Governments and international financial institutions can significantly accelerate the growth of climate-related private-equity (PE) investments in emerging markets by encouraging the formation of funds that specialise in such investments, according to a new report released by International Finance Company, a member of the World Bank Group, and one of the largest PE investors in India.
The report says that PE and venture-capital (VC) funds are suited to financing climate-friendly (sectors such as clean energy, climate efficiency and clean transport), investments because they tend to back risky or innovative projects, support early-stage companies, and help such companies improve their business and technical capacity. These funds are expected to provide only a small part of estimated $4.6 trillion in climate investment needed worldwide, but they can fill a key niche in emerging markets.
Climate-friendly investments by such funds totalled $20 billion a year in 2010, according to the report, but most of the investments were in developed countries. Less than 10 per cent of climate-friendly deals were in emerging markets, mostly in India and China.
IFC leads the table
“As a result, less than two per cent of PE/VC fund activity is spread out across all the emerging markets outside of India and China,” says the report on Public Privatequity Partnerships: Accelerating the Growth of Climate Related Private Equity Investment.
Since 1956, IFC has invested in 264 companies in India, providing over $7 billion in financing for its own account and $2.1 billion in mobilisation from external resources. Its portfolio of $3.6 billion (as of January) makes India IFC's largest country of operations.
There are both capital market and carbon market barriers that hinder the development of the PE/VC market for climate friendly investing in emerging markets.
New investment areas need new fund managers. However, putting together a new fund is risky, costly, and time-consuming. A few professionals with the right skills have the appetite to do it. Unfortunately, a shortage of good fund managers slows the rate at which the entire market can develop.
Most of the investment in emerging markets has been made by international firms investing from overseas. There are still a very limited number of locally developed climate friendly private equity funds in emerging markets, says the report.
Needs huge investment
Mitigating climate change requires vast investment. The World Bank estimates the volume of financing needed to meet the additional costs by the international community for climate change-related development between $180 billion and $250 billion a year. However, this sum represents only the additional or incremental costs.
It would need to leverage nearly 20 times that amount — or up to as much as $4.6 trillion — from underlying investment finance from other public or private sources, according to a report.