The International Finance Corporation is looking to develop a guarantee facility for private investors to boost finance for greener construction in emerging markets, as growing populations, urbanization and industrialization are set to spur pollution far beyond safe limits.
IFC, the world’s largest global development institution focused on the private sector in low-income countries, is working with its counterparts in the World Bank Group to “create a one-stop shop for guarantees offered to private investors,” Susan Lund, vice president for economics and private sector development, told Bloomberg in an interview. We have “really high aspirations to scale that up dramatically for climate finance and in particular for green buildings and decarbonizing the construction sector,” she said.
Lund’s comments follow a recent speech given by World Bank President Ajay Banga who said the bank is working to better unify guarantee insurance across the institutions.
The IFC typically provides commercial financing priced at market rates. The planned facility would see IFC “put up money for guarantees and then also raise donor funding for a blended concessional finance,” Lund said.
In a report released Wednesday the IFC identifies a $1.5 trillion investment opportunity to cut emissions in the building sector in emerging markets. Global construction value chains account for about 40% of energy and industrial-related CO2 emissions globally, with that number set to increase by about 13% by 2035, the IFC study finds. Two thirds of these emissions come from emerging markets, which also depend on construction activity for economic development.
When it comes to decarbonization, “so much attention has been paid to energy production,” Lund said. “We've got to expand” the focus to “everything from the production of steel and cement, to how buildings are designed and how energy efficient they are when they're operated.”
The IFC highlighted some decarbonization technologies that are already available for the construction industry. For example, a Senegalese subsidiary of French cement maker Vicat SA is looking to use alternative fuels from biomass and recycled tires to help cut emissions by about 300,000 tons of CO2 equivalent per year by 2030. IFC is supporting the project with its first green loan for materials in Africa.
“The technologies are out there,” said Lund. “The issue is getting them to be more widely used and that is a matter of financing, a matter of policy and I think just a matter of information flow.”
Governments are lagging behind on the issue, according to the IFC. About 110 countries have no mandatory building energy codes, the report said. Last year roughly two and a half billion square meters of floor space were built without any energy related performance standards, equivalent to all the buildings in Spain, Lund said.
Finance is another drag on progress to decarbonize buildings. Global private debt financing for decarbonizing construction using ‘green’ financial instruments reached a record high in 2021 of about $230 billion, but emerging markets only issued about 10% of that total, the IFC finds.
Often when new markets like those for green buildings begin to establish in a country, “you do need some de-risking,” Lund says. That usually takes the form of public funds being used to leverage private capital and can be done using tools like performance-based incentives or first loss guarantees. This is where a new facility from the IFC could come in.
“We have this opportunity to use technologies that are already commercially viable today to build in a more green way as opposed to building per the status quo and then having to go back and retrofit,” Lund said. “There are ways to get this market off the ground and we're working on it.”
