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Agreements reached in Cancún, Mexico, at the 2010 United Nations climate change conference recognised the need for deep cuts in global greenhouse gas (GHG) emissions in order to keep the global average temperature increase below two degrees Celsius (2°C) above pre-industrial levels. To meet a two-degree climate change goal, massive investments will need to be made in the coming decades in low-carbon and climate-resilient (LCR) infrastructure. Public finance can and does play a critical role to “jump start”, leverage and guide LCR investment, but transformational change will inevitably require large-scale private sector engagement.

This chapter provides an integrated overview of the structure of the report, which delves into the various channels (financing instruments and investment funds) and approaches (risk mitigants and transaction enablers) for mobilising investment by institutional investors for sustainable energy infrastructure. To assist policy makers in visualising investments and their defining characteristics, the chapter introduces a framework for understanding investment channels which includes a classification system (elaborated in Chapter 3). The chapter provides definitions for the key issues covered in the report and provides an introduction to a number of tabular and visual devices which are used to illustrate how the classification works for individual transactions and groups of transactions. It provides an introduction to the diverse actors involved in sustainable energy financing and concludes by proposing where in the broader literature the report makes its contribution.

This chapter proposes a framework for understanding how institutional investors, specifically large pension funds, allocate capital to sustainable energy investments in projects or “corporates”. The analysis is supported by 47 actual investment cases collected for the purpose of this report and described in detail. The chapter introduces a framework for understanding investment channels by constructing a classification system. Tabular and visual devices illustrate how the classification works for different types of transactions. “Investment pathways” illustrate decision processes, including the choice between direct or intermediated investment, in projects or corporations. “Matrix frames” visually plot transactions together and display trends. A “schematic overview” visual device is used at the level of a single transaction to highlight how instruments, funds, risk mitigants and transaction enablers have all come together in a specific investment example. The chapter concludes with how the framework can be used in the future.

Building on findings from previous OECD reports and conclusions from the preceding chapters, this chapter proposes nine key policy recommendations for governments to address barriers and to facilitate institutional investors’ investment in sustainable energy infrastructure. These recommendations are presented in abridged form and Annex 5.A1 provides the foundation for this list with a comprehensive discussion of policy recommendations, annotated and referenced against existing OECD policy guidance and G20 recommendations. Finally, the chapter proposes a map aligning the barriers with the relevant recommendations for government to consider in their efforts to ameliorate or overcome these barriers.

This chapter advances the discussion beyond the investment channels for sustainable energy that can be used by institutional investors to the interventions that can enable or facilitate these investments, either through mitigating risks or lowering transaction costs. By providing coverage for risks which are new and are not currently covered by financial actors, or are simply too costly for investors, risk mitigants increase the attractiveness and acceptability of sustainable energy projects. These include a range of targeted interventions generally aimed at reducing, re-assigning or re-apportioning different investment risks (e.g. credit enhancements, cornerstone stakes, and tools targeting different challenges across stages of the project lifecycle). As a subset of risk mitigants, techniques facilitate institutional investment in sustainable energy infrastructure projects by reducing the transaction costs associated with these investments while also mitigating risk in some cases (e.g. warehousing, securitisation and supporting co-investment and collaboration among institutional investors).

At the core of the OECD’s work on climate finance and investment is the recognition that policy makers need to focus on and strongly influence how decisions are made to invest in long-lived infrastructure if global climate change goals are to be achieved. To meet these goals, a massive shift of investment toward low-carbon, climate-resilient infrastructure must occur. For institutional investors in OECD countries which manage a very large share of national savings, a fundamental pre-condition for investing in sustainable energy infrastructure is the presence of investment grade policies – the domestic framework of policies that provides clear price signals and predictability and policy coherence that investors need. While simple enough in principle, such a framework often proves difficult to achieve in practice, as retroactive policy changes, weak carbon pricing, fossil fuel subsidies and unintended effects of non-climate-related (e.g. financial and pension fund) regulations can undermine policies that are otherwise supportive of the low-carbon transition.

The next 20 years will need to see some USD 53 trillion in cumulative capital expenditure on energy supply and in energy-efficiency to get the world onto a 2°C emissions path. This amount will be spent on dramatically extending energy services available in rapidly-growing emerging economies and developing countries and renewing the energy infrastructure of developed countries. The scale of that investment is so large that it will, inevitably, have to rely in large part on mobilising private capital. A key potential source is the capital controlled by institutional investors.

This chapter discusses the role of institutional investors in financing sustainable energy infrastructure. The chapter commences with a review of the rationale for investment in sustainable energy infrastructure and explores the financing needs and economic opportunities for the transition to sustainable energy provision. The chapter proceeds to highlight the strained financing capacity of governments, utilities and banks for sustainable energy project finance. Practical information is provided on the financial capabilities of institutional investors, as well as an examination of how their assets are allocated and their investment decisions are made internally. The barriers to institutional investment in sustainable energy are then explored. The chapter provides information on the state and trends of institutional investment in sustainable energy and emerging channels that hold significant promise for scaling up institutional investment, including green bonds, YieldCos and direct project investment.