One of the biggest investor lobby groups against global warming, has called for governments and international finance organizations such as the World Bank to support investment funds with tax breaks and insurance guarantees in a bid to combine private institutional capital with public money in the fight against rising greenhouse gas emissions. The Institutional Investors Group on Climate Change (IIGCC), which has 52 members representing assets of around €4trillion, said support via export credit guarantees and political risk insurance – which already exist for carbon reducing project finance – could facilitate the establishment of large-scale infrastructure or private equity funds investing in climate change mitigation backed by large amounts of institutional money. The IIGCC said: “Crucially, support will need to be available to funds, not just individual projects. These packages should be available to groups of pension funds or other end-investors, or fund managers who structure funds and raise finance from end-investors. Many of these mechanisms are not new. They need to be coordinated and targeted to climate change.” The investor group said it would also welcome an international system toregister, oversee and review national climate change action plans and offer support and advice to developing countries on the design and implementation of effective policies. This, it said, would give investors greater confidence to invest in important climate mitigation projects in emerging markets where national policies were long-term and linked to international legal frameworks. Governmental and international groups are increasingly looking towards institutional investors as potential capital sources for funding long-term climate change reduction strategies. The European Commission’s January 2009 Communication planning for a climate change agreement in Copenhagen proposed a Global Climate Financing Mechanism financed by bond issuance. The UK’s Prince of Wales’ Rainforest Project has also proposed that the World Bank could issue government-backed bonds to finance forest conservation. However, the IIGCC said it was still not clear whether institutional investors could generate attractive investment returns by providing financing for the developing world’s “enormous need” for climate change adaptation, which it said would mostly have to be met by the public sector at the moment. It warned that
it would not be possible to raise significant sums from investors for so-called ‘climate bonds’ unless their risk-return characteristics are competitive with currently available market bonds. In addition, the IIGCC said climate bonds would have to demonstrate tangible climate benefits. Nonetheless, it said governments should look to the successful International Finance Facility for Immunisation, which had demonstrated that bonds designed for specific public policy purposes could be attractive to institutional investors if properly structured. In a separate paper, IIGCC has also called for the caps set on polluting companies within carbon emissions trading systems (ETS) to be tightened in order to raise prices and give investors what it called a “robust price signal”.It said ETS’s had to create scarcity and demand and lead a carbon price that would incentivise investment in low carbon solutions: “Long-term policy clarity is essential to reduce much of price volatility that undermines investor confidence in carbon markets. Timeframes have to be consistent with the investment cycles of the sectors covered by the schemes. We encourage governments to learn from the experience of the EU ETS and the problems faced by long-term investors as a result of excessive volatility and uncertainty.” Relatively few institutional investors have to date made investments in carbon markets, citing many of the issues raised by the IIGCC.