Early stages of green innovation, as well as investments in green infrastructure or renewable energy in fragile economic environments, encounter problems in attracting sufficient private capital to fund climate-progressive projects, as risks are perceived as too high. Policy responses could include public investments as well as risk-sharing instruments, for example, some form of investment guarantees.
The Climate Governance Commission and the Council on Energy, Environment and Water propose the establishment of a Global Clean Investment Risk Mitigation Mechanism (GCI-RMM) to unlock capital for investments in fossil fuel-free pathways to development in countries with fragile economies – investments that are often seen as too risky by many investors.
The GCI-RMM would facilitate access to non-project risk management tools and reduce transaction costs. It would work with financial institutions to optimise currently available derisking products. The GCI-RMM intervention could increase overall volumes in risk markets, thereby increasing liquidity and giving insurance providers the option of more diversified portfolios to reduce de-risking costs. Higher volumes could also trigger learning effects and promote future innovation.
Designed originally as a consortium of institutions, the GCI-RMM would need a digital platform as a marketplace to connect financiers, insurers and project developers, a common guarantee to absorb residual risks, and a common regulatory and contractual framework.
The GCI-RMM would be funded through international public money. But the amount required from public funds to mitigate risks would be lower than relying on limited public funds to finance clean energy and climate-related infrastructure when adequate private capital is missing. Its potential could be to leverage public money up to 30 times in the form of private capital.