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Climate Finance Module 2

Module 02

Climate Finance
Lesson 2

Risk Mitigation Instruments

Presentation Script

Climate Finance Module 2
Module 2: Lesson 2 – Risk Mitigation Instruments

Presentation Script

Welcome to Lesson 2: Risk Mitigation Instruments.

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risk mitigation instruments used as tools to reduce risk. Specifically.2 Introduction In this lesson. the different types of risk categories in low-carbon projects. and case studies of risk mitigation in practice.Climate Finance Module 2 Module 2: Lesson 2 – Risk Mitigation Instruments Presentation Script 1. you will better understand the various risks acting as barriers to private sector climate finance investments. you will learn how public finance and risk mitigation instruments can remove barriers to climate finance investment. Page 2 of 26 .

3 About Lesson 2 Some key questions that will be addressed during this lesson include: What are the risks in low-carbon investment projects? How are risk mitigation instruments being used? What are the current gaps and trends in risk mitigation instruments? What are examples of utilizing risk mitigation instruments and how have they supported climate finance investment? Page 3 of 26 .Climate Finance Module 2 Module 2: Lesson 2 – Risk Mitigation Instruments Presentation Script 1.

policymakers should focus on addressing these risks. In order to unlock climate finance investment. Low-carbon project risk factors include a dependence on public policy. markets. high upfront costs and a lack of dedicated investors. particularly in developing countries. long investment horizons.Climate Finance Module 2 Module 2: Lesson 2 – Risk Mitigation Instruments Presentation Script 1. Page 4 of 26 . and industries.4 High Perception of Risk in Low-Carbon Projects Low-carbon projects typically suffer from high perceptions of risk. the relative immaturity of technologies. which can negatively affect climate finance investment and even hinder private sector's participation.

Climate Finance Module 2 Module 2: Lesson 2 – Risk Mitigation Instruments Presentation Script 1.5 Categories of Risk In order to better understand risks to climate finance investment. Page 5 of 26 . The following slides will introduce each category of risk is more detail. the Climate Policy Initiative has grouped risks into four categories according to their different sources and character.

Social Risks The first risk category includes political. Social risks are due to actions of private individuals or groups. These risks also include misappropriation of public and private resources. policy.Climate Finance Module 2 Module 2: Lesson 2 – Risk Mitigation Instruments Presentation Script 1. and social risks associated with actions by governments and citizens. Policy risks involve legitimate actions of local authorities exercising their power to rule. Policy. Click on each Example button to read more.6 Political. Political risks are due to illegitimate actions of public authorities discriminating against investors. Page 6 of 26 .

7 Political. having investment horizons longer than policy cycles. and sometimes cause environmental impacts that lead to social resistance. For example reliance on public financial and institutional support. Policy. Social Risks in Low-Carbon Projects These risks are enhanced by the very nature of low-carbon projects.Climate Finance Module 2 Module 2: Lesson 2 – Risk Mitigation Instruments Presentation Script 1. Page 7 of 26 .

environmental impact risks and decommissioning risks. Take a moment to read about these examples in detail. Four examples include. Physical Risks The second risk category includes technical and physical risks. They are technologyspecific or related to the ongoing availability of natural resources. physical output risks. Page 8 of 26 . construction and operation risks.8 Technical.Climate Finance Module 2 Module 2: Lesson 2 – Risk Mitigation Instruments Presentation Script 1.

and suffer from uncertainty over measurements of the natural resources availability.9 Technical. Physical Risks in Low-Carbon Projects In low-carbon projects. these risks are enhanced by the fact that many technologies employed are not yet proven green technologies.Climate Finance Module 2 Module 2: Lesson 2 – Risk Mitigation Instruments Presentation Script 1. This means that such projects lack accurate technology performance data. Page 9 of 26 .

