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Written by Julia Wdowin

Climate investment: How much do we (not) know?

No-one would question that when building a house you should know the grounds you are building on. However, with climate finance and investment, it seems we are trying to raise a skyscraper on a place we have hardly visited. By Michaela Valentova and Julia Wdowin.

Matthew Henry on Unsplash

The EU has set itself ambitious energy and climate targets to tackle the urgency connected with climate change. The European Commission estimated that to reach them, 180 billion euros of additional annual investment (both private and public) is needed. At the same time, the awareness surrounding the type and levels of investment among most of the EU Member States is, at best, scattered. In the draft National Energy and Climate Plans, only one Member State could provide any information at all on their current climate and energy investment – all the rest are in the dark.

In short, we know we need to raise a substantial amount of investment. At the same time, we still know surprisingly little about what is “going on” in the field:

  • To what extent does public money trigger private investment?
  • What is the institutional setting (who are the key players)?
  • What types of investment/end uses are financed?

In 2011, the Climate Policy Initiative started tracking global climate finance flows, picturing their whole life-cycle from sources, through intermediaries, financial instruments, to final uses. Shortly, similar reports followed in individual countries, such as Germany, France, and Belgium (and most recently in Czechia and Latvia). The landscape supports the understanding of who invests how much into what kind of measures. It can also help shed light onto the effectiveness of various policies; especially, whether they are effective in mobilising the desired investment. Both the methodology and availability of data have improved in the last decade. But together with irregular and unsystematic data collection and analysis, the climate finance landscapes are still left with many grey (to blank) areas.

1. Some fundamental data is not available

While there may be a good overview of the investment that is channelled through public institutions, the data on private investment flows is much more blurred and more difficult to grasp. One of the main reasons is confidentiality. However, more importantly, the private (financial) institutions do not even often know themselves. Many of them do not label and categorise many of their products in a way that shows the climate-specific actions. The (scattered) private initiatives, then, provide only limited access to information. These missing numbers hide an essential part of the story, as the private sector is the most important source and intermediary of climate and energy investment.

2. There is trouble with definitions and categories of climate investment

Generally, there are two types of investment: climate-specific (with climate change mitigation as the main target) and climate-related (with climate change mitigation as a secondary target). However, the line between is sometimes vague, for instance, a programme to exchange high-polluting boilers with a primary goal to reduce local pollution. In the case of climate-related investment, it is not clear which part of the investment is attributable to climate. An example would be investment in railways: the main aim is to provide transport services, but the trains are also climate-friendly.

3. The term climate investment (or green investment) is ambiguous

In some cases, the risk of “green” (or “climate”) washing is high. For instance, in the last couple of years, green (or climate) bonds have started to appear. They are issued typically to raise money for environmentally, and climate-friendly investments and have attracted more than 500bn USD so far. However, the connection to real climate-friendly measures and their impacts remains sometimes questionable, for the lack of transparency and adherence to (voluntary) standards.  

On the road to improvement …

Some improving developments are on the way, stemming both from private and public initiatives. The Task Force on Climate-related Financial Disclosures is an industry-led initiative with almost 600 supporting organisations, which has worked on recommendations allowing climate-related risks to be better evaluated. From the regulatory point of view, investors based in France are required to report on the climate impacts of their investments, which they are doing with different degrees of success since 2015. They have not been followed by any other EU country, yet.

The EU Technical Expert Group on Sustainable finance developed a classification system for sustainable activities, which sets criteria for actions that can make a substantial contribution to climate change mitigation and adaptation. The report marks a starting point for subsequent regulation. Standards for green bonds (and other instruments) have been developed and are continuously being improved, the same for instance, for green mortgages.

Next steps must combine coordinated international efforts on standardisation and national governmental pressure on the collection of data. For the EU, the European Commission should require that the Member States monitor climate investment, with a focus on the private sector. In-depth knowledge of these “grounds” will help us unlock the private investment needed to enable the climate and energy transition. There is a lot of work ahead, and the time to start has already passed.

  • About the author

    Julia Wdowin, Research Assistant

    Julia Wdowin is a Research Assistant at the Bennett Institute for Public Policy. She works with Professor Diane Coyle on the 'Well-being, progress and public policy' programme. Julia's research will look at how prosperity can be achieved with human, social and natural goods and how ...   Learn more

    Julia Wdowin