Chapter 11: Guiding Funds, Market Failure, and the Supply of Early-Stage Green Capital
The previous chapter ended on a boundary. Sci-tech finance intermediaries can move a green project from one stage to the next, but only when the mandate spans the handoff, the instrument is matched to the leverage required, and additionality is verified before the money moves. That boundary is where private capital usually stops. Early-stage green technology — first-of-a-kind electrolyzers, solid-state battery chemistries, direct-air-capture modules, biological feedstock conversion — sits in a zone where the risk is too high for commercial debt, the ticket too small for institutional equity, and the horizon too long for most venture funds whose limited partners expect a return inside seven to ten years. The gap is not a rumor. It is measurable, and it is the reason government guiding funds exist.
The design question runs through this chapter: what does a guiding fund need to get right so that it supplies capital the market will not supply, without displacing the capital the market would have supplied anyway? The answer is less about the size of the fund than about the structure of its incentives, the discipline of its evaluation, and its willingness to lose money on purpose in a defined and auditable way.
11.1 Market Failure in Early-Stage Green Finance
11.1.1 Two failures, not one
The case for public intervention in early-stage green finance rests on two distinct market failures. They are often conflated, and conflating them produces bad policy.
Information asymmetry is the first. A green technology startup knows more about its process, its bill of materials, its yield curve, and its failure modes than any outside investor can learn at reasonable cost. This is the classic lemons problem that George Akerlof described in 1970, applied to a domain where the technical due diligence requires domain expertise that generalist investors do not hold. The asymmetry is worse in green technology than in software because the verification of a claim requires physical testing, third-party certification, and often years of field data. A software company can show a demo. A solid-state battery firm cannot show you a five-year cycle-life result until five years have passed.
A positive externality is the second. A green technology that succeeds produces knowledge that spills over to competitors, suppliers, and adjacent industries. It also produces a public good — avoided emissions — that the firm cannot price. The social return exceeds the private return, and private investors, who capture only the private return, underinvest. Nicholas Stern made this argument in the 2006 Review, and the economics of climate change has refined it since: the gap between social and private returns to early-stage green R&D is large enough that no plausible private capital market closes it on its own.
The two failures call for different instruments. Information asymmetry calls for screening, certification, and signaling — the rating machinery of Chapters 3 and 4, and the intermediary functions of Chapter 10. Externality calls for a subsidy, a guarantee, or a public co-investment that absorbs a share of the risk the private market will not absorb. A guiding fund that tries to solve the externality problem with a screening instrument, or the asymmetry problem with a subsidy, will fail at both.
11.1.2 The valley of death is a specific place
The phrase "valley of death" is used loosely. In green technology it has a precise location: between the completion of a pilot and the construction of a first commercial plant. The pilot proves the chemistry. The commercial plant proves the economics. The gap between them is a capital requirement that is too large for venture capital and too risky for project finance.
Consider the numbers. A pilot line for a novel battery cathode might cost $5 million to $15 million and be funded by venture capital and strategic investors. A first commercial plant at 10,000 tonnes per year might cost $200 million to $400 million. Project finance lenders will not touch it because the technology has no operating history at scale, so the debt-service coverage ratio cannot be computed with any confidence. Venture capital will not touch it because the ticket is larger than the fund's reserve capacity and the return profile is a single binary outcome. The firm is stranded.
This is not a hypothetical. The history of the solar industry shows the pattern. First Solar survived the valley because it had a strategic partner and a capital structure that could absorb the risk. Solyndra did not survive, and its failure became a political event. The difference between the two was not the quality of the technology alone; it was the structure of the capital and the willingness of a public instrument to absorb a defined share of the risk.
11.1.3 Why private capital does not close the gap
Three structural features of private capital markets explain the underinvestment.
The limited-partner horizon comes first. A typical venture fund has a ten-year life with an option to extend by two years. Early-stage green technology often requires twelve to fifteen years to reach commercial scale. The fund's limited partners — pension funds, endowments, family offices — have liability structures that make a fifteen-year illiquid position unattractive. The fund manager, facing a ten-year clock, will prefer software and consumer investments where the exit is faster.
Return distribution compounds the problem. Green technology investments have a bimodal return distribution: most fail, a few return 10x or more. This is true of venture capital generally, but the failure rate in hardware is higher and the time to the winning outcome is longer. A fund with a ten-year life and a 2 percent management fee cannot carry a portfolio of positions that take fifteen years to resolve without raising a second or third fund, and the fund's limited partners may not re-up.
