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LEDS Finance Resource Guide – Creating an enabling environment for investment


Introduction

An enabling environment to attract investment is one which has appropriate policy conditions – including laws, targets, and regulations – and the institutional capacity to implement policy. It also has appropriate industry conditions, including engineering expertise and the presence of enabling infrastructure, and a stable financial sector with the capacity to support low carbon energy (text from WRI 2013 Mobilizing Climate Investment report below)

“The broad investment environment is [also] a key determinant of investors’ willingness to invest in developing countries. Factors such as the stability and transparency of the rule of law in a general sense, standards of corporate governance, import tariffs, restrictions on the repatriation of investment returns and the enforceability of contracts are every bit as important as a country’s climate change policy in shaping investors’ appetite to invest.” – Statement by the Institutional Investors Group on Climate Change (IIGCC), 2009

General resources

This section of the guide is not divided into subsections but instead a selection of resources is presented on the topic of enabling environments (also referred to as the ‘investment environment’ or ‘investment grade policy’). The first three are introductory resources that explore the importance of addressing the broader investment environment (alongside specific instruments designed to support investment, which are the focus of the ‘implementing effective financial instruments section’); then three more comprehensive resources are presented that look in more detail at what countries can do to put in place an ‘investment grade’ enabling environment. A specific resource is included on fossil fuel subsidy reform as for many countries subsidy reform will be a key part of developing a coherent investment environment for NDC and LEDS finance.

 

Key resources

Catalyzing Climate Finance: A Guidebook on Policy and Financing Options to Support Green, Low-Emission and Climate-Resilient Development (Section 2.1) (UNDP, 2011, 160 pgs (Section 2.1 = 3 pgs))

Section 2.1 of this useful general resource covering many aspects of financing LEDS (also included in the overall resources in the Introduction section) outlines some “Key Policies to Create an Enabling Environment for Climate Investing”, and provides a concise introduction to the importance of this aspect of attracting investment.

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Mobilizing Climate Investment: The Role of International Climate Finance in Creating Readiness for Scaled-up Low-carbon Energy (WRI, 2013, 68 pgs (Ch 2 = 4 pgs))

This report provides guidelines to help countries develop an effective enabling environment for climate investment. Based on in-depth analysis of existing “readiness” activities in six developing countries, it lays out an effective framework for stimulating investment in renewable energy and energy efficiency. The report outlines how government leadership and commitment to policy and institutional reform is essential to inspiring investor confidence. In Chapter 2, ‘Creating the conditions for investment’, the report gives detailed guidance on priority policy, institutional, industry, and financial sector conditions that can attract scaled-up investment. Six case studies are presented identifying key lessons learned: energy efficiency in India and Thailand; wind power in South Africa and Mexico; solar water heaters in Tunisia; and geothermal power in Indonesia.

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Unlocking Finance for Clean Energy: The Need for ‘Investment Grade’ Policy (Chatham House, 2009, 8 pgs)

This briefing paper looks at what policy needs to deliver to provide the conditions for scaled up investment in renewable energy, drawing on work with leading mainstream financiers. It covers some of the fundamental issues at the heart of investment decisions and the importance of policy design and clear evidence that governments are serious about their policy goals and achieving them. This paper contributed to a major body of work taken on by the Capital Markets Climate Initiative in the UK (CMCI, see following resource).

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Principles for Investment grade policy and projects (CMCI, 2012, 52 pgs)

This document sets out 5 operational principles for creation of an ‘investment grade’ policy environment, as developed by the Capital Markets Climate Initiative. These principles are aimed at policymakers from developed and developing countries, to help address the issue of how to use public policy and public sector capital to leverage private sector capital into investment in climate change. The purpose is to help policymakers assess and plan national policy that will lead to long term capital investment in climate change solutions. Chapter 3 sets out the 5 principles that cover dialogue, policy framework, price signals, economic drivers, and government programs. Annex 2 provides detailed case studies of experience of developed and developing countries in managing their investment environment. Annex 3 provides more detail on key aspects of the investment grade principles.

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Towards a green investment policy framework (OECD, 2012, 60pgs)
This report aims to advise governments on how to create and to improve domestic enabling conditions to shift and scale up private sector investments in green infrastructure, as part of their agenda to finance their transition to a low carbon, climate resilient economy. The target audience is national policymakers and their advisors in developed and developing countries, who are looking to increase private sector participation to finance a transition to low carbon and climate resilient development. Section III outlines 5 key elements of a policy framework to mobilize private sector investment: (1) goal-setting and aligning policy goals across and within levels of government; (2) reforming policies to enable investment and strengthen market incentives; and (3) establishing specific financial policies that provide transitional support for new green technologies; (4) harnessing and scaling up resources; (5) establishing practices that promote green business and consumer behavior, such as information and education policies.

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Aligning policies for a low carbon economy (OECD/IEA/ITF/NEA, 2015, 242 pgs)

This very detailed and comprehensive report presents a broad diagnosis of the coherence between overall policy and regulatory frameworks and climate goals. It identifies a number of opportunities for realigning policies to enable an efficient and cost-effective shift to a low carbon economy, across four policy domains (investment, taxation, innovation and skills, and trade) and three specific areas that are important for the low carbon transition (electricity, urban mobility, and rural land use). Chapter 2 (especially pgs 54-58) discuss the importance of the enabling environment and aligning investment policies with climate goals. Chapter 3 discusses taxation policies and subsidies and how they can undermine climate action. Available in French and German as well.

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Fossil fuel subsidy reform: from rhetoric to reality (ODI/New Climate Economy, 2015, 88 pgs)

In order to support governments and other stakeholders that are seeking to understand the potential for fossil fuel subsidy reform, or are planning to undertake or provide financial assistance for wider programs of energy subsidy reform, this report outlines: The current scope and scale of subsidies for fossil fuels; The economic, social and environmental costs of fossil fuel subsidies; Emerging evidence of the global benefits of reforming fossil fuel subsidies; Potential barriers to subsidy reform; Drivers and opportunities for reform; Key principles for national level reform; and Current opportunities to accelerate reforms on fossil fuel subsidies through international support. The report also contains 15 case studies of fossil fuel reform across developed and developing countries.

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This report is complemented by a regional report on sub-Saharan Africa (SSA) that provides more specific guidance on reform of fossil fuel subsidies that could apply to countries in that region.

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Country examples

Kenya’s National Climate Change Action Plan – An Investment Climate for Climate Investment (Govt of Kenya, 2012, 31 pgs)

The purpose of this section of Kenya’s National Climate Change Action Plan was to assess the broader enabling framework and environment for private sector low carbon investment in Kenya, so as to provide recommendations for improvement. It addresses the policy and regulatory environment for renewable energy and energy efficiency and the existence of government incentives and barriers in that environment. It analyzes the issue of how to access finance and the relevant barriers to this, and it looks at perceived and actual institutional strengths and weaknesses of businesses and financial institutions. Finally, it makes a series of recommendations for improvement, including on potential implementing agencies.

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Also see 6 case studies in WRI Mobilizing Climate Investment report (above): energy efficiency in India and Thailand, wind power in South Africa and Mexico, solar water heaters in Tunisia and geothermal power in Indonesia.

 

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