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Investors looking to de-risk COP26 plans for emerging economies

09 November 2021 Cristina Brooks

Funds that emerging economies need for climate change investments — for example to build renewable power and conserve natural resources — are not flowing because investors think they are risky, according to speakers at the World Climate Summit on the fringes of COP26 on 8 November.

The hunger emerging markets have for climate finance is enormous. "There is a lot of financing, but a lot of it is not going to emerging markets," said Neil Brown, head of equities at GIB Asset Management, which builds emerging market credit portfolios.

"There's a tremendous pent-up demand for flows of investment into these economies," said Nico Marais, formerly of Allspring Global Investments.

The gap in investment needed to reach the UN's Sustainable Development Goals currently stands at $100 trillion, with developed countries taking most of today's capital, according to a September report by social impact network Force for Good.

Nina Seega, research director at the Cambridge Institute of Sustainable Leadership said that climate finance needed to be approached in a "structural way" because growing economies were still held back by the pandemic.

"If you're still struggling with COVID and in a largely informal economy, that is based on people being out there showing up, and you haven't started solving those problems, it is fundamentally very challenging to think about the transition towards a future," said Seega.

Climate change itself poses new risks that have to be mitigated. "We are very aware that the returns will be generated, [but] the value of that will be dictated by people who cross the line last, by the emissions of those we have to help get over the line," said Emmanuel Nyirinkindi. vice president, cross-cutting solutions at the International Finance Corporation.

Easing new investors into emerging markets

Henrietta Pacquement, head of European investment-grade credit at Allspring Global Investments, said investors are flooding into the green finance space.

"We've seen huge growth on the green sustainable and sustainability-linked indices over the last 18 months, and if you look at the composition of those bonds, about 60% are now issued from governments, agencies, and supranational development banks," she said.

Public finance is increasing, and emerging economies can invest in each other, too. "We need to see more of that, and we need to see more coming from emerging and developing countries," said Pacquement.

Financiers are not strictly focused on returns from their green investments in emerging economies. For example, the Inter-American Development Bank (IDB) this month pledged to make sure its loans and projects would be fully aligned with the Paris Agreement by 2023.

Institutional Investors face risk

There has been an influx of institutional investor interest in emerging economy climate finance.

Institutional investors are seeking to de-risk investments through blended finance partnerships set up by multinational development banks. "In the past, you would see the multilateral development bank [as] more of a primary investor in impact assets, so very much a buy-and-hold strategy," said Jozef Henriquez, head of resource mobilization for the IDB's independent affiliate, IDB Invest.

"As we see more interest from institutional investors coming into the impact space, our role has changed as well.… Our role is becoming more of one that is sourcing, qualifying, structuring, and risking these assets to place them with institutional investors," he added.

"So, for a lot of institutional investors, they don't have the resources to sit there and analyze the transaction line-item-by-line-item; a lot of institutional investors still don't roll out of bed for less than $50-100 million tickets," said Henriquez. "They're not going to have the time to sit there and look at a $10-million investment, so we need to find ways to package these more … so that institutional investors can get invested."

But many institutional investors thought that emerging market investments were not investment grade, he said, adding that data showed the idea was not "grounded in reality."

More private foundations should assist with packages, blended finance partners should be less restrictive, and a standard method of measuring the positive impacts of climate projects is needed, according to Henriquez.

A consensus on standards and data for green investments would reassure investors and would enable greater cooperation between the investment community and governments globally, said Krista Tukiainen, head of research with Climate Bonds Initiative, speaking later in a World Climate Summit panel on emerging markets.

A global classification system such as a taxonomy would help investors identify sustainable small projects, allocate costs, and ensure "capital flows where it needs to go," she said.

The European Commission advanced the cause in recent days with a report on the green taxonomy harmonization effort between the EU and China, which would enable finance flows into China, said Tukiainen.

Making clean technology cheaper

Pacquement said that greening technologies should be made available more cheaply to developing markets.

She described a 700-MW wind farm in Brazil that required wind speed and topography instruments, and suggested that these technologies might be supplied by developed markets in an innovative way.

Without "more commitment" from developed economies on technology sharing, Africa cannot invest in sustainable projects despite the greater impact in Africa of its effects, said Principal Secretary at Kenya's Department of Shipping and Maritime Nancy Karigithu in a separate panel.

Posted 09 November 2021 by Cristina Brooks, Senior Journalist, Climate and Sustainability

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