Then there is the absence of a comparable. Valuation of an early-stage green technology firm is difficult because there are few public comparables and the technical milestones are not standardized. This makes the asset hard to mark, hard to sell in a secondary transaction, and hard to use as collateral. The illiquidity discount is large.
The exit problem deserves its own treatment, and I take it up in Chapter 12. For now, the point is that the gap is structural, not a temporary shortage of risk appetite. It will not close on its own.
11.1.4 The counterfactual: what happens without intervention
The counterfactual is not "the market eventually supplies the capital." In some cases it does, but slowly and at a higher cost. In others it does not, and the technology migrates to a jurisdiction where the public sector is willing to absorb the risk. The history of battery manufacturing is instructive: the technology was developed in the United States and Japan, but the scale-up happened in China and Korea, where state-backed capital was available at a cost and on a timeline that private markets could not match. What is lost is the plant, and with it the manufacturing learning curve, the supply chain, and the process knowledge that accumulates around the plant.
This is the additionality argument in concrete form. A guiding fund is additional if the investment would not have happened, in the same place and on the same timeline, without it. The test is not whether the fund made a good return. The test is whether the fund changed the set of feasible projects.
11.2 Design and Operation of Guiding Funds
11.2.1 What a guiding fund is
A government guiding fund (政府引导基金) is a public capital vehicle that invests in private funds or directly in companies, with a mandate to steer private capital toward policy priorities. The Chinese form, which is the largest experiment in the world, emerged in the early 2000s and expanded sharply after 2015. By the end of 2023, according to data from the Zero2IPO Research Center, China had established more than 1,500 government guiding funds with total committed capital exceeding RMB 6 trillion. The scale is unprecedented. The design questions are universal.
The defining feature is not the source of capital. It is the steering. A guiding fund does not simply write a check; it attaches conditions that shape where the money goes. Those conditions can be sectoral (a percentage must go to green technology), geographic (a percentage must be invested in the province), stage-specific (a percentage must go to early-stage companies), or leverage-based (the fund must raise a multiple of the public commitment from private investors).
11.2.2 The three structural models
Guiding funds are organized in three basic structures, and the choice of structure determines the incentive problems that follow.
The fund-of-funds model. The public entity commits capital to private venture funds as a limited partner, typically matching private limited partners at a ratio of 1:2 or 1:3. The private fund manager makes the investment decisions. The public entity's influence is exercised through the fund's limited partnership agreement, which can specify sector targets, stage targets, and reporting requirements. This is the dominant model in China and in the European Union's InvestEU program.
The direct investment model. The public entity invests directly in companies, either alone or alongside private co-investors. This gives the public entity more control over the selection and the terms, but it requires the public entity to build an investment team with technical expertise. The risk is that the public entity becomes a de facto venture fund with a political mandate, and the investment decisions become subject to non-financial pressure.
The hybrid model. The public entity invests through a fund-of-funds structure but retains a co-investment right, allowing it to invest directly alongside the private funds in specific deals. This is the model used by the Singapore government's investment company Temasek in some of its early-stage vehicles, and by the UK's British Business Bank through its Enterprise Capital Funds.
The choice matters because the incentive problems differ. In the fund-of-funds model, the principal-agent problem is between the public entity and the private fund manager. In the direct model, it is between the public entity and the taxpayer. In the hybrid model, it is both.
The three structures can be summarized as follows. Public capital enters one of three channels: a fund-of-funds, in which a private fund manager selects portfolio companies and collects management fees and carry from private LPs; a direct-investment team inside the public entity, which answers to taxpayers; or a hybrid vehicle that combines a private fund with a public co-investment right, so that both private LPs and taxpayers bear accountability. In every case the portfolio companies are the same, but the line of accountability runs in a different direction.
flowchart TD
A[Public Capital] --> B{Structure}
B -->|Fund-of-Funds| C[Private Fund Manager]
B -->|Direct| D[Public Investment Team]
B -->|Hybrid| E[Private Fund + Co-Investment Right]
C --> F[Portfolio Companies]
D --> F
E --> F
C -.->|Management Fee + Carry| G[Private LPs]
D -.->|Political Accountability| H[Taxpayers]
E -.->|Both| G
E -.->|Both| H
11.2.3 The incentive contract
The core of the design is the contract between the public entity and the private fund manager. Three terms matter most: the management fee, the carry, and the clawback.
