Frameworks for Energy Investment in Development Organizations
March 12, 2018
Every year, capital is sunk into a range of energy projects, including the installation of new generation capacity, the extension of transmission lines, or the search for new hydrocarbon deposits. In 2015, this energy-specific investment totaled $1.8 trillion worldwide—more than 9.3 percent of overall investment and nearly 2.4 percent of total world gross domestic product (GDP). The origins of this investment capital are similarly varied, consisting of both private-sector sources such as retained earnings, bank borrowings, and equity markets, as well as public-sector entities. Of this latter category, international financial institutions such as the World Bank, the Asian Infrastructure Investment Bank, and aid agencies like the U.S. Agency for International Development (USAID) or the Japan International Cooperation Agency (JICA), have proved particularly important. As described in CSIS’s 2017 report Energy and Development: Providing Access and Growth, these public-sector organizations fill a crucial niche in the energy investment ecosystem, where their ability to catalyze private-sector participation has enabled the financing of numerous projects around the world. But while most of these public-sector entities publish individual descriptions of their own energy lending frameworks—for instance, what kind of projects they invest in, why they invest in them, and how much they invest—synthesizing a collective account has been difficult, due in no small part to variations in definitions, accounting practices, and data disclosures.
Nonetheless, by comparing the evolution of policy frameworks and lending volumes of a few key organizations—the latter of which is detailed in the graphic below—a few crosscutting conclusions emerge: First, nearly every organization studied has elevated the importance of “sustainability” issues, sometimes under an explicit climate-change and decarbonization heading, but also under a variety of other mantles, such as pollution control or social responsibility. Second, with the maturation of the Millennium Development Goals in 2015, most organizations have either prioritized their own country-level energy policies or pivoted to other multilateral agreements—most notably the Sustainable Development Goals to serve as guiding principles for their energy lending. Third, spending on energy has grown in both relative and absolute terms for the majority of studied organizations. Fourth, most groups have steadily deemphasized, at least rhetorically, the “affordability” measure of their programs, possibly due to the current environment of low energy prices. Finally, increasing emphasis has been placed on the catalytic potential of energy investment. For groups such as the International Finance Corporation (IFC) and the World Bank, not only does their energy investment help by directly financing projects, but it also serves to attract additional lending from private parties through “de-risking” practices, such as the extension of loan guarantees or the deployment of aggregation funds. The ability to catalyze additional funding is particularly important for those institutions with strong climate-change-oriented goals and objectives.