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PRIVATE SECTOR PEER LEARNING POLICY BRIEF 4

Private Sector Engagement to Address and Promote Green Growth

KEY MESSAGES • Development Assistance Committee members are increasingly engaging the private sector to mobilise green investment, promote green private sector development, and harness skills and knowledge for addressing climate change in developing countries. Efforts include developing clean infrastructure, reducing and water use, improving the climate resilience of cities and communities, and supporting and ecosystems. • Challenges for private sector engagement on the environment include a lack of evidence on environmental outcomes, moving beyond demonstration projects to scale up successful approaches and the need to strengthen links with partner country priorities. • Emerging good practice spans ways to communicate the business benefits of addressing environmental issues (e.g. cost savings, reduced risks), understand and address the barriers to private sector engagement on environmental issues, promote sound business models and adopt a holistic approach that includes support for the enabling policy environment for investment and business.

INTRODUCTION well recognised by different parts of the private he Goals and sector. The financial sector has acknowledged Paris Agreement reconfirm that growth and that addressing global environmental challenges, T development cannot continue without all such as climate change, is key to managing countries tackling climate change and boosting business risks and ensuring long-term returns on environmental . Transitioning from investment (Carney, 2015). Optimising resource the current development pathway to a low-carbon, use and improving environmental performance climate-resilient one will require significant also help companies reduce costs, streamline investment and innovation and, operations and increase efficiency. In addition, more importantly, a shift in the need for innovative solutions in the areas the way governments and the of climate change mitigation and adaptation is private sector make decisions. an opportunity for companies to develop new To support partner countries in products and services and serve new markets. this context, development co- Finally, there is increasing emphasis on corporate operation providers will need to social responsibility and responsible business better engage with the private conduct among multinational companies. sector to mobilise resources, Addressing environmental risks and impacts is a knowledge and innovation for key part of their efforts. addressing climate change and LESSONS promoting green growth. The private sector will be a critical partner in The importance of tackling delivering effective development co-operation climate change and other on environmental issues in partner countries. environmental issues is now Business practice has been associated with

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PRIVATE SECTOR PEER LEARNING POLICY BRIEF 4 © OECD environmental pollution and degradation, especially in FIGURE 1. CLIMATE-RELATED DEVELOPMENT FINANCE SUPPORTING PRIVATE countries where safeguard SECTOR ENGAGEMENT ACROSS DEVELOPMENT FINANCE PROVIDERS, 2013 systems and environmental governance need strengthening. Total 22% Direct support to Yet, companies also play an private sector important role in driving green Climate funds 25% growth in developing countries. Support “likely to Multinational companies can engage” private promote greener behaviour MDBs 32% sector across the supply chains that they manage, investors and banks are No private sector Bilateral 15% engagement potential sources of investment for clean infrastructure, and 0% 20% 40% 60% 80% 100% businesses and entrepreneurs provide the skills and knowledge Note: Bilateral providers include Development Assistance Committee members; multilateral development leading to innovation in clean banks (MDBs) include the African Development Bank, , European Investment Bank, European Bank for Reconstruction and Development, Inter-American Development Bank and ; technologies and resource climate funds include estimates from the Adaptation Fund, Climate Investment Funds, Global Environment efficiency. Facility, International Fund for Agricultural Development and Nordic Development Fund. Estimates are based on USD commitments for 2013. Recognising this, development Source: OECD DAC Statistics in Crishna Morgado et al. (forthcoming) co-operation providers are increasingly engaging the private sector to promote green growth. climate change. Businesses are required to provide matching A review of development finance flows shows that up funds to ensure that grants are catalytic and financial risks to 20% of climate-related development finance in 2013 are shared between partners. supported activities to engage the private sector, with the Promoting Green Private Sector Development majority of finance being deployed toward climate change Development co-operation providers work with partner mitigation (see Figure 1). countries to improve the enabling policy environment for Mobilising Green Investment private climate investments. This support includes, for Development co-operation providers deploy different instance, policy reforms such as helping phase out fossil approaches to mobilise private finance to combat climate fuel subsidies, which in turn increases the profitability of change. Where political and commercial risks reduce clean energy investment, and creating feed-in tariffs for returns on investment, they use loans and blended finance specific technologies. More broadly, to attract private capital and make use of guarantees to this support promotes building new markets and much de-risk private finance for renewable energy technologies. needed institutional and technical capacity in partner Led by a group of bilateral development finance country governments, which enables these governments institutions, the Interact Climate Change Facility serves to mobilise and sustain green investment over time. as one example of a mechanism that pools finance from Efforts are also underway to shape policies and different development finance institutions and co-invests programmes to improve the environmental performance in renewable energy and energy efficiency projects in of businesses in partner countries as a way of supporting partner countries. sustainable and inclusive growth. Small businesses in Development co-operation providers are also increasingly particular face several barriers in addressing climate using grant financing in more catalytic ways. For example, change, including a lack of capacity and access to tools matching grant schemes support particularly innovative needed to green their businesses, poor access to finance companies that would otherwise not have access to for low carbon technologies, and inadequate awareness of financing in playing a role in climate change mitigation the business case for increasing efficiency and improving and adaptation. A special window on renewable energy resilience. within the Africa Enterprise Challenge Fund provides grant Emerging approaches by development co-operation financing through an open competition for projects based providers take a market systems approach to promote on low-cost clean energy and climate technologies that help green growth through the development of value chains smallholder farmers access energy services and adapt to and markets for environmental products and services.