The management fee is typically 1.5 to 2.5 percent of committed capital per year. On a fund with a ten-year life and a 2 percent fee, the manager collects 20 percent of committed capital in fees regardless of performance. This is the standard venture model, and it creates a bias toward deploying capital quickly and toward larger funds. A guiding fund that wants to steer toward early-stage green technology should consider a lower fee on committed capital and a higher fee on invested capital, or a fee that steps down after the investment period.
The carry is typically 20 percent of profits above a hurdle rate, usually 8 percent. The carry aligns the manager with the limited partners, but it also creates a bias toward investments with a plausible exit inside the fund's life. For early-stage green technology, where the exit may be twelve to fifteen years out, the carry structure can push the manager away from exactly the investments the guiding fund wants.
The clawback is the mechanism that recovers carry if the fund's later investments lose money after the manager has already taken carry on earlier winners. A well-designed clawback is essential in a fund with a long life and a bimodal return distribution, because the manager may take carry on the first winner before the rest of the portfolio resolves. The standard clawback is a contractual obligation, but its enforcement depends on the manager's willingness and ability to repay. A guiding fund should require an escrow of a portion of the carry until the fund is substantially wound down.
11.2.4 The leverage ratio and the additionality test
The leverage ratio is the ratio of private capital to public capital in a fund. A 1:3 ratio means that for every one yuan of public capital, three yuan of private capital is committed. The leverage ratio is the most visible metric of a guiding fund's success, and it is also the most easily gamed.
The problem is that leverage measures the wrong thing. A fund that raises a 1:3 leverage ratio by investing in late-stage companies with proven technologies has not solved the market failure. It has crowded in capital that would have been invested anyway. The additionality test — would this investment have happened without the public capital? — is harder to measure but more important.
The European Commission's 2005 expert group report on best practices for public support of early-stage equity finance made this point explicitly: the test of a public instrument is not the amount of private capital it attracts but the extent to which it changes the behavior of private investors. A guiding fund that co-invests in a hot sector at the same terms as private investors is not additional. A guiding fund that takes a first-loss position in a technology that private investors would not touch is additional, even if the leverage ratio is lower.
The measurement problem has its own section below. The design implication is that the leverage ratio should be set differently for different stages and sectors. A late-stage fund can sustain a high leverage ratio. An early-stage green technology fund should accept a lower ratio and a higher public share of the risk.
11.2.5 The first-loss tranche
The most direct way to make a guiding fund additional is to give it a subordinate position in the capital structure. The public capital absorbs the first losses, and the private capital absorbs losses only after the public tranche is exhausted. This is the structure of the UK's Enterprise Capital Funds, which provide a first-loss guarantee of up to 50 percent of the fund's capital, and of the EU's InnovFin Equity facility.
The first-loss tranche changes the private investor's risk-return calculation. A private investor who would not invest in an early-stage green technology fund at a 20 percent expected return might invest at a 12 percent expected return if the first 30 percent of losses are absorbed by the public tranche. The public tranche is expensive — it is a subsidy — but it is a targeted subsidy that buys additionality.
The design question is the size of the tranche. A tranche that is too small does not change behavior. A tranche that is too large subsidizes investments that would have happened anyway and invites moral hazard on the part of the private manager. The European Investment Fund's 2020 evaluation of the InnovFin Equity facility reports that first-loss coverage in the range of 20 to 30 percent of fund capital was sufficient to attract private capital to early-stage technology funds in most European markets. The optimal size depends on the risk profile of the target sector and the depth of the private market.
11.2.6 The investment strategy: sector, stage, and geography
A guiding fund's investment strategy is defined by three parameters: the sector, the stage, and the geography. Each parameter creates a tension between policy objectives and financial returns.
The sector parameter is the most visible. A green guiding fund might require that 60 percent of its capital go to companies in renewable energy, energy storage, energy efficiency, or circular economy. The risk is that the definition of "green" is too broad, allowing the fund to meet its target with investments that are only marginally green, or too narrow, excluding promising technologies that do not fit the taxonomy. The EU Taxonomy Regulation, discussed in Chapter 4, provides a classification system, but its application to early-stage technology is imperfect because the taxonomy is designed for established activities with measurable environmental performance.
