Development finance institutions can play a key role in incubating and developing nascent markets. They have been instrumental over the last decade in supporting microfinance to the extent that it is now a relatively mature asset class. Current activities in frontier sectors include support for cleantech private equity and VC funds in developing countries, and an increasing emphasis on solutions for poor consumers.
Greening sovereign wealth funds (SWFs) The growth of state-owned investment funds willing to invest globally is relatively new, but already significant in its impact. While there are concerns about the growing influence of SWFs – such as their capacity for exploiting market inefficiencies and a lack of transparency – these funds can play a major role in financing the green economy transition.
Support should go towards helping SWFs to incorporate climate risk considerations directly and systematically into
their actual stock selection and portfolio
construction processes, as is the case with the example of the Norwegian Pension Fund Global (see Box 14). Suggestions such as the creation of mutual green funds
invested in by collaborating SWFs – such as Brazil’s Amazon Fund launched in 2008 to solicit international donations to save the Amazon forest – are also worth considering.
Like pension funds, SWFs tend to have a long- term horizon. As a result, SWFs have a clear interest in improving the environmental performance of companies and other entities in which they invest, so as to enhance their long-term returns and better manage risk and reputation.
5.4 Fiscal policies
Green Economy fiscal policy options fall into five broad categories. These cover environmental tax reforms and instruments such as carbon taxes, tax exemptions and reductions; broader and robust pollution charges; green subsidies, grants and subsidised loans to reward environmental performance; removing environmentally harmful subsidies; and direct public expenditure on infrastructure. They can serve, among other things, to address high upfront investment costs. This smart
Box 14: Norwegian Pension Fund Global
The Norwegian Pension Fund Global, one of the largest SWFs in the world, has a broad ownership in approximately 8,400 companies worldwide. The fund is largely passively invested and holds an average ownership share of 1 per cent in each company it is invested in. The fund is a universal owner with a long investment horizon, and inherently has a clear financial interest in companies taking good corporate governance and environmental and social issues duly into account. Fiduciary responsibility for the fund also includes safeguarding widely shared ethical values. In the area of environmental issues, including climate change mitigation and adaptation, the fund employs the following tools:
Research The Norwegian Ministry of Finance, acting as principal for the fund, currently participates in a climate change and strategic asset allocation research project between the investment consultancy Mercer and 13 other large international pension funds from Europe, North America, Asia, and Australia. A report from this project was published in February 2011.
Environmental investment programme The Norwegian Finance Ministry has established a new investment programme for the fund that will
focus on environmental investment opportunities, such as climate-friendly energy, improving energy efficiency, CCS, water technology, and the management of waste and pollution. The investments will have a clear financial objective (Norwegian Ministry of Finance 2010). At the end of 2009, over NOK 7 billion had been invested under this programme, a faster escalation than originally assumed (Norwegian Ministry of Finance 2011).
Dialogue with companies The pension fund’s manager, Norges Bank through its asset management department Norges Bank Investment Management (NBIM), has set out its expectations on companies’ climate change management. As a long-term investor, it is of vital importance that the fund is able to evaluate the degree to which a specific company is exposed to the risks and opportunities that arise from climate change, both in its direct operations and across its supply chain. NBIM considers companies’ efficient adaptation to this transition to be a significant factor when protecting the financial assets of the fund, and expects companies to develop a well-defined climate change strategy.