Adapting to climate change and reducing greenhouse gas

Environment and Climate Change GIZ DISCUSSION PAPER Tackling climate change at scale MOBILISING PRIVATE SECTOR INVESTMENTS through technical assistance GIZ s experiences and lessons learned Adapting to climate change and reducing greenhouse gas emissions on a large scale entails mobilising significant financial resources. Public financial resources alone are insufficient to finance the mitigation of GHG emissions and adaptation to climate change to the extent needed. As such, an effective response to climate change requires the engagement of: a) the private sector, in the form of businesses, through investments in low-carbon and climate-resilient technologies, infrastructure, products and services, and b) the private financial sector through the provision of capital and adequate investment products. However, private investment in mitigation and adaptation measures in developing countries is currently lagging behind what is needed. For over 40 years, the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH has worked in numerous developing countries on private sector development, including work with a focus on catalysing private investment in environmental protection, and in climate change mitigation and adaptation. This discussion paper summarises key lessons learned from this work. Enabling environments for leveraging private sector investment PHOTO: VISUM Over the past few years, an extensive body of conceptual work, together with case-study analyses by a wide range of different institutions 1, have identified key investment barriers as well as the required enabling conditions including policy and financial instruments to overcome these barriers and attract private investment in mitigation and adaptation activities in developing and emerging economies. Although the specific findings gleaned from this existing body of literature vary somewhat depending > 1 Such as IFC, OECD, WEF, UNEP, UNDP, CMCI, WRI, CPI, GIZ among others

on the geographical and technological areas of focus, there is broad consensus on key enabling conditions and related support needs. The experience gained in programmes implemented by GIZ confirms the validity of the general enabling conditions and support needs identified in the literature. More specifically, in our programmes we have come to the following conclusions: We believe that a coordinated approach at all levels of the economy is a key success factor. The private sector can contribute both to climate change and to effective mitigation and adaptation measures. In this context, one of the major challenges relates to changing political and macroeconomic framework conditions in a way that leads to a shift of traditional investment patterns into low-carbon, climate-resilient alternatives. Certain characteristics are specific to climate change-related investments, such as the fact that mitigation and adaptation benefits are frequently long-term and are not valued in today s markets. However, we have seen that, by nature, successful approaches to incentivise private sector investments in climate change-related areas are mostly not fundamentally different from the initiatives designed to enable private sector engagement that have traditionally been undertaken in the context of sectoral development strategies and industrial policy. At the same time, in some sectors, such as the forest sector, opportunities for private sector investment have increased significantly with the increased awareness of climate change and new international public funding mechanisms such as REDD. For the private sector to invest in activities related to climate change mitigation and adaptation, these activities need to offer genuine business opportunities. If there are no profits to be made, or losses to be avoided and costs to be saved, private sector engagement will remain a niche market dependent upon public support. The private sector plays a key role in implementing a majority of climate change mitigation activities. However, when it comes to adaptation, the role for private sector engagement is sometimes > Innovative insurance products for adaptation to climate change In cooperation with national governments and the insurance industry, GIZ has supported the development of innovative insurance products for adaptation to climate change in China, Peru, Ghana and Kenya. In the Chinese province of Fuijan, an insurance product against typhoon damage was developed together with China Life, the largest Chinese insurance company. In three provinces in northeastern China, the foundations for developing weather insurance have been laid. In Peru, indexbased insurance schemes against climate risks have been introduced in the regions along the coast which are particularly affected by the extreme climate phenomenon El Niño. In Ghana, cooperation between Ghanaian insurance companies and an international reinsurer has been initiated to enable the insurers to minimise their aggregate risk. Based on these experiences, the Agricultural & Climate Risk Insurance Unit (ACRI) of GIZ has identified key success factors for the development of sustainable agricultural and climate risk insurance solutions. 2 These include the need for innovation in the use of technology to be able to serve low-income clients in developing and emerging market economies and the need to develop new insurance schemes with a view towards fast scale-up in order to achieve the required risk diversification. GIZ s Ready for Climate Finance Approach The Ready for Climate Finance approach is the conceptual base of GIZ s support in the field of climate finance. It consists of the following five modules which address key areas dealing with climate finance. Depending on the context and the request of the respective partner country, GIZ s support may focus on individual modules or provide tangible support in all areas. For more information see: www.giz.de/fachexpertise/ downloads/factsheet_ready_for_climate_finance_-_ GIZ_s_Approach_to_Making_Climate_Finance_Work.pdf 5 Promoting private sector engagement 4 Effective and transparent spending and implementation 1 Strategic planning and developing policies 2 Strengthening institutions and good financial governance 3 Accessing international climate finance 2 Success Factors For the Development of Sustainable Agricultural and Climate Risk Insurance Solutions, GIZ, 2013 2