The stage parameter is the most consequential for additionality. A fund that requires 50 percent of its capital to go to seed and early-stage companies is more additional than a fund that requires 50 percent to go to growth-stage companies, because the early-stage market is thinner. The Chinese guiding funds have increasingly moved toward early-stage mandates, but the enforcement is uneven. A common pattern is that the fund-of-funds agreement specifies an early-stage target, but the private fund managers, facing the incentive problems described above, drift toward later stages.
The geography parameter is the most politically sensitive. A provincial guiding fund that requires 70 percent of its capital to be invested in the province limits the fund manager's ability to invest in the best companies, which may be elsewhere. The result is a fragmentation of the national market and a misallocation of capital toward less promising companies in the favored region. The Chinese central government has repeatedly criticized local guiding funds for geographic protectionism, but the practice persists because the political incentives favor it.
11.2.7 The governance structure
The governance of a guiding fund determines whether the design survives contact with reality. Three governance features matter.
The independence of the investment committee comes first. If the investment committee is composed of government officials who are subject to political pressure, the fund will drift toward politically favored projects. If it is composed entirely of private-sector professionals, the fund may drift away from its policy mandate. The best structure is a mixed committee with a majority of independent members and a clear mandate that the committee is bound to follow.
Reporting requirements come second. A guiding fund should report its financial returns and its additionality metrics: the number of companies funded that would not have been funded otherwise, the amount of private capital mobilized per unit of public capital, the environmental outcomes of the portfolio companies. The reporting requirement should be specified in the fund's constitutional documents and should be audited by an independent evaluator.
The exit mechanism is the third. A guiding fund's capital is committed for the life of the fund, but the public entity may want to exit early or to recycle capital into new funds. The exit mechanism should be specified in advance, including the valuation method and the conditions under which the public entity can sell its position.
11.3 Evaluating Effectiveness and Avoiding Distortions
11.3.1 The evaluation problem
Evaluating a guiding fund is harder than evaluating a private fund because the guiding fund has multiple objectives. A private fund's objective is financial return. A guiding fund's objectives include financial return, additionality, environmental impact, and regional development. These objectives can conflict, and the evaluation must make the trade-offs explicit.
The standard evaluation metrics are inadequate. The internal rate of return (IRR) measures the financial return but not the additionality. The leverage ratio measures the private capital mobilized but not the change in behavior. The number of companies funded measures the scale but not the impact. A credible evaluation requires a counterfactual: what would have happened without the fund?
11.3.2 Measuring additionality
The counterfactual is the core of the evaluation problem, and it is the hardest to measure. Three approaches are available.
The self-reported counterfactual is the cheapest. The fund manager and the portfolio companies are asked whether the investment would have happened without the public capital. This approach is unreliable, because the respondents have an incentive to overstate additionality.
A comparison group is more reliable. The fund's portfolio is compared with a matched group of companies that did not receive public capital. The difference in outcomes — investment, growth, survival — is attributed to the fund. This approach requires a large sample and a credible matching method.
The structural approach is the most rigorous. The evaluator models the private capital market and estimates the gap between the private and social return. The fund's contribution is measured as the extent to which it closes the gap. This approach requires data that is often unavailable.
In practice, the best evaluations combine the three approaches. The European Commission's evaluation of the InnovFin Equity facility, published in 2020, used a combination of self-reported additionality, a comparison group of non-funded companies, and a structural model of the European venture capital market. The evaluation found that the facility was additional in the early-stage segment but not in the growth-stage segment, where private capital was already available.
11.3.3 The crowding-out risk
The most serious distortion risk is crowding out: the public capital displaces private capital that would have been invested anyway. Crowding out can occur at three levels.
At the fund level, a guiding fund that commits capital to a private fund may reduce the fund's need to raise capital from private limited partners, and the private limited partners who would have invested may instead invest in other funds. The net effect on the total supply of early-stage capital may be zero.
At the deal level, a guiding fund that co-invests in a company at the same terms as private investors may simply displace private capital that would have invested on its own. The company gets the same money at the same price, and the public capital has no additional effect.
At the market level, a guiding fund that subsidizes a particular sector may attract capital away from other sectors, reducing the total supply of capital to the economy. The net effect on green investment may be smaller than the gross effect.
The empirical evidence on crowding out is mixed. Douglas Cumming and Grant Fleming's 2006 study of Australian venture capital found evidence of crowding out in some segments. Douglas Cumming and Sofia Johan's 2009 study of pre-seed government venture capital funds in Canada found that the public funds were additional in the pre-seed segment but crowded out private capital in later stages. The consistent finding is that crowding out is more likely in segments where private capital is already available and less likely in segments where it is not.
