e. D for the Allianz rating or C, D and E for the Coface rating, accounted for 27% and 19% respectively.
Figure 16. Private climate finance mobilised by country risk rating in 2016-2020 (%)
Source: Based on OECD DAC statistics and complementary reporting to the OECD.
Note: the Allianz Medium-Term Country Risk Rating captures a wide spectrum of different types of risks while the Coface Business Climate Assessment focuses on the business environment and risk of default (Allianz, 2022[31]; Coface, 2022[32]).
MDBs appear to mobilise private finance in more risky environments than donor countries and multilateral climate funds. The higher the risk, the higher the share of private climate finance mobilisation by the MDBs and the lower the share by countries and climate funds (Figure 17):
Based on the Allianz Medium-Term Country Risk Ratings, MDBs mobilised a comparable sum of private finance in 2016-2020 across all three risk categories (B/BB, C and D), whereas private climate finance mobilised by climate funds and donors was rather concentrated in countries with lower risk profiles (B/BB). While only 36% of private climate finance mobilised by the MDBs was in countries with the lower risk (B.BB), it was 55% in the case of donor countries and 73% for the climate funds.
Using the Coface Business Climate Assessment, 53% of private climate finance mobilised by MDBs served countries with medium and higher risk ratings (B, C, D and E). The share decreased to 42% for donor countries and only 30% for multilateral climate funds (noting that, for climate funds, this relates to a single project in a South American HIC).
Figure 17. Private climate finance mobilised by country risk rating and provider group in 2016-2020 (%)
Source: Based on OECD DAC statistics and complementary reporting to the OECD.
Note: the Allianz Medium-Term Country Risk Rating captures a wide spectrum of different types of risks while the Coface Business Climate Assessment focuses on the business environment and risk of default (Allianz, 2022[31]; Coface, 2022[32]).
In 2016-20, guarantees were used predominantly in medium to high-risk countries. Based on the Coface Business Climate Assessment, 30% of private finance mobilised by guarantees was in countries with a medium risk profile (B-, C- and D-rated), whereas it was only 15% in lower risk countries (A-rated). The Allianz Medium-Term Country Risk Ratings indicate that 39% of private climate finance mobilised by guarantees was in higher risk countries (D-graded), 22% in medium risk countries (C-graded) and only 12% in the less risky countries (B/BB-graded). These findings suggest that the lower the economic and political uncertainties and the more favourable the business climate, the lesser the need for guarantees to mobilise private finance for climate projects.
Insights from the disaggregated analysis of private climate finance mobilised
This section unpacks possible explanations for the trends observed above. In doing so, it further draws on relevant literature as well as a qualitative OECD survey (hereafter referred to as the 2022 OECD survey). The 2022 OECD survey was conducted to update information on bilateral and multilateral providers’ development finance portfolios, with a particular focus on mechanisms and instruments designed to mobilise private finance, as well as to gather qualitative insights from providers on the main incentives and obstacles to mobilise private finance for sustainable development and climate action.2
Adaptation continued to represent a minor share of total climate finance mobilised
Over 90% of adaptation finance provided and mobilised by developed countries in 2016-2020 stemmed from public sources (Figure 1 in Chapter 1). While adaptation expenditures can stimulate private sector activity, with direct benefits for the economy, they often lack clear revenue streams (e.g. via payment by end users) and, as a result, do not meet private sector investment criteria.
Moreover, adaptation activities may be less attractive to private investors who tend to operate with shorter time horizons than those that characterise future scenarios of climate impacts. Therefore, it is often challenging to make a business case for adaptation projects with long payback times and whose benefits are conditional on future climate scenarios with high degrees of uncertainty (UNEP, 2021[28]). Public sources are most needed in support of projects and activities that have high social returns and lower financial returns, or where particularly vulnerable or marginalised countries and communities need support (Pauw et al., 2021[33]). It is in this context that public finance actors can substitute for market actors by extending grants or long-term loans at concessional terms.
The results of the 2022 OECD survey further underlined that adaptation projects often lack the size and scalability potential sought by the private sector. Several providers also mentioned a lack of knowledge by private investors about existing or possible adaptation projects, as well as higher project costs in some cases. In contrast, providers indicated to have a greater capacity to mobilise private investors for projects that contribute to climate change mitigation in sectors they understand well and with clearly identified projects such as energy, transport and industry.
There are opportunities to increase private sector involvement in adaptation-related projects, notably via improving enabling environments in the respective sectors that need to become well-adapted and resilient. Governments can for example set policy targets that help implement their commitment to enforcing resilience and invest in legal and regulatory frameworks that facilitate public-private partnerships. The 2022 OECD survey also underlined the need to structure and formulate adaptation projects and programmes in a way that involves potential private investors from the very design stage of the financing opportunities.