less obvious given that many large-scale adaptation-related investments (e.g. in infrastructure) are generally considered to fall under the remit of public services. We have seen, though, that companies do invest in adaptation measures as part of their risk management activities. Others are starting to consider new business opportunities related to climate change adaptation by offering new products and services, e.g. innovative insurance solutions, to households and other companies. With respect to public investment in infrastructure projects for adaptation, it is worth exploring whether these investments can generate cash flow or other value, e.g. through increases in land prices that can be used as a basis for private sector engagement. In our experience, the key financial barriers that prevent climate change mitigation and adaptation-related investments from being profitable include: the higher costs of low-carbon or climate-resilient technologies and services compared to traditional alternatives; the existence of (fossil) fuel and electricity subsidies in the case of energy-related activities; the lack of access to capital to cover the high up-front costs of low-carbon or climate-resilient investments; high (perceived) risks both in the business sector and in banks; the lack of appropriate financial products and services to meet the diverse requirements of investors and enterprises In many countries in which we work, the key non-financial barriers include: the lack of adequate and reliable regulations and standards for the implementation of low-carbon and climate-resilient solutions; the operational risks of new technologies; the private sector s lack of technical capacity and awareness of the opportunities and risks related to climate change impacts and low-carbon development; the lack of technical expertise in financial institutions to assess the risks associated with new technologies; and the lack of understanding between public and private sector actors about their respective needs. In addition, the general investment climate and business environment play an important role in enabling or hindering largescale private investment in climate change-related activities in some developing countries. Relevant factors include political and regulatory risks, opportunities for long-term (re)financing, and for foreign investments the ability to hedge exchange rate risks. These kinds of general issues cannot be addressed by international climate change support programmes alone; rather, they need to be part of broader national development strategies and related measures. In addition, in many developing countries, a considerable proportion of private sector activities are carried out by a large in- formal sector that operates without direct regulation by government. In addition, the individuals or small companies that form part of that informal sector often lack access to capital and other formal financial services and are difficult to reach with capacity-building measures. Thus, we have seen that a > Example: Kick-starting new products and business services for corporate climate change adaptation and energy efficiency measures in India Micro, small and medium-sized enterprises (MSMEs) are the driving force behind the Indian economy. However, there is little awareness among MSMEs about how climate change might negatively affect their business operations and how they can reduce fossil fuel energy consumption, thereby saving costs as well as mitigating GHG emissions. To support more sustainable business practices, GIZ India is promoting both adaptation and energy efficiency (EE) measures among MSMEs. GIZ has supported the Small Industries Development Bank of India (SIDBI) in implementing a new pilot initiative to promote a market for business services in the area of corporate climate change adaptation (CCA). The initiative succeeded in kick-starting the development of new CCA service offers by a range of business service providers. In terms of demand, 40 companies in the textile and garment sector have identified climate changerelated risks to their operations and identified new business opportunities based on the new e-learning tool (see www.climate-expert.in). The market for EE products and related services such as energy audits is already much more advanced than the CCA business services market. However, there is still a lack of high-quality services relating to the selection and implementation of technical measures, and for reasonable credit products to refinance corporate up-front investments. GIZ India is facilitating dialogue between corporate customers, technology and service providers, and banks to create transparency regarding specific needs and available business solutions. GIZ has also worked with the State Bank of India to develop a new credit product to refinance EE measures. In 2011, these experiences prompted GIZ to sponsor the establishment of the Responsible Investment Research Association (RIRA), an industry and advocacy body to encourage financial sector institutions to consider the climate impact of their investment and lending decisions. 3