11.3.4 The distortion of investment decisions
A guiding fund can distort the investment decisions of private fund managers in ways that reduce the quality of the portfolio.
Herding is the most visible distortion. If the guiding fund specifies a sector target, the private fund managers may all invest in the same subsector, creating a bubble. The Chinese photovoltaic industry experienced this in the 2010s, when local guiding funds across the country poured capital into solar manufacturing, creating overcapacity and a price collapse.
Gaming follows. If the guiding fund's evaluation is based on the leverage ratio, the private fund managers may structure their funds to maximize the ratio, even if the structure is not optimal for the companies. A common gaming strategy is to raise a large fund with a small public commitment and a large private commitment, then invest in later-stage companies where the private capital would have invested anyway.
Mission drift is the third. If the guiding fund's financial return is the primary evaluation metric, the private fund managers will drift toward later-stage, lower-risk investments, abandoning the early-stage mandate. The Chinese guiding funds have experienced this drift, and the central government has responded with regulations that require a minimum percentage of early-stage investment.
11.3.5 The design principles that reduce distortion
The evidence suggests six design principles that reduce the risk of distortion.
The mandate should be set in terms of additionality, not leverage. The fund's performance should be evaluated on the extent to which it changes the behavior of private investors, not on the amount of private capital it attracts.
A first-loss tranche prices the risk. The public capital should absorb a defined share of the losses, and the private capital should absorb the rest. This aligns the private investor's incentive with the public objective.
The instrument should be matched to the stage. Early-stage green technology requires equity and first-loss guarantees. Later-stage technology can use debt and mezzanine instruments. A single instrument applied across all stages will be either too expensive or ineffective.
The evaluation should be specified in advance. The fund's constitutional documents should specify the evaluation metrics, the data collection requirements, and the independent evaluator. The evaluation should be conducted at the fund's midpoint and at its close.
Geographic protectionism should be avoided. A guiding fund that requires a high percentage of local investment limits the fund manager's ability to invest in the best companies. The geographic target should be set at a level that is consistent with the distribution of the target sector, not at a level that maximizes local political benefit.
A credible exit mechanism should be built. The public entity should have a clear path to exit its position, including a valuation method and a timetable. The exit mechanism should be specified in advance and should not be subject to political renegotiation.
11.3.6 The Chinese experience: scale and its discontents
China's guiding fund program is the largest in the world, and its experience offers lessons that are relevant beyond China.
The scale is impressive. By the end of 2023, according to Zero2IPO, the total committed capital of government guiding funds exceeded RMB 6 trillion, with more than 1,500 funds. The funds have been used to support a wide range of sectors, including semiconductors, artificial intelligence, biomedicine, and renewable energy.
The problems are also instructive. Fragmentation is the first: each province and many cities have their own funds, and the funds often compete for the same deals, driving up valuations. Geographic protectionism is the second: local funds require a high percentage of local investment, which limits the fund managers' ability to invest in the best companies. Mission drift is the third: many funds have drifted toward later-stage investments, and the early-stage mandate is often unmet. The difficulty of exit is the fourth: the funds' portfolios are illiquid, and the public entities have limited options for exiting their positions.
The Chinese government has responded with a series of reforms. The 2018 "Opinions on Regulating the Development of Government Investment Funds" required funds to focus on early-stage and hard-technology investments and to reduce geographic restrictions. The 2023 reforms went further, encouraging the consolidation of local funds and the creation of a national fund-of-funds structure. The effectiveness of these reforms is not yet clear, but the direction is consistent with the design principles outlined above.
11.3.7 The European experience: additionality and the first-loss model
The European experience offers a different set of lessons. The European Investment Fund (EIF), the EU's specialized venture capital arm, has been the main vehicle for public support of early-stage equity in Europe. The EIF's model is a fund-of-funds with a first-loss guarantee, typically covering 20 to 50 percent of the fund's capital.
The EIF's 2020 evaluation of the InnovFin Equity facility found that the facility was additional in the early-stage segment: the funded companies had higher growth and survival rates than a matched comparison group, and the private investors reported that they would not have invested without the EIF's participation. The evaluation also found that the facility was less additional in the growth-stage segment, where private capital was already available.