PRIVATE SECTOR PEER LEARNING POLICY BRIEF 4 GIZ’s for Sustainable Development in Africa increasingly involves working through intermediaries programme, for example, provides finance to support such banks, business and professional associations, public-private partnerships with local companies in order and companies with extensive supply chains. While to generate employment in key value chains that will this approach may be a necessary and effective way of contribute to a greener economy in areas such as water, reaching out to companies, especially small and medium- energy and waste management. GIZ supports vocational sized enterprises, it leads to significant difficulties in training and skills development so that poorer segments monitoring and verifying environmental impacts and of populations can engage in these value chains. outcomes. Programmes also target improved access to finance in Supporting Partner Country Priorities order to encourage uptake of low carbon technologies Private sector engagement approaches also need to and improve the environmental performance of make stronger links with national development plans businesses. One major area of donor effort is the use and priorities on climate change and the environment. of credit lines to incentivise businesses to invest in Approaches to promote clean technologies in partner environmental solutions. The multi-donor Green for countries are sometimes combined with efforts by Growth Fund provides concessional finance to public Development Assistance Committee member countries and private financial intermediaries in order to set up to promote their own private sector, and therefore favour and demonstrate the viability of financing for low carbon technologies from their own countries. While such technologies in the Middle East and North Africa. The fund approaches may be effective in delivering environmental includes technical assistance to financial institutions, benefits at the project level, like fuel savings or reduced business associations and businesses, and government emissions, they do not necessarily contribute to supporting partners to build capacity and raise awareness of green the development of local technologies or longer-term finance. solutions. Also, it is unclear whether they would promote the most cost-effective approaches. In addition, the Harnessing Skills and Knowledge for Green Growth eventual roll-out of clean technologies past the pilot stage Through dialogue, policy discussions and formalised is less likely when partner country governments are not partnerships, development co-operation providers engage engaged adequately and therefore complementary policy the private sector to harness skills and knowledge to reforms do not take place. address environmental issues. For example, through the Swedish Leadership for Sustainable Development network, Realising Scale the Swedish International Development Cooperation While there are several examples of successful innovative Agency co-ordinates 20 Swedish or Swedish-rooted ways to engage the private sector in promoting green companies that meet regularly and discuss opportunities growth, there is still a need to scale up such approaches. to promote global leadership in addressing sustainability One of the biggest challenges facing infrastructure issues. investors is the limited flow of bankable projects in clean infrastructure such as renewable energy or low-carbon CHALLENGES transport, despite many of these technologies being Private sector engagement on the environment faces a proven at a small scale. number of key challenges. GOOD PRACTICE Evidence of Impacts Find Common Ground There is a general lack of evidence on the extent to To engage the private sector in partner countries where which private sector engagement efforts have resulted there may be a lack of awareness and understanding in wide-ranging environmental outcomes, beyond the of environmental issues, development co-operation mobilisation of private investment. The United Nations providers need to find ways of communicating with Framework Convention on Climate Change negotiations private sector partners that highlight win-win solutions. have focused on mobilising climate finance within the In the context of private sector engagement on the context of financial commitments made by developed environment, this approach involves focusing on the countries to address climate change in developing benefits of improving environmental performance such as countries. This has resulted in high visibility for tracking increased competitiveness, reduced costs and reduced the amounts of private capital mobilised, but less exposure to risks, rather than environmental benefits attention to the effectiveness and impacts of these efforts. per se. In addition, development co-operation providers’ efforts to improve the environmental performance of businesses Understand Private Sector Needs Adopt a Holistic Approach Private sector engagement to support green growth Mechanisms to leverage green private investment should be centred on a good understanding of demand will only result in improved long-term environmental from the private sector for development co-operation performance if an adequate enabling policy environment support. In other words, approaches should be rooted in an exists in partner countries. To scale up successful project understanding of how development co-operation providers cases to programmes or sustainable market level, it is can better address the barriers that companies face in important to adopt a holistic approach to private sector pursuing market opportunities for green technologies, engagement on climate change and green growth. This products and services in developing countries. approach involves supporting a range of policy reforms and regulations to promote climate change mitigation To drive lasting positive environmental change, private and adaptation and improved environmental performance sector engagement needs to promote sound business – the enabling policy environment for private climate models for environmental protection that deliver investments – along with use of limited public finance for environmental outcomes, are financially feasible and mechanisms to leverage green private investment. create decent jobs.

REFERENCES Carney, M. (2015), “Breaking the tragedy of the horizon – climate change and financial stability”, speech given at Lloyd’s of London, 29 September, www.bankofengland.co.uk/publications/Documents/speeches/2015/speech844.pdf. Crishna Morgado, N. et al. (forthcoming), “Engaging the private sector for green growth and climate action – an overview of development co-operation efforts”, OECD Development Co-operation Working Paper, OECD Publishing, Paris. Green for Growth Fund (n.d.), “About Green for Growth Fund”, http://www.ggf.lu/about-green-for-growth-fund/ (accessed 9 September 2016).

PRIVATE SECTOR PEER LEARNING POLICY BRIEF 4