Report identifies key risks involved in securing large scale climate change finance from investors.
Significant stumbling blocks need to be overcome before institutional investors will allocate substantial amounts of their capital to low-carbon projects and climate change adaptation activities in developing countries, according to a new report published today by Standard & Poor’s Ratings Services and Parhelion Underwriting Ltd. Offering valuable insights to policymakers and investors, the report identifies nearly 30 risks that are a concern for funders and investors and which currently prevent widespread participation by institutional investors in climate change finance.
The report, titled “Can Capital Markets Bridge The Climate Change Financing Gap?,” highlights the findings of a Climate Change Financing Roundtable hosted by Standard & Poor’s Ratings Services, a leading provider of credit ratings and investment research, and Parhelion Underwriting, a U.K.-based specialist insurance vehicle, in London in June 2010. The event brought together more than 30 participants from the public and private sector, including representatives from multilateral agencies, development banks, investment banks, the insurance industry, policy think tanks, and institutional investors, to assess the appetite for climate change finance, identify financial structures that may be applied to fund climate change projects, and examine the risks and barriers that prevent their implementation.
“There is an urgent need for large-scale financing to enable developing countries to mitigate and adapt to climate change. However, there is a yawning gap between the level of finance currently available and even the most conservative estimates for the amount required,” said Michael Wilkins, Managing Director and Global Head of Carbon Markets at Standard & Poor’s. “As the developed world emerges from recession with severely depleted public finances, capital markets have a big role to play in climate change finance and investors have signaled they are committed to taking action–providing policymakers put in place a long-term framework of climate and energy policy and regulation that reduces risk, minimizes uncertainty, and allows an appropriate risk and reward balance to be struck.”
After examining a number of financing mechanisms, such as green funds and securitization structures, that have the potential to mobilize private sector investment on a massive scale in developed and developing countries, roundtable participants identified 28 discrete risks arising in climate change financing. These risks were grouped in four main categories–policy risks, capacity risks, transaction risks, and project risks–and these risks were then ranked by participants to show how they interact in terms of probability and severity.
“Since international policymakers view the mobilization of substantial amounts of private sector capital into climate change financing within the next two years as a major priority, we see the results of this risk-ranking exercise as a useful illustration of the obstacles that need to be cleared in order to achieve this aim,” said Julian Richardson, CEO of Parhelion Underwriting. “Our roundtable participants, by identifying and prioritizing the risks that are generally viewed as the key stumbling blocks to attracting institutional investment, have provided critical insight for policymakers.”
In the opinion of participants at the Roundtable, many of the proposals and structures related to climate change financing that were discussed could be viewed as complimentary to the three flexible mechanisms of the Kyoto Protocol, which is due to expire at the end of 2012. Furthermore, such proposals and structures could be applied in both developed and developing countries.
For further information or to request a full copy of the report, please contact:
Communications, Standard & Poor’s
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Parhelion is a specialty risk and insurance company focused on carbon trading markets, climate change risks, renewable energy, and emission reduction projects. It works with a range of operators to develop, structure, and implement risk management and risk finance solutions. It provides traditional and non-traditional insurance and risk transfer products as well as advisory services.
Parhelion’s products and services are suitable for a range of interested parties including investment banks, project financiers, insurers/reinsurers, multilateral institutions, project developers, carbon fund managers, and compliance buyers. Parhelion has expertise and understanding of risks associated with Kyoto projects and opportunities to manage and transfer these risks.
Parhelion Underwriting Ltd. is authorized and regulated by the Financial Services Authority, United Kingdom.
CEO, Parhelion Underwriting
Tel: +44 (0)20 76458331