10 Market. financing risks. Take a moment to read about these examples in detail. counterparty and credit risks. and liquidity and exit risks. Six examples include currency risks. Commercial Risks The third risk category includes market and commercial risks.Climate Finance Module 2 Module 2: Lesson 2 – Risk Mitigation Instruments Presentation Script 1. market risks. Page 10 of 26 .

long investment horizon and payback periods.11 Market. Page 11 of 26 .Climate Finance Module 2 Module 2: Lesson 2 – Risk Mitigation Instruments Presentation Script 1. financiers' unfamiliarity with green investments. Commercial Risks in Low-Carbon Projects In low-carbon projects. and complexity of infrastructure investments. these risks are enhanced by the fact that they incur high upfront costs.

Outcome risks include emission reduction risks.12 Outcome Risks The last category of risks include outcome risks which are risks perceived by the public sector and are linked to the ability of publicly-supported green projects to meet objectives within expected costs. Page 12 of 26 .Climate Finance Module 2 Module 2: Lesson 2 – Risk Mitigation Instruments Presentation Script 1. coimpact risks and budget impact risks. Take a moment to read about these examples in detail.

Climate Finance Module 2 Module 2: Lesson 2 – Risk Mitigation Instruments Presentation Script 1. Page 13 of 26 . outcome risks are typically enhanced by the amount of public support required for such projects to be successful and the budget constraints such projects face.13 Outcome Risks in Low-Carbon Projects In low-carbon projects.

14 Categories of Risk Mitigation Instruments In light of the low-carbon projects risks we just covered. Click on the private and public sector buttons to learn which sector uses which instruments. risk mitigation instruments are tools to promote climate finance investment.Climate Finance Module 2 Module 2: Lesson 2 – Risk Mitigation Instruments Presentation Script 1. Advance the slide to start learning about each instrument. Page 14 of 26 . The Climate Policy Initiative has identified six categories of instruments that directly addresses specific risks or multiple risks at once.

15 Risk Mitigation Instruments: Bilateral Contracts Bilateral contracts are risk mitigation instruments addressing project risks not related to credit. implying high transaction costs. or to cover output price risks. They are usually provided by private entities to cover technical risks related to the operation phases of projects. like offshore wind farm projects. bilateral contracts can be highly specific with complex drafting. Click on each example on the right to learn more.Climate Finance Module 2 Module 2: Lesson 2 – Risk Mitigation Instruments Presentation Script 1. For more advanced technologies. Page 15 of 26 .

Click on each example on the right to learn more. Page 16 of 26 .16 Risk Mitigation Instruments: Credit Enhancement Instruments Credit Enhancement Instruments are usually developed by specialized public and private entities to cover commercial and market risks by guaranteeing (partially or in full) the liabilities of a project towards its lenders. mostly focused on guarantees. You may also click on a mapping of the World Bank's Risk Mitigation Instruments. Credit Enhancement Instruments improve the quality of loans and bonds issued by the projects by mitigating the borrower's credit risk and enhancing coverage of debt service obligations.Climate Finance Module 2 Module 2: Lesson 2 – Risk Mitigation Instruments Presentation Script 1.

market and political risks. This is in exchange for a premium and upon verification of the liability of the claim.17 Risk Mitigation Instruments: Insurance Insurance is a well-established risk mitigation instrument. Insurance risk mitigation instruments are very common in mitigating physical.Climate Finance Module 2 Module 2: Lesson 2 – Risk Mitigation Instruments Presentation Script 1. Click on each example on the right to learn more. typically provided by private companies. Page 17 of 26 .

as technology deployment increases. creating incentives for governments to renegotiate them. One drawback is that.18 Risk Mitigation Instruments: Revenue Support Policies Revenue Support Policies are the public sector's main tool for promoting low-carbon projects by reducing output price risks and offering resources that reduce financing risks. For investors. revenue support policies become heavier for public budgets.Climate Finance Module 2 Module 2: Lesson 2 – Risk Mitigation Instruments Presentation Script 1. Click on each example on the right to learn more. Page 18 of 26 . for example tax credit or equity. this creates the perception of policy risks.

dedicated private-equity facilities.Climate Finance Module 2 Module 2: Lesson 2 – Risk Mitigation Instruments Presentation Script 1. Click on each example on the right to learn more. Page 19 of 26 .19 Risk Mitigation Instruments: Direct Concessional Investments Direct Concessional Investments are risk mitigation instruments from public entities (such as governments' budgets. and international climate funds. They help mitigate financing risks by providing loans or equity funding that enhances the financial viability of low-carbon projects. bilateral and multilateral development banks).

