Mobilizing institutional investor capital for climate-aligned development

Abstract

Financing from institutional investors will be critical to achieving the sustainable development goals (SDGs) and curbing climate change. However, these large investors have been largely absent from multilateral initiatives to mobilise private capital. Partly as a result, such initiatives have been unable to reach the scale required for development finance to go “from billions to trillions”. Successful mobilisation of private capital – including from institutional investors – has instead frequently taken place at the local level, by strategic investment funds and some green banks. This is likely due to advantages of being a local investor, including risk assessment, networks and “boots on the ground”, as well as the design of mandates, structure, governance, and staffing. At the same time, some institutional investors have been changing their modus operandi, from an intermediary to a collaborative model, and are re-localising their operations. The elimination of financial intermediaries with a short-term focus removes a bottleneck between two categories of long-term investors – institutional investors and multilateral finance institutions –, and opens new opportunities for collaboration. To take advantage of such opportunities, multilateral finance institutions will likely need to deepen their integration with the collaborative model and work closely with successful strategic investment funds and green banks.

Keywords: Institutional Investors, Blended Finance, Strategic Investment Funds, Green Banks, Development Finance Institutions, Sustainable Finance, Climate Finance

JEL Classification: O10, O19, G23