Obtain the data you need to make the most informed decisions by accessing our extensive portfolio of information, analytics, and expertise. Sign in to the product or service center of your choice.
Multilateral development banks (MDB) can help developing
economies secure backing for clean energy projects by using their
robust credit rating in tandem with private finance, according to
bankers, investors, and finance officials participating in a recent
discussion on financing the net-zero transition.
Such banks should not directly finance individual projects in
countries that cannot raise money on their own, Leslie Maasdorp,
chief financial officer of Shanghai-based The New Development Bank,
said during a 22 September World Economic Forum (WEF) discussion,
which was part of the international body's 2021 sustainable impact
summit.
But, they can play a key role, he suggested. "Because we are
double- and triple-A rated, we can do more credit enhancement.
Where, instead of financing projects directly, we take the first
loss guarantee piece [of compensation] if you like in the capital
stack, and then enable institutional investors to come and take the
senior debt piece, which then will be priced lower because of lower
risk, and that way we can improve a lot more funding to developing
countries," Maasdorp added.
Accelerating the transition to net zero and averting a climate
catastrophe will require about $50 trillion of incremental
investments over the next 30-40 years, according to the WEF.
MDBs, such as Maasdorp's own bank, which Brazil, China, India,
and South Africa founded in 2014, typically provide financial
assistance in the form of loans and grants to developing countries
to promote economic and social development and enjoy double- and
triple-A ratings.
Overcoming decarbonization risks
The US is the largest shareholder in the development bank
system, which includes the World Bank, the Inter-American
Development Bank, the Asian Development Bank, the African
Development Bank, and the European Bank for Reconstruction and
Development (EBRD).
In August, the US Department of the Treasury directed the MDBs
to end international financing for unabated coal-fired generation
in line with President Joe Biden's May 20 climate finance
order.
At the UN General Assembly meeting on 21 September, Chinese
President Xi Jinping also announced an end to international coal
project financing.
Maasdorp and other panelists from the public and private sector
agreed that it is a challenge for developing countries to overcome
the risks that impede large-scale infrastructure spending in those
economies that are transitioning to a low-carbon future. With
lenders wary, it's tough for these countries to close the
investment gap for multi-million-dollar sustainable energy projects
as they transition to a net-zero economy.
Evolving role of MDBs
The net-zero transition presents an opportunity for MDBs to
revisit their roles and to consider whether their existing business
model is being put to optimal use or if there is an opportunity for
redesign, Maasdorp said.
Torben Pedersen, CEO of PensionDanmark, which has €36 billion
($42.17 billion) under management, agreed with Maasdorp that MDBs
should get involved in helping developing countries.
But he is skeptical about the idea of total redesign, citing the
urgency of the situation. "2030 is just eight or nine years away, I
don't think we should waste our time with complicated redesigns,"
Pedersen said.
Pedersen said there should be more public-private partnerships
where a sovereign government can back a project, thereby lowering
its risk.
HSBC would like to invest in more sustainable infrastructure in
developing countries, but "the challenge has been a lack of
bankable big sustainable projects," said panelist