Overall, to generate and scale adaptation investments, it is important to understand and distinguish between adaptation investments that can be provided by the private sector in response to needs and demand for adaptation products and services; and where adaptation investments take the form of public investments that provide economic benefits, but no financial business model. In this regard, access to and the cost of finance have strong impacts on what are economically efficient adaptation investments in a given context (Mullan and Ranger, forthcoming[34]).
Different mechanisms aim to mobilise private finance in different contexts
Activity-level data collected by the OECD on private climate finance mobilised covers the main mechanisms used by DFIs and MDBs i.e. guarantees, syndicated loans, shares in collective investment vehicles (CIVs), direct investment in companies or special purpose vehicles (SPVs), credits lines and simple co-financing arrangements. Annex A (Table A A.2) offers an overview of leveraging mechanisms and their uses for different types of activities and in different contexts.
The 2022 OECD Survey on providers’ portfolios confirmed the key role played by project finance, guarantees and syndicated loans for mobilising private finance, whether for climate action or more broadly. Some providers underlined the effectiveness of guarantees in mobilising private finance in nascent markets through risk mitigation. Others also mentioned the role of syndicated loans in decreasing early entrant costs and encouraging developers to enter the market as well as the ability of credit lines to support local SME development through better access to finance.
Financial innovation is an important factor for expanding providers’ mobilisation portfolios. While many providers generally referred to the relatively traditional and well-established mechanisms when mobilising private finance (e.g. syndicated loans, guarantees, credit lines and project finance), some also highlighted the need to explore new and innovative mechanisms to attract private investment. For instance, several bilateral and multilateral actors mentioned the potential of public anchor investment or bond subscriptions for building local private bond markets more generally. Others indicated that they consider establishing or expanding guarantee programmes. A number of bilateral providers also referred to their capitalisation of MDB-administered or other blended finance funds and facilities that aim at mobilising private finance for climate purposes. In addition, some providers have started exploring possible approaches to attract institutional investors, such as through portfolio investment solutions.
Most private climate finance was mobilised for projects in middle-income countries with relatively conducive enabling environments and low-risk ratings
Developing countries’ socio-economic conditions play a fundamental role to attract private finance and investment. Enabling environments relate to a wide range of features, such as sector-specific regulatory framework, as well as overall investment policy and facilitation, competition policy, trade policy, and financial market policy (Ang, Röttgers and Burli, 2017[35]; OECD, 2015[36]; OECD, 2021[37]). Other factors play a role in determining a country’s ability to absorb and scale-up investment, such as the country's implementation and enforcement capacity, human capital, qualified workforce, the existing stock of economic infrastructure, and integration into global trade systems. Further, a functioning financial system plays a central role in facilitating the mobilisation, and effective allocation of and access to finance for investment (Levine, 1996[38]). Finally, there are cross-cutting enablers for investments: data and information; governance, public and private financial systems and processes; access to technology (OECD/The World Bank/UN Environment, 2018[39]; OECD, 2021[27]; OECD, 2019[40]).
The enabling environment and absorptive capacity of countries tend to advance with economic development and income levels. The data analysis presented earlier indicates that developed countries mainly mobilised private climate finance in countries with existing economic infrastructure and a degree of market maturity, which typically are MICs. Many of the underlying investment opportunities related to project finance involve private equity and debt mobilised through syndicated loans, guarantees and direct investments.
The modest mobilisation totals in the riskiest countries (Figure 16 above) may relate to the limited capacity for private sector development due to a high degree of political and macroeconomic uncertainties than the need for de-risking mechanisms at the level of individual investments. For example, only 15% of private climate finance mobilised for the riskiest countries (E-graded, using the Coface Business Climate Assessment) was mobilised through guarantees, a typical de-risking instrument.
On the other hand, as further discussed in the next section, developing countries with relatively well-functioning markets and regulatory frameworks can mobilise private finance without further international public climate finance being provided. Hence, within such frameworks, external public finance interventions may have limited additionality for climate projects in profitable sectors such as energy and industry in developing countries that may be financed entirely by private investors (see the right end of Figure 19 further down). As such where private financiers do not directly benefit from any kind of developed countries’ public finance intervention or leveraging mechanism, they are not considered mobilised by developed countries’ and thus, as already mentioned in the Context section of the report, fall out of the scope of the accounting framework of the present analysis.
