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Climate finance

European Impact Investing Luxembourg has taken stock of what Luxembourg’s fund sector is already doing to mobilize financing for climate change mitigation and adaptation. 

The momentum created by the historic adoption of the new Sustainable Development Agenda alongside the adoption of the Paris Agreement by the Conference of the Parties (COP) to the UN Framework Convention on Climate Change (UNFCCC) has generated considerable attention to the need for collective action and innovative climate finance initiatives. To finance the transition to a low-carbon economy and to mount a successful response to climate change, the world needs $1 trillion worth of investment a year to 2050 according to the International Energy Agency, a significant increase from the global climate-related finance flows of USD 390 billion in 2014 as estimated by the Climate Policy Initiative. The increased flow will need to be more or less financed by private sector investors, and the role of the public sector is to stimulate the flow through sound policymaking and smart use and leverage of public financial resources.

Public actors are increasingly recognizing the benefits of climate action and innovative climate finance for achieving their goals for the benefit of their national economic interest. While the discussion following the COP21 in Paris has been very much focused on the need to increase investment volumes, ensuring that the additional volume of investment is effectively delivering the desired environmental (and social) impact should be paramount when using public resource.

The main challenges associated with climate finance are:

  • The innovative nature of financial instruments directed at climate change which makes institutional investor wary of the risk/return profile of such investments
  • Embedding environmental (and social) impact requirements in financial instruments that are offered by public actors with the aim of attracting private investments into climate finance (e.g. risk mitigation tools), is likely to add to the level of fragmentation and complexity of the initiatives.
  • Lack of standardised impact metrics making the assessment of impact targets and realisations complex for investors and other stakeholders in the value chain of climate finance initiatives.

The EIIL has published two papers regarding this topic :

  • " What can Luxembourg contribute to the financing of climate change adaptation and mitigation?" - European Impact Investing Luxembourg has taken stock of what Luxembourg’s fund sector is already doing to mobilize financing for climate change mitigation and adaptation. Innovative capital structuring allow the Luxembourg based funds to be an effective tool to combine private and public financing to leverage public money for financially sustainable climate investments. With a track record of more than 10 years, the structured funds in Luxembourg have grown in numbers, size and impact focus areas, including climate finance. The EIIL paper presents 7 of those funds and their characteristics.
  • "How can we ensure that climate finance initiatives are delivering the desired environmental impact?" - Exploring 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. 

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