This report coordinated by the European Impact Investing Luxembourg (EIIL) explores the opportunities and challenges of tools and initiatives designed to attract private investment into climate finance and effective ways of linking the environmental impact with financial returns.
A common denominator of most climate finance projects is their innovative nature and therefore a relatively high financial risk, whether real or perceived. Embedding environmental (and social) impact requirements in individual financial instruments that are offered by public actors with the aim of attracting private investment into climate finance (e.g. risk mitigation tools), is likely to add to the level of complexity of the instruments, requiring additional due diligence efforts from investors.
It is therefore assumed that the emergence of common impact metrics and standards on how such impact objectives are integrated in the design of financial instruments would decrease the level of complexity, increase predictability and ultimately make investors less wary of the various risk components that may impact the financial return potential of their investment.
A systemic approach to the design of financial instruments in support of climate change objectives by development finance institutions and other public investors could enable the above-mentioned standard setting and facilitate market-acceptance. Development finance institutions can capitalize on their neutrality as an actor in the financial markets and build on their holistic understanding of market dynamics in various geographies for the design of a collaborative approach to climate finance.
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