Selecting effective financial instruments to support action on climate change
This low emission development strategies (LEDS) Finance Resource Guide presents a curated selection of resources on a range of topics around finance for LEDS and Nationally Determined Contributions (NDCs). It is designed to help LEDS practitioners find high-quality resources that meet their specific needs, avoiding time-consuming searches on the internet. It will be useful to individuals working on, or interested in, LEDS and NDC finance in both developed and developing countries.
- 1. Understanding the situation
- 1.1 Understanding current flows
- 1.2 Assessing financing needs
- 1.3 Assessing capacity
- 1.4 Identifying and overcoming barriers
- 2. Planning and coordinating
- 2.1 Institutions and governance
- 2.2 National finance strategies
- 2.3 Investment plans
- 2.4 National climate funds
- 2.5 Green investment banks
- 4. Using public finance
- 4.1 Managing national finance
- 4.2 International climate finance
- 4.3 Climate finance readiness
- 4.4 The Green Climate Fund
- 4.5 Direct access
- 5. Designing financial instruments
- 5.1 General resources
- 5.2 Sources of private finance
- 5.3 Risk mitigation
- 5.4 Guarantees
- 5.5 Feed-in tariffs and auctions
- 5.6 Taxes and tax incentives
- 5.7 Carbon pricing
5.2 Sources of private finance
Across debt and equity there is a diverse ecosystem of sources of capital for financing renewable energy and other low carbon options. This includes investors from across the finance sector with different appetites for risk and different return expectations. Policymakers looking to increase the levels of green investment in their country and to finance their NDCs should have a good understanding of the sources of capital available, and which are most appropriate for different project types. These resources provide an introduction to different types of finance and to which might be most appropriate for particular investment opportunities, based on their characteristics. (Adapted from Finance guide for policy-makers: Renewable energy, green infrastructure, BNEF/Chatham House/FS-UNEP, 2016.)
Climate Policy Initiative’s Gobal Landscape of Climate Finance publications track global flows of climate finance. In addition to commentary about the nature of recent flows, the summary graphic presented in Annex B of this update report clearly shows relative size of the main types of finance (balance sheet financing, market rate debt, low cost project debt, equity) that make up climate finance flows in recent years, as well as what kinds of institutions these flows come from.
This guide provides an introductory and factual overview of the landscape of finance as it relates to renewable energy and green infrastructure investment (including energy efficiency), and outlines how transactions work. Section 1, on finance basics and sources of capital, introduces the different financial institutions (banks, institutional investors, different types of funds, impact investors), explains the roles of the debt and equity markets, and introduces the concepts of yieldcos and green bonds. A brief exploration of cost of capital is provided in Section 1.4. Section 2.4, on completing a transaction, shows how the types of finance are brought together to finance individual projects.
Part B of this report highlights the fact that the effective design and implementation of public interventions needs to be guided by a more nuanced understanding of current barriers to the flows of private finance in developing countries. These barriers, in turn, depend on the type of private finance required, as well as the location of the activity. The report considers three case studies (grid scale renewables; energy efficiency; climate resilient infrastructure) and for each one identifies the major barriers that currently prevent private capital from flowing into these project types, and what interventions can overcome them.
Catalyzing climate finance: A guidebook on policy and financing options to support green, low-emission and climate-resilient development
This is a useful general resource covering many aspects of financing LEDS, and is relevant across several of the sections covered by this guide. The principal audience for this publication is public development practitioners at national and subnational levels, as well as domestic and international experts involved in assisting governments in catalyzing finance for climate investment and sustainable development. The guide outlines a four-step methodology to assist developing countries in selecting and deploying an optimal mix of public policies and financing instruments to catalyze climate finance in line with national development priorities:
- Step 1: Identify priority mitigation and adaptation technologies
- Step 2: Define and assess key barriers to technology diffusion
- Step 3: Determine appropriate policy mix to catalyze climate capital
- Step 4: Select financing options to create an enabling policy environment
Other UNEP Inquiry country papers are available via this webpage, including those for Bangladesh, Colombia, Indonesia, and South Africa.
This report explores Kenya’s financial system from a green investment perspective. It focuses on policy, structural, and investment innovations across the economy and financial sector that would increase capital flows that support sustainable development. Chapter 3 describes the different sources of capital in the Kenyan financial sector, covering the banking sector, retirement/pension funds, insurance funds, capital markets, private equity, savings and credit cooperatives, and foreign direct investment. For each source covered, the chapter explores market composition, policy and regulation, and barriers and potential solutions relating to green investment.