formalisation of the sector is often a prerequisite for investment in low-carbon or climate-resilient technologies. At the same time, GIZ has a long track record of directly working with the informal sector in the areas of business promotion and financial inclusion. Lessons learned from GIZ s experience We have identified some key lessons learned while designing and implementing technical assistance to create enabling conditions for greater private sector investment in low-carbon and climateresilient development: Always consider the sector - It is crucial that technical assistance to improve enabling conditions for private climate investments is not separated from ongoing general developments in the sector, related national priorities and needs and other (non-climate-related) donor programmes. For instance, support for private sector investment in renewable energy needs to be planned in the context of the overall national energy development strategy and the existing regulatory framework, etc. Focus on credible business scenarios - It is key to focus technical assistance for promoting private investment in mitigation and adaptation to climate change on cases where there is a credible scenario for creating business opportunities. Decades of development assistance for creating regulatory frameworks, efficient institutions, functioning markets and access to sustainable financial services have shown the complexity of improving the business environment for private enterprises. Limited international climate funds for catalysing low-carbon and climate-resilient investments should thus preferably focus on products and services that can soon become cost-competitive on their own (or, in the case of the provision of some public services, where there is a credible national or international commitment to continuing public sector support). Long-term assistance pays off - In our work we have seen that technical assistance has proven to be most successful when provided in physical proximity to the partner and over a longer period of time. Improving enabling conditions for low-carbon and adaptation investments requires patience and persistence. GIZ s experience has shown that technical assistance often has the greatest impact when international support is provided continuously over an extended time frame (three to five - sometimes up to ten years). Additionally, it has been proven most effective where expert advisors are integrated into partner institutions, assisting their counterparts with sufficient flexibility and establishing the required trust with key actors. Get the right private actors on board early - We have seen that involving relevant private sector stakeholders in the climate change policy development process at an early stage facilitates the subsequent private sector investment into climate change mitigation and adaptation measures. In many cases, technical assistance can provide added value by taking on the role of an intermediary between the public and private sectors, helping those involved to understand each other s specific needs. In addition, effective market development requires the involvement of a range of market actors, including private sector actors from both demand and supply sides and the financial sector, as well as end customers. New business opportunities are best promoted when all relevant market actors are engaged in parallel. Promote alliances for change - There is often a lack of formal or informal cooperation between companies within a sector or > Example: Promotion of renewable energies and energy efficiency in Tunisia Tunisia s economy experienced moderate but sustained growth in the first decade of the 21st century. In combination with its heavy dependence on fossil fuels this led to an increase in GHG emissions. To tackle this development, GIZ worked with Tunisia s Ministry of Industry and National Agency for Energy Conservation (ANME) from 2003 to 2013 to promote renewable energy (RE) and energy efficiency (EE). Support initially focused on developing ANME s personnel and technical capacities, and improving agency services. In a second phase, GIZ assisted the government with revising national energy regulations to promote EE measures and to enable Tunisian households and private companies to produce electricity from renewable energy sources for their own consumption and feed any surplus into the national grid. The improved regulatory framework together with various new public assistance programmes substantially boosted domestic and corporate investment in solar thermal and photovoltaic systems and drove forward the implementation of EE measures. To support wind power in Tunisia, the project also implemented a wind measurement campaign to identify suitable sites for wind power plants. In its third phase, the project directly targeted the nascent Tunisian RE and EE market by providing technical information and advice to energy consumers and Tunisian companies to improve the demand for and quality of their products and services. As a result, the total number of Tunisian RE and EE businesses has increased from 53 in 2004 to 357 in 2013; more than 3,500 new jobs have been created. Over the course of the GIZ project, the Tunisian government realised fossil energy savings totaling over 4,400 kilotons of oil equivalents (see www.giz.de/en/ worldwide/19474.html). 4

across sectors, which hinders the development of business opportunities related to climate change mitigation or adaptation measures. Technical assistance can play an important role in facilitating knowledge exchange on low-carbon and climate-resilient technologies and business opportunities within and across business sectors and foster cooperation between early movers to advocate common interests. Ultimately, private sector players can then become a key driver for political change on low-carbon, climate-resilient development, e.g. by lobbying governments to support clean technologies. Example: Facilitating private sector investment in low-carbon, climate-resilient infrastructure in Asian cities Work directly with the private sector - GIZ s experiences have also shown that technical assistance can mobilise private investments most effectively when international support also directly addresses companies alongside public stakeholders. International support should seek to raise awareness among private businesses about how proposed policy changes and/or new technologies can provide new business opportunities, save costs, and increase profits and competitiveness. In this context, it has proven successful to work with business associations and trade organisations to increase the scale of the impact. International support can also provide technical capacity building directly to