Laying a Green Path for Climate-Smart Investments in Latin America

The historic agreement in Paris this past December was a major turning point for the global climate change agenda, laying a green path for greater opportunities for the private sector. While the discussion around what level of opportunity exists for private sector investment in climate-smart activities is still on-going, the evidence is continually mounting that these investments are good business and can generate healthy returns on investment.

Latin America and the Caribbean (LAC) is a region especially ripe with climate-smart opportunities that also make good business sense. According to the We Mean Business Coalition, companies in the region can achieve an annual average internal rate of return (IRR) of 17 percent for energy efficiency projects, above average compared to other emerging market countries. Historically, IFC has been a strong supporter of clean energy projects in the region, investing over $2.8 billion since 2005 while mobilizing another $2.3 billion.

IFC continues on its quest to maximize investments in climate-smart industries in the region. In an effort to focus the conversation and spur innovation, IFC released a white paper entitled “Climate-Smart Investment Potential in Latin America: A Trillion Dollar Opportunity” at the recent LAC Climate Business Forum June 14-15, 2016.

Hosted in Bogota, Colombia, with the support of the Spanish government and Spanish donor agency ICEX, the Forum featured an unprecedented high level of representation from the Colombian government with President Juan Manuel Santos opening the Forum and reiterating his commitment to support climate-smart solutions in the country. The rich discussions during panel break-out sessions covered topics ranging from investments in renewable energy, sustainable agribusiness, green bonds, to waste management, transport, green buildings, water and  needed technological innovation for ‘smart-cities’ and sustainable cities.

The paper points to specific investment opportunities present in the region, which, when forecasting through 2030, are in the billions for renewable and energy efficient energy. The region’s highest potential lies in Brazil, where an estimated $152 billion investment potential in renewable energy and $29.7 billion in energy efficiency for industry, transport, and buildings is increasingly attracting investors. The paper also outlines key policy interventions that national governments need to take, including carbon pricing, removal of fossil fuel subsidies, green fiscal reform, and targeted public finance and subsidies to generate a robust project pipeline. Companies like those in attendance at the forum are increasingly advocating for more smart policies like these, hoping to turn national climate commitments into investment-grade plans for low-carbon, climate resilient assets that will secure and safeguard the region’s future prosperity.

The LAC region is regarded as one of the great frontiers for climate-smart investment given current demographic and socioeconomic trends combined with its immense wealth of natural capital. A recent white paper released by IFC offers a preliminary assessment of how the formulation and adoption of Nationally Determined Contributions (NDCs) by governments in the region presents the private sector with huge investment opportunities to tap into these opportunities.

According to IFC’s research, LAC economies are not just ready for climate-smart development – they need it if they’re to meet the region’s expected demand for low-carbon, climate resilient infrastructure. It is expected that the population of Latin America will soon rise to 625 million, and as the world’s most urbanized developing region, nine out of every 10 Latin Americans are expected to live in a city by 2050.