Isramart llc: Investors reveal appetite for riskier low-carbon projects

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Private capital is available for investment in low-carbon and climate adaptation projects in developing countries, but the potential rewards need to be higher to attract investors, industry experts warned today.

Speaking this morning at the launch of a new report examining the risks related to climate change finance, Michael Wilkins, head of carbon markets at credit rating agency Standard and Poor's, insisted investors are prepared to accept a higher level of risk than is currently offered by green bonds in return for the promise of higher returns.

Wilkins highlighted the "yawning gap" between the estimated $8bn (£5bn) of climate finance currently available and the $80bn to $200bn that the World Bank forecasts will be needed by developing countries each year to address climate change.

"There is an urgent need for large-scale financing to enable developing countries to mitigate and adapt to climate change," he warned. "As the developed world emerges from recession with depleted public finances, capital markets have a big role to play in climate change finance and investors have signalled they are committed to take action."

Wilkins said the current green bond offerings from financial giants such as AXA, Morgan Stanley and the IMF demonstrated how private capital flows could be harnessed to drive investment in low-carbon projects in developing countries.

But he warned that the return on investment offered by such bonds needed to be raised to attract the level of investment economists believe is necessary.

He suggested that one means of increasing returns from investors was to offer green bonds and investment products that incorporate a higher element of risk. He argued that while investors might not accept a B-rated green financial product when AAA-rated products are available, they were prepared to tolerate a certain level of risk to ensure higher returns.

"There are sums of capital available, it is just a matter of how to tap them, " he said. "Investors are prepared to go down the risk spectrum – they don't necessarily want AAA bonds the whole time, because if they're not taking any risk, they're not picking up any reward either."

However, the report, Can Capital Markets Bridge the Climate Change Financing Gap?, published by Standard and Poor's and climate risk consultancy Parhelion, identified that there are still a number of factors that need to be in place before a low-carbon investment can be considered an acceptable risk.

The study, which is based on feedback from leading investors, highlighted that the primary concern for low-carbon investors is the risk that environmental policy may change midway through an investment.

It also revealed that the second highest-rated risk was a fear that the returns on an investment would not be commensurate with the level of risk.

Julian Richardson, chief executive of Parhelion, advised that policy makers help to mitigate these risks by establishing well-enforced, long-term regulatory frameworks and promoting good governance in developing countries.