Opportunities for increasing private finance mobilisation
Challenges to be overcome
Increasing private climate finance mobilisation has proved challenging. The 2022 OECD survey of providers gathered information on factors, which may affect their ability to mobilise private finance in developing countries, including for climate action. The two foremost challenges identified are high risks and relatively low investment returns, as well as a lack of investment opportunities and project pipeline development (Figure 18).
Figure 18. Main challenges identified by providers for scaling up private mobilisation
Source: 2022 OECD DAC Survey on Providers’ Portfolios.
Other challenges for public actors included a lack of internal incentives and expertise (for institutions not traditionally focused on the private sector), and growing competition among public actors. Limited local capacities in developing countries and compliance with local regulations were identified as additional barriers to private investors. Further, a lack of financial innovation was identified as a limiting factor for both the public provider and private sector sides.
Addressing the challenges faced by investors in developing countries and scaling up the volumes of mobilised private climate finance to close the climate finance gap will require, in the coming years, a more profound and radical shift of providers’ portfolios. Experience-sharing between providers could help drive behaviour change and contribute to strengthening institutions’ financial capacities and expertise (e.g. developing green bond ecosystems to attract private investors). More comprehensive reporting and disclosure on co-financing schemes involving private finance would not only greatly benefit peer learning but could also contribute to reducing the high-risk perception.
Tailoring the blending of public and private resources and instruments in different country, sector, and risk contexts
Figure 19 offers a stylised presentation of the differentiated blending of public and private finance in different contexts and development stages. Initially, public finance has a key role to play in supporting developing countries in enhancing enabling environments that are key for unlocking private mobilisation. This includes support for the development and implementation of mitigation and adaptation policies and actions needed to attract investment and finance. Over time, this can lead to a dynamic evolution, where private finance and investments can be catalysed in maturing markets without the need for continued use of public international finance, thereby allowing direct mobilisation by public finance to shift towards less advanced economies, more recent technologies, and investments requiring demonstration and de-risking in new markets (OECD, 2018[41]; OECD, 2018[42]).
Figure 19. Stylised representation of the blending of public and private finance in different contexts and development stages
Source: Adjusted from (OECD, 2018[41]).
However, evidence from the data analysed earlier shows that the financing mix for some large-scale projects and other investment opportunities remained largely dominated by public finance, leaving little space for private finance mobilisation. For example, although project finance equity comes usually from private sources, complementary debt financing often involved syndicated loans arranged and participated primarily by official development actors, such as the MDBs, bilateral DFIs and developing countries’ own national development banks, with private lenders playing a marginal role or being absent at all. Particularly in contexts conveying high risks, the availability of concessional finance may prove more of a priority than seeking private sector co-investment.
In this context, low-income countries, LDCs and SIDS would be situated further to the left in the representation of Figure 9, as they generally face more constraints to attract private finance and investment than higher-income level countries with relatively higher absorptive capacity and more conducive enabling environments. Given these constraints, successfully enhancing mobilisation, which would see them move towards the right, would be an important factor to enable enhanced climate action. To do so, however, they would require more basic capacity support involving more concessional international public finance for accelerating progress in that direction, notably by building capacities.
Capacity constraints are typically further exacerbated in countries such as SIDS, where small and often dispersed populations often translate into relatively low numbers of qualified staff working in key capacities, challenge governments’ ability to provide basic services and hamper the creation of sizable domestic markets and private sector (OECD, 2018[17]). Providers can support SIDs and LDCs to overcome the constraints they face. Not least, this can include support for access to public climate finance, for example by simplifying approval processes for access to finance of small and low-risk projects, or funding access to high-quality expertise that can assist countries in meeting the requirements needed for project proposals (Caldwell and Larsen, 2021[19]).
Ultimately, effective climate mitigation and adaptation action takes place in and is shaped by the socio-economic situation of each country. The scale and type of climate finance provided and mobilised differ depending on each developing country's characteristics. Enhancing the enabling environment for climate action and investment has two key dimensions: efforts to enhance the policy and regulatory environment, alongside building core capacities at the country level.
Notes
← 1. This project accounts for 46% of total private climate finance mobilisation for adaptation in 2020, and 25% of the 2016-20 total.
← 2. The survey was carried out in March-June 2022, administered by the Development Co-operation Directorate through the DAC Working Party on Development Finance Statistics (WP-STAT) in close collaboration with the OECD-led Research Collaborative on Tracking Finance for Climate Action. It was sent to 57 providers (30 bilateral providers and 27 multilateral institutions). Complete or partial responses were received from 21 and 16 bilateral and multilateral institutions respectively, including most of the providers mobilising large volumes of private finance. More details available at oe.cd/mobilisation.