Fast-tracking Green Public Financial Institutions

A solution for both developed and developing countries

modern office building with green leaves
modern office building with green leaves

Countries, both developed and developing, are at a critical moment. The decisions they make today are going to have a long-lasting impact and their economies for years to come, as the stimulus packages being prepared in response to the COVID-19 health crisis include massive investment in infrastructure.

Developed and developing countries have goals in common, including ensuring a rapid and smooth transition to cleaner and more resilient infrastructure, and ensuring inclusive economic growth in an uncertain environment.

To achieve these goals, they will need to strengthen the underlying institutional landscape and restore private sector confidence.

Dedicated mission-driven Green Public Finance Institutions (GPFIs) such as Green Investment Banks, are one way to do this whilst also channelling investment to national priorities that need more investment in expectation of a net-zero and climate-changed world.

Government intervention, in the form of the creation of GPFIs, is needed because the private sector is rather conservative when it comes to financing emerging infrastructure technologies. This problem is especially acute in developing economies where political risks are overestimated.

Conventional textbook solutions may not work to address the barriers and market failures involved. For example, boosting investments by increasing rewards is a costly way of dealing with risk and market failure, and setting an economy-wide carbon price may prove insufficient to drive investments into technologies which face specific barriers.

Permanent, mission-driven institutions can act as market-makers, breaking down the structural barriers which are suppressing the green investment and job creation which are required to rebuild national economies.  

The success of a GPFI will depend on how well it is designed, and on its ability to evolve and adapt to new challenges emerging from the climate transition. To deliver ambitious institutions it will be key that policymakers avoid template-driven solutions and embrace process-driven solutions. In fact, a key learning from E3G’s experience is that successful institutional design begins with an assessment what is required to solve the problems faced, rather than what is achievable within the existing institutional and funding landscape.

Trying to replicate existing GPFIs in new geographies will not solve the recurring questions which come from policymakers and wider society in relation to new institutions; Do we need to create a new GPFI rather than adjusting our current institutional architecture? Who will run it? What should its focus be? How will it fit within the wider landscape?

E3G explores how to design a green bank in this 90 second video.

E3G’s research on GPFI design suggests that the answers to these questions are determined and defined by policy and institutional, sector, technology, and market specific factors; therefore, an institution’s impact depends on how it fits inside its broader national context. By going through an iterative process of designing a GPFI, policymakers can ensure that the decisions taken at each step will ultimately shape the institution to fit the local context.

The questions involved in establishing a GPFI and the route to answering them are common across jurisdictions, regardless of the institutional backdrop or a country’s level of development.

What is more, setting up ambitious institutions does not have to be complex or cumbersome. E3G has used the learnings from its experience in advising key policymakers on the design green public financial institutions across different jurisdictions, in the UK, South Africa, Colombia and Mexico to create a question framework that can ensure that ambition is locked into the shape and functions of a new GPFI. E3G’s framework maps out the iterative process required to set up an ambitious Green Public Financial Institution. Each iteration of the process offers the opportunity to ensure that the institution is better matched to the local circumstances.

Learn more about the process of desinging a green banks and financial hubs here.

E3G’s experience has shown that the process of building mission driven GPFIs can be categorised into five phases. In each of the phases we break the process down into the what, the who and the why:

>  What the key decisions are and how they are reached –  Decision Making Process.

>  Who are the key actors and organisations to engage with that will inform the decision-making process and will be making these decisions – Stakeholder Engagement

>  Why are these policy decisions being made, what analysis is needed to develop the options which in turn informs the ultimate decision – Analytical Support, Standards and Frameworks.

This process can serve as a decision-making tool to support policy makers.

It highlights that each step taken to create a Green Public Financial Institution is similar regardless of the jurisdiction and the decisions taken at each step will shape the institution to match the local context. This process can help fast-track the design of institutions as more economies embark on the journey of deep decarbonisation and increasing resilience of their economies. An agile market-maker will be needed to match finance with projects by providing a sophisticated understanding of risks and returns of emerging technology whilst ensuring equitable social outcomes.

Recently, E3G has used this framework to advise on the design of the London Future Finance Facility. This new institutional concept builds on established models but addresses London’s goals by uniquely combining innovation with market-making, reflecting local needs and the local institutional landscape whilst putting the social agenda at the heart of the institution. E3G is also using its framework to advise European Investment Bank (EIB) and its shareholders on its transition to become a Climate Bank in order to fulfil the EU’s investment needs set on ambitious EU Green Deal plan. At the same time, the UK has come full circle after a ten-year process, once more finding itself in a position considering whether a new GPFI would add value to its economy.

The current crisis presents unprecedented challenges, but as many countries prepare stimulus packages, Ministers of Finance (Ministers of Economy, Planning and Treasury) should back up their vision with the full force of their fiscal support. A chance like this shouldn’t just be used to place a band-aid over the existing economy but instead offer a compelling vision of the future economy and drive private sector investment and the jobs it will required.

The Finance in Common Summit taking place in November offers an opportunity for the world development to give a clear vision on how they can meet both the current crisis whilst delivering future climate and development needs.

New green finance institutions can rapidly ramp up ambitions; the proof of concept has already been demonstrated, finance ministers now have an opportunity to act at scale on the basis of learning gained from early experiences.  

You can explore more of our work on GPFI’s here.


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