Instrument Overview
A green investment fund is an investment vehicle created to mobilize capital toward domestic low-carbon and climate-resilient infrastructure (LCR)Using innovative transaction structures, risk-reduction and transaction-enabling techniques, and local and market expertise, green investors are channelling investment from private and/or intuitional investorsinto low-carbon projects. GIBs can facilitate investments in commercial and residential energy efficiency retrofits, rooftop solar photovoltaic systems and municipal-level, energy-efficient street lighting. Green investment funds can differ substantially in their design and operations depending on their governance structure, including ownership, decision-making authority, and accountability arrangements. These governance differences shape investment objectives, risk tolerance, and the types of financial instruments the fund deploys [1].
Why it matters for cities
Cities can leverage green investment funds to catalyze private sector financing for local climate infrastructure projects that might otherwise struggle to secure capital due to risk, scale, or return uncertainty. These funds:
- Bridge the investment gap by blending public and private finance (blended investment funds).
- Unlock funding for net-zero targets through investments in energy efficiency (e.g., building retrofits), renewable energy (e.g., rooftop solar), clean transport, and waste management (green investment funds)
- Enable long-term resilience, especially when integrated with urban adaptation strategies (e.g., flood protection or circular economy infrastructure).
- Create green jobs and stimulate local economic development, as seen in the London Green Fund’s creation of 2,000+ jobs.
Key features
- Public-Private Blended Investment Funds: Typically seeded with public funds (e.g., EU structural funds, municipal capital), leveraged to attract private capital.
- Risk Mitigation: Instruments like guarantees or subordinated debt reduce perceived risk for private investors.
- Scalability: Can be structured as a revolving fund, recycling returns into new projects and scaling over time.
- Sector Flexibility: Can target diverse urban sectors (waste, energy, transport) under unified oversight.
- Moderate Maturity & Return Expectations: Usually medium- to long-term investments, with returns aligned with infrastructure cash flows (e.g., utility savings or service charges).
- Adaptable Structure: Can be customized to city needs, such as creating multiple sub-funds for specific goals (e.g., London's Urban Development Funds).
How It Works
1. Capitalization: Initial capital comes from public sources (e.g., city government, EU programs, development banks). For example, the London Green Fund combined ERDF, GLA, and waste board funding.
2. Fund Management: A central fund manager (often a public or development finance institution like the EIB) oversees fund distribution, performance monitoring, and reinvestment strategy.
3. Creation of Sub-Funds or Delivery Vehicles: Separate Urban Development Funds (UDFs) or similar entities are established to manage investments in specific project categories (e.g., waste, energy).
4. Project Selection and Investment: Eligible projects apply for financing. The fund may offer loans, equity, or guarantees. Risk-sharing tools help lower the hurdle for private co-investors.
5. Blended Investment: The fund attracts co-financing from private investors by offering concessional terms, first-loss positions, or due diligence support.
6. Revenue and Reinvestment: Projects generate returns (e.g., through energy savings, service revenues), which are returned to the fund and reinvested in future projects—creating a revolving capital model.
Benefits & Challenges for Cities [1]
Benefits
Such an institution can be considered, depending on the set-up, as a one-stop shop for green investments in a city, thereby reducing overlaps and increasing effectiveness and efficiency.
Challenges
Capitalisation and adequate capacity to ensure its sustainability may not be sustained.
Use Cases
London Green Fund [2]
The London Green Fund’s GBP 102 million (USD 135 million) investments are predicted to save 288,805 tonnes of GHG per annum and to divert 440,980 tonnes of waste from landfill per annum, resulting in the creation of 2000 jobs and 34% energy use savings. Through two of its three Urban Development Funds, the fund managed to secure GBP 575 million (USD 761 million) from the private sector and other investors.
London aims to reduce GHG emissions by 60% below 1990 levels by 2025. To achieve this goal, the city has developed a number of strategies and programmes related to energy efficiency, energy supply, waste, low carbon economy and adaptation (e.g. RE:FIT, RE:NEW, London Waste and Recycling Board). The London Green Fund (LGF) was established in 2009 and provides a useful tool to ensure that the city’s priority programmes and projects benefit from additional financial support from the private sector.
The LGF is a JESSICA Holding Fund of GBP 120 million (USD 159 million) and is managed by the European Investment Bank (EIB). It is made up of GBP 60 million (USD 79 million) from London European Regional Development Fund (ERDF) Programme, GBP 32 million (USD 42 million) from the Greater London Authority, GBP 18 million (USD 24 million) from the London Waste and Recycling Board, and GBP 10 million (USD 13 million) from private funding at project level.
The LGF has a revolving fund structure made up of three smaller funds, each targeting different projects. The EIB manages the LGF on behalf of the Greater London.
Authority and the London Waste and Recycling Board. Their main responsibilities are to hold the initial capital, any proceeds from investments, and interest earned from capital that has not been invested. The EIB is also responsible for setting up and selecting the organisations to manage the Urban Development Funds and to monitor their performances.
The LGF focuses on waste management, decentralised energy and energy efficiency schemes that support the Mayor’s environmental targets, with a particular focus on reducing GHG emissions. The fund allocates funding to three Urban Development Funds, which are separate legal entities and invest directly in projects.
The LGF has invested GBP 102 million (USD 135 million) in 18 projects so far. As of November 2014, they are predicted to save 288,805 tonnes of GHG per annum and to divert 440,980 tonnes of waste from landfill per annum, resulting in the creation of 2000 jobs, 34% energy use savings and 61 MW of energy generated. The returns will be reinvested in similar activities, generating more impact.
When to Use It
Setting up an institution such as this usually requires adequate capitalisation, technical assistance for legal and institutional aspects, sufficient positive track record, meeting fiduciary and other standards, and capacity in a variety of topics (financial, institutional, sectoral) [1].
References
[1] https://citiesclimatefinance.org/financial-instruments/instruments/green_investment_funds
[2] C40 Good Practice Guides: London - London Green Fund - C40 Cities
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