Click on each example on the right to learn more. quality certificates. policy and regulatory risks.Climate Finance Module 2 Module 2: Lesson 2 – Risk Mitigation Instruments Presentation Script 1. as well as technical and physical risks. non-financial. Instruments under this category include technical assistance for sustainable energy policies and capacity building activities. Page 20 of 26 . including political. for example. interventions that usually target multiple risks.20 Risk Mitigation Instruments: Indirect Political/Institutional Support Indirect Political and Institutional Support refers to public.

21 Current Gaps in Risk Mitigation Instruments In developing countries. Also. which do not improve the liquidity of investments or attract private finance. not policy risk. Page 21 of 26 . And most low-carbon projects supported by public spending weigh heavily on already tight public budgets. For example. public and private entities provide several risk mitigation instruments yet this does not cover all kinds of risks. instruments only appear to address political risk.Climate Finance Module 2 Module 2: Lesson 2 – Risk Mitigation Instruments Presentation Script 1. financing risks have been mostly addressed with concessional resources. This means that new and innovative risk mitigation instruments are needed. furthering the perception of outcome risks.

Page 22 of 26 . enhancing the credit worthiness and improving the financial profile of an investment. when national governments shift policies in ways that hurt the financial stability of projects. Policy risk insurance provides coverage against “retroactive policy risk”. Click on each new instrument to learn more.Climate Finance Module 2 Module 2: Lesson 2 – Risk Mitigation Instruments Presentation Script 1. two types of new risk mitigation instruments have emerged: Policy Risk Insurance and First-Loss Protection.22 Trends in New Risk Mitigation Instruments Currently. First-loss protection protects investors from a pre-defined amount of financial loss.

such as feed-in-tariff insurance.Climate Finance Module 2 Module 2: Lesson 2 – Risk Mitigation Instruments Presentation Script Policy Risk Policy risk insurances can indirectly address policy risk. reduces the impact of policy risk by providing coverage for changes to national policies that would harm the financial stability of existing projects. Partial Risk Guarantees can also address policy risk. Page 23 of 26 . Another form of policy risk insurance. but only when it is clearly identified in the contract and when a counter-guarantee by the host government is available.

Page 24 of 26 .Climate Finance Module 2 Module 2: Lesson 2 – Risk Mitigation Instruments Presentation Script First Loss Protection To be effective. such as liquidity of a secondary market and mitigation of some specific project-level risks. first-loss protection should address specific investor needs by matching their required risk-adjusted rate of return and allowing securities to obtain an investment-grade credit rating. First loss protection can also address institutional investors' unique circumstances.

addressing risks to low-carbon projects helps to unlock climate finance investment. raising the cost of capital and hindering private sector's participation. Click next to visit links for additional information. Six risk mitigation instruments are currently being used by the public and private sector. Risks act as barriers to investment. with new instruments emerging to fill the gaps in risk allocation. The case studies in this lesson highlight the success of risk mitigation in promoting climate finance investment. Page 25 of 26 . You have now reached the end of lesson two.23 Summary In summary.Climate Finance Module 2 Module 2: Lesson 2 – Risk Mitigation Instruments Presentation Script 1. Organizing risks into the four categories helps to focus risk mitigation efforts.

24 Key References and Resources The following links provide key references and additional resources. Page 26 of 26 .Climate Finance Module 2 Module 2: Lesson 2 – Risk Mitigation Instruments Presentation Script 1.