Mechanisms for Promoting Green Investment

Faced with the complex challenges of climate change, technological innovation offers the best hope of delivering solutions that are good for the planet, good for development and good for business. While the importance of innovation is widely recognized, how to actually stimulate it is less well understood. This article focuses on the role of investment in fostering innovation – from research and development (R&D) through to implementation and diffusion. Creating a favorable investment environment is critical in determining the pace at which technologies that support a sustainable planet become available in the marketplace.

Institutional funding

Institutional funding by the Global Environment Facility GEF1 and Multilateral Development Banks (MDBs), and their finance arms, is playing a key role in cultivating demand for clean technologies, particularly in developing and least developed countries where the impacts of climate change are often most acute. They offer the governments of many countries affordable access to loans and grants for clean technology projects.

The GEF - a partnership for mainstreaming global environmental concerns into national sustainable development strategies - supports projects related to a range of environmental issues2. GEFhas so far allocated US$8.8 billion and some US$38.7 billion in co-financing arrangements, to 2,400 climate change-related projects in over 165 countries.

Rather than funding R&D directly, MDBs focus on underwriting projects that use clean technology to mitigate or adapt to climate change in developing countries. In creating and building demand for clean technologies in this way, they are helping to make investment in R&D and innovation in these technologies more attractive and generating significant spillover effects for home-grown innovation.

This positive impact has prompted MDBs to scale-up their lending in recent years. In 2005, annual bank lending rose to a total of US$66.162 billion, with an average lending rate over the past 10 years of over US$40 billion per year. The World Bank alone – through the International Bank of Reconstruction and Development3 (IBRD) and the International Development Association - increased funding for clean energy by 20 percent each year from 2004 to 2009.

While creating demand for clean technologies is crucial, risk and return are key factors in determining investment decisions.

On the face of it, investing in the development of climate change-related technologies is economically sound, because the social benefits significantly outweigh the costs of developing and implementing these technologies. Advantages could be curbed climate change impacts, modernized infrastructure, lower energy costs, improved manufacturing efficiencies and new jobs.

However, from the private investor’s perspective investing in such high-risk ventures – particularly in an under-regulated market – is not necessarily such an attractive option. Commercial survival hinges on generating a return on investment and increasing profit margins to allow for further investment. This underlines the need for an effective regulatory environment to encourage investment in environmentally-supportive technologies. Consider, for example, the positive impact of stronger pollution controls on the development of cleaner, more fuel-efficient engines.

A further complication is that such investments often involve long-term financial commitments and can carry an even higher risk in lower income regions where purchasing power is limited, climate change impacts are greater and investment is most needed.

While market demand usually enables investors to anticipate the likely return on an investment, this is much harder to predict for long-term R&D initiatives, such as those in the area of clean technologies - even where investment results in a technology breakthrough.

In certain markets, such as the U.S. and China, private companies are beginning to recognize the commercial potential of investing in “green” technologies. In the first half of 2010, U.S. corporations invested US$5.1 billion in green technology companies - a 325 percent increase over investment levels for the same period in 2009. General Electric, for example, plans to invest an additional US$10 billion in green technology projects over the next five years. Investors in the expanding Chinese green technology market have also increased private investment, sinking some US$1.73 billion into initial public offerings (IPOs) of green technology-focused companies in the second quarter of 2010 alone4.

The United Nations Framework Convention on Climate Change (UNFCCC) supports the creation of an attractive investment environment through various practical measures. These include technology needs assessments (TNAs) which:

• offer governments valuable insights in prioritizing climate-related technology projects;
• provide R&D investors with valuable market information;
• help strengthen the technical know-how and skills within countries to ensure efficient implementation of these technologies; and
• support the creation of a regulatory framework that encourages investment in long-term climate-neutral development projects.

The UNFCCC’s emerging Technology Centers & Networks approach promises to spur further developments in these areas.

Photo: iStockphoto / Leonid Yastremskiy

Establishing a framework in which private companies can be confident they will receive a healthy return on their investment, would enable the resources and ingenuity of the private sector - historically, the major driver of innovative activity - to be more fully harnessed. The intellectual property (IP) system is a proven mechanism for doing this with the added benefit of enabling the widespread dissemination of the technologies developed.

Patents, for example, enable companies to obtain a return on R&D investment when new products are commercialized. Licensing agreements underpinned by IP rights also create opportunities for expanded business prospects and are at the core of many partnerships. The patent system also offers free access to a wealth of technological information on which to build for future innovation. Patent landscaping can be used to identify new business opportunities and can support national policy formulation by shedding light on emerging trends and clusters of related technologies. [See WIPO Magazine 01/2008 - Climate Change – The Technology Challenge].

Some commentators believe the IP system blocks access to mitigation and adaptation technologies because those countries with the greatest need simply cannot afford to pay market prices. However, denying the opportunity to use IP as a strategic business and policy tool would, in reality, diminish returns – technologically, economically and socially.

IP rights and the incentives they offer are essential elements of the investment equation. A balanced IP system that offers effective protection can help to attenuate the risks associated with long-term and costly R&D projects. It offers an assurance of a return on commercially viable investments, thereby strengthening the economic arguments for investors (both public and private). In facilitating the diffusion of technologies, it also serves the broader public interest – creating a wealth of economic opportunities and fulfilling an important social need.

Direct investments underwritten by MDBs have created increased demand for energy efficient technologies in developing and low-income countries and have made investment in clean technology R&D more attractive. National governments can play a pivotal role in ensuring public policy goals are met by establishing appropriate legal and regulatory frameworks. The private sector is an additional key player in sustaining investment in clean technologies and has enormous potential to efficiently drive innovation.

Climate change is a global problem requiring the commitment and ingenuity of humanity as a whole. While MDBs have been successful in catalyzing demand for “green” technologies, much more needs to be done if we are to successfully move to a low carbon, sustainable economy. IP rights and their protection will undoubtedly play a major role in enabling this transition.

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Acknoweldgements: Mike Sherby

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1  GEF, an independent financial organization active since 1991, provides funds to developing countries and countries with emerging markets for projects relating to, among others, climate change and biodiversity.
2  These include biodiversity, climate change, international waters, land degradation, the ozone layer, and persistent organic pollutants.
3  To qualify for an IBRD loan, a country’s per capita income must be between U$875 and US$10,276.
4  representing 75 percent of all Chinese IPO investments for that period.