The European experience suggests that the first-loss model is effective when it is targeted at the segment where the market failure is most severe. The model is expensive — the EIF's first-loss guarantees have an expected cost of 10 to 15 percent of the guaranteed amount — but the cost is justified by the additionality.
11.3.8 The US experience: the limits of direct intervention
The US experience is different again. The US government has generally avoided direct equity investment in early-stage companies, preferring tax incentives, loan guarantees, and research grants. The Advanced Research Projects Agency-Energy (ARPA-E) funds early-stage energy research but does not take equity. The Department of Energy's Loan Programs Office provides loan guarantees for commercial-scale projects but not for early-stage companies.
The exception is the Small Business Innovation Research (SBIR) program, which provides grants to small companies and does not take equity. The SBIR program has been evaluated extensively, and the evidence suggests that it is additional: the funded companies have higher growth and survival rates than a matched comparison group, and the program has a positive return on investment.
The US experience suggests that direct equity investment is not the only way to supply early-stage green capital. Grants, loan guarantees, and tax incentives can be effective, particularly when they are targeted at the earliest stages where the market failure is most severe. The choice of instrument depends on the stage and the risk profile of the technology.
11.3.9 The evaluation of the guiding fund: a framework
I propose a four-part evaluation framework for guiding funds. The framework is designed to be applicable across jurisdictions and to make the trade-offs explicit.
Financial return comes first: the fund's IRR, net of fees, compared with a benchmark of private funds in the same sector and stage. The financial return is not the primary objective, but a fund that consistently loses money is not sustainable.
Additionality comes second: the percentage of the fund's investments that would not have happened without the public capital, measured through a combination of self-reported counterfactuals, comparison groups, and structural models. The additionality metric should be reported at the fund level and at the portfolio company level.
Environmental impact comes third: the avoided emissions, the resource efficiency gains, and the other environmental outcomes of the portfolio companies, measured against a baseline. The impact should be attributed to the fund using a credible methodology, such as the Impact Management Project's five dimensions.
Market development comes fourth: the extent to which the fund has contributed to the development of a sustainable private market for early-stage green capital. The metrics include the number of new private funds in the sector, the number of new private investors, and the reduction in the cost of capital for green technology companies.
The framework should be applied at the fund's midpoint and at its close, and the results should be published.
11.3.10 The risk of policy failure
The final risk is policy failure: the guiding fund is designed well but implemented poorly, or the political environment changes and the fund's mandate is abandoned.
The risk is real. The history of public venture capital is littered with funds that were created with great fanfare and then quietly wound down. The reasons are varied: a change of government, a fiscal crisis, a scandal, or simply a loss of interest. The design of a guiding fund should include a political sustainability plan: a clear legislative mandate, an independent governance structure, and a constituency of beneficiaries who will defend the fund.
The most important safeguard is transparency. A fund that publishes its results, including its failures, is more likely to survive political change than a fund that hides its losses. Publishing the evaluation results is an accountability measure, and it is also how the fund stays alive politically.
11.4 The Guiding Fund as a Bridge, Not a Substitute
The guiding fund is a bridge between the public and private capital markets. It is not a substitute for either. The public capital provides the risk absorption that the private market cannot provide; the private capital provides the discipline and the market knowledge that the public sector lacks. The bridge works when the two sides are matched: the public capital is additional, the private capital is mobilized, and the companies get the capital they need on terms they can service.
The bridge fails when the public capital displaces the private capital, or when the private capital captures the public subsidy without changing its behavior. The six principles above determine whether the bridge holds or collapses.
The guiding fund's capital is committed for the life of the fund, but the public entity's objective is to build a self-sustaining market, not to hold a permanent portfolio. The exit mechanism is the test of whether the bridge has done its job. A fund that exits at a profit has demonstrated that the market can value the assets it created. A fund that exits at a loss has demonstrated that the market failure was real, but it has also raised the question of whether the public capital was well spent.
The answer to that question depends on the additionality, and the additionality depends on the counterfactual. The counterfactual is the hardest thing to measure, and it is the thing that matters most. A guiding fund that cannot measure its additionality cannot defend its existence. A guiding fund that can measure its additionality can justify its cost, even if the financial return is negative.
That is the standard I will apply in Chapter 14, when I evaluate the financial and social returns of policy-guided green finance. The standard is not whether the fund made money. The standard is whether the fund changed the set of feasible projects, and whether the change was worth the cost.