companies. When working with small and medium sized entreprises in this respect, focusing on opportunities with short payback periods is key. p The Cities Development Initiative for Asia (CDIA) is jointly implemented by the Asian Development Bank (ADB), GIZ and KfW, and is supported by ADB and the governments of Germany, Sweden, France and China. It aims to enhance the institutional capacity of medium-sized cities to prepare and finance sustainable urban infrastructure investment projects with development impacts related to environmental improvement, climate change mitigation/ adaptation, pro-poor development and good governance. During the first five years of the programme, 44 prefeasibility studies were completed in 28 Asian cities and 21 projects have been financed. With Asia s rapid urbanisation, there is a growing demand for private sector participation in infrastructure financing. CDIA is therefore helping more cities to approach the private sector for urban infrastructure financing, both through developing Public-Private Partnerships so that the cities can access private equity investments and by facilitating commercial private funding through local financial institutions. In this context, CDIA also works with cities to understand how the private sector can realistically support projects, and create adequate local legal frameworks for private sector involvement in infrastructure investments. Examples of infrastructure projects where CDIA input has helped secure private sector finance and which have mitigation co-benefits include public transport projects in Guiyang, China and Palembang, Indonesia. In collaboration with municipal governments, CDIA is also exploring options for private sector financing for adaptation measures, such as seawalls and improved flood management, by taking advantage of increases in land values and property development opportunities. Acknowledgement This paper was written and edited by Laura Würtenberger and Frederic Wils of the GIZ Climate Change Competence Centre in close collaboration with the Economic Development and Employment division at GIZ Head Office, based on a review of project documents and interviews with project managers and implementers. We would like to acknowledge the valuable insights and comments of Roland Gross, Fabian Barsky and Götz von Stumpfeldt at the Economic Development and Employment division and of various colleagues involved in GIZ projects in Mexico, the Philippines, Indonesia, Tunisia, India, South Africa and other developing countries. 5

Environment and Climate Change GIZ DISCUSSION PAPER Catalysing private climate investments GIZ s services GIZ offers expertise and advisory services to develop the capacities of individuals, organisations and societal systems. GIZ offers long-term capacity development services that are tailored to meet its partners individual needs in building strong institutional foundations. With a mandate to support sustainable development worldwide, GIZ currently operates in more than 130 countries. To assist developing countries in mobilising private sector investments in low-carbon and climate-resilient measures, GIZ works with government agencies, financial institutions and private sector representatives in four broad areas depending on the specific needs and interests of the partners. Supporting governments GIZ assists governments in improving the overall investment climate for private business, as well as in creating specific incentives for private sector investment in climate change mitigation and adaptation. This includes developing and implementing environmental regulations and market-based instruments like carbon markets or taxes and green financial sector policies, and assisting central banks and supervisory/regulatory authorities in designing, implementing and monitoring (green) financial sector regulations like, for instance, modified green credit policies or reporting standards. In addition, GIZ supports sector ministries and agencies at the national and subnational level to develop and implement concrete incentive schemes such as feed-in tariffs and to develop low-carbon and climate-resilient infrastructure projects. Supporting public-private dialogue GIZ also facilitates public-private dialogue on climate change-related issues, such as: sustainable business models; the role of institutional investors, project developers and policy makers; and, private sector priorities and needs in the context of developing climate change-related policies and plans. In this context, we often take on the role of an intermediary between government and the private sector. Supporting financial institutions GIZ supports capacity development in financial institutions and the development of specific financial products to promote low-carbon and climate-resilient development for low-income households or SMEs which are investing into renewable energy or energy efficiency technologies. Also, GIZ s works with financial institutions to develop particular instruments to mitigate risks such as partial guarantees, upfront grants, climate risk insurance products etc. Supporting business associations and private sector enterprises Working with business associations and private sector enterprises including SMEs, GIZ also provides technical and managerial capacity development and supports the development of low-carbon and adaptation-relevant products and services through the development of sustainable value chains, market analyses, technical and economic (pre-) feasibility studies and environmental and social impact assessments. Through business support programmes, such as the German developpp.de programme, GIZ assists individual, international companies to enter developing-country markets and provide local employment opportunities. Imprint Published by Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH Registered offices Bonn and Eschborn, Germany Dag-Hammarskjöld-Weg 1-5, 5760 Eschborn, Germany Phone: +49 61 96 79-0 Fax: +49 61 96 79-11 15 Internet: www.giz.de Email: climate@giz.de Authors: Laura Würtenberger and Frederic Wils As at: February 2014