Based on the contributions of Innpact, the European Impact Investing Luxembourg (EIIL) network has published a report that explores the opportunities and challenges surrounding the tools and initiatives designed to attract private investment into climate finance and highlights effective ways of linking the environmental impact with financial returns.
A common denominator of most climate finance projects is their innovative nature and therefore a relatively high financial risk, whether real or perceived. Embedding environmental (and social) impact requirements in individual financial instruments that are offered by public actors with the aim of attracting private investment into climate finance (e.g. risk mitigation tools), is likely to add to the level of complexity of the instruments, requiring additional due diligence efforts from investors.
It is therefore assumed that the emergence of common impact metrics and standards on how such impact objectives are integrated in the design of financial instruments would decrease the level of complexity, increase predictability and ultimately make investors less wary of the various risk components that may impact the financial return potential of their investment.
A systemic approach to the design of financial instruments in support of climate change objectives by development finance institutions and other public investors could enable the above-mentioned standard setting and facilitate market acceptance. Development finance institutions can capitalize on their neutrality as an actor in the financial markets and build on their holistic understanding of market dynamics in various geographies for the design of a collaborative approach to climate finance.
The European Impact Investing Luxembourg is an open initiative supported by a group of Luxembourg-based firms in the financial services sector that seeks to contribute to the development of the impact investing sector, facilitate initiatives in this area within Luxembourg, and promote the Luxembourg financial center’s capacity to support and coordinate the impact finance industry.
Innpact supports the EIIL and played a leading role in the drafting of the paper.