Mobilising private capital to combat climate change

Substantial volumes of funding are needed to combat climate change around the world, and private finance is crucial to supplying them. Financial institutions have a central role to play as intermediaries. However, there are obstacles to large-scale private investment in areas where much of the funding is required. The Swiss Bankers Association (SBA) has published a discussion paper examining this issue and addressing the need to mobilise private capital. It highlights the potential contribution of financing mechanisms that create an investment cycle by combining private and, most often, public funding.

Climate change is a global social and economic challenge. Funding is essential to counter it and meet the goals set out in the Paris Agreement. The Standing Committee on Finance of the United Nations Framework Convention on Climate Change (UNFCCC) estimates that the transition to an emissions-free and resilient economy by 2050 will require annual investment of USD 1.6 to 3.7 trillion globally. Sums of that magnitude cannot be raised by governments alone, and the private sector will therefore need to step up. Emerging market and developing economies, however, face challenges in mobilising private finance for their projects. The reasons for the financing gap are many and varied, but most have to do with risk considerations.  

So what will it take to get the available finance flowing towards the right recipients, and the projects best suited to combating climate change? The SBA tackles this question in its discussion paper “Climate finance – mobilising private capital via blended finance”, and identifies a promising solution in a combination of public and private funding. This approach involves dividing investment products up into tranches with differing risk/return profiles. Typically, public or philanthropic capital bears the higher risks, activating private funds by means of a leverage effect. This lowers the barriers for available investments and mobilises the finance that is needed.  

Future-oriented instruments of this kind are already in existence and being used – albeit not in sufficient quantity to close the financing gap when it comes to combating climate change. A dialogue between private and state actors both nationally and internationally, together with a review of the existing frame-works, will be key to expansion and scaling up in this area, to reduce obstacles and risks and capture opportunities going forward.

Sustainable finance

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Hans-Ruedi Mosberger
Head of Sustainable Finance
+41 58 330 62 61

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