Public-Private Finance Schemes are Markers to De-Risking Green Finance

Greening the economy involves improving the quality of our environment and tackling climate change, which is a major economic and financial challenge. It is largely dependent on government funding, which has created a gap between funding requirements. Private finance is needed to close this financing gap to fund low-carbon investments.

According to the Intergovernmental Panel on Climate Change (IPCC), all segments of society will be required to contribute around $90 trillion over the next 15 years. The success of green finance projects will be heavily reliant on governments, which are responsible for providing a consistent taxonomy and a simple framework to avoid the misuse of capital. ‘De-risking’ of specific projects is vital to attracting private funds, particularly those where returns are expected over a longer timeframe, such as city infrastructure projects that are required to underpin the sustainability transition.

NextGenerationEU (NGEU) and Recovery and Resilience Facility (RRF)

The EU, as an example, has developed its NextGenerationEU (NGEU) and Recovery and Resilience Facility (RRF), which are designed to stimulate a sustainable recovery across the bloc.

The NGEU aims at mobilizing around 800 billion euros of funding in the form of grants and loans for the project’s core objective:

To assist green transition

• Modernize the European economy

• No net emissions of greenhouse gases by 2050

The RRF is the largest component of NGEU that aims to fund the following areas:

• Power up (clean technologies and renewables)

• Renovate (energy efficiency of buildings)

• Connect (roll-out of rapid broadband services)

• Modernize (digitalization of public administration)

• Scale-up (data cloud capacities and sustainable processors)

• Reskill and upskill (education and training to support digital skills)

As can be seen, the RRF supports two growth ambitions within the EU - climate neutrality and digital transition. An advantage of this classification is that the overlaps between these seven items are small and each spend can be placed under a single category. While the disadvantage is that it does not include all green and digital goals.

This has led many countries and cities to create their environmental resiliency plans. Each region has its own aims, policies, public funding, and private investment plans. Good resilience planning accounts for chronic events such as?rising sea levels, worsening air quality, and population?migration.

The overarching aim of climate resiliency plans is to stimulate growth and de-risk private investments. This can be achieved with the help of banking institutions as they fund projects through tax incentive schemes, direct grants, and subsidized loans. This allows them to construct matrices that map out the correlation between ‘brown to green’ transition pathways. With this, banks will be able to clearly calculate the risk capital, which is then translated into low-interest rates.

With GreenCap’s ‘Risk as a Service (RaaS), banks can build climate pathway-specific risk analysis for their current and future balance sheets. It is designed to work as a calculator assisting risk management and specific green finance pricing.