KfW Research: Public promotional funds play a key role for climate investment

• SMEs use promotional funds for 22 per cent of their climate investments
• Such funds are critical for large-scale projects in particular
• KfW CEO Stefan Wintels: “The goal must be to mobilise private capital for climate action”

Small and medium-sized enterprises in Germany rely heavily on public promotional funds for their climate investments. Businesses that are driving the green transition with investments had 22 per cent promotional funds such as state investment grants or reduced-interest loans in their funding mix for such investments in 2023 – an increase of three percentage points on 2021. By contrast, total investment by SMEs was made up 13 per cent of promotional funds, which include capital made available by KfW.

The share of promotional funds was particularly large in the funding of major climate investments with a volume of over EUR 80,000. It averaged 24 per cent, while businesses raised a further 30 per cent of the investment sum through bank loans and provided 44 per cent from their own funds. The fact that promotional funds are being used to such a great extent in major climate projects in particular shows that the cost of implementing them often exceeds the funding capacity of businesses.

These are the findings of a special analysis of the KfW Climate Barometer. It is an annual business survey that provides what is so far the only representative database for the investment behaviour of all German enterprises in the area of climate action.

“KfW stands ready to provide financial support to enterprises in transitioning to a sustainable economy”,

said Stefan Wintels, Chief Executive Officer der KfW.

“The market does not yet adequately take into account the risks and costs of climate change. Climate projects are therefore often not attractive for investors because of their risk-return profile. Our climate needs to have a price because it’s the only way to make climate projects economically viable and mobilise private capital in the necessary amounts. KfW’s promotional offers in the field of climate action support this development.”

Thus, promotional banks such as KfW can support the market penetration of climate technologies by closing financing gaps and improving the viability of climate investments with favourable financing conditions. Furthermore, promotional banks can strengthen transparency and public awareness of new climate technologies by setting technical efficiency standards, for example in the field of energy-efficient construction, or finance young innovative climate start-ups that do not yet obtain regular bank finance.

The analysis can be accessed at Focus on Economics | KfW.