Modifying Development Finance Institutions` Investment Strategies to Capture Climate Targets: A Case Study on Norfund and its Clean Energy Department

Astrid Regine Øyehaug & Magnus Lilleås

Student thesis: Master thesis

Abstract

In light of increased recognition of climate change as an ecological and humanitarian threat, climate targets have become more stringent to improve the world’s ability to minimize the consequences. The developing countries experience the strongest impact of climate change and are at the same time poorly equipped to finance mitigation and adaptation investments projects to reach the targets. Hence, the purpose of the paper is to investigate whether DFIs should increase their involvement. DFIs have the ability to bridge the gap between the public and private sectors in developing countries. Greenhouse gases (GHG) from fossil fuel consumption are often cited as the major reason for climate change. Much of this is due to power generation. DFIs should therefore arguably increase investments in the clean energy space. This paper is motivated by the limited literature on why DFIs should move from solely a developmental focus to a dual focus on development and climate. Therefore, a case study of the Norwegian DFI, Norfund, and its Clean Energy department was applied as a force of example.
The stringent climate targets are affecting the DFIs investment strategies, due to the increased attention to achieve these from a number of stakeholders. The DFIs will become more climate-focused in the future and will look for more investment opportunities in the clean energy sector. The empirical data and academic literature show that the level of investment in clean energy needs to be increased considerably if we are to reach the targets on time. However, DFI’s investments in the sector have decreased due to high risks and shortage of bankable projects. Therefore, DFIs may need to modify their investment strategies to be able to increase the investment level in the clean energy sector.
DFIs should increase their geographical investment focus to include more developed countries that emit higher levels of GHG, increase investment horizon and re-evaluate their financial return expectations to be able to follow a climate-focused energy investment strategy. This will give them the opportunity to grasp higher developmental effect levels in the long run.
The findings of the paper can be generalized in an analytical nature to advice DFIs on their future investment strategies and offer a new line of thought for foreign direct investments strategies to incorporate development and climate focus.

EducationsMSc in International Business, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2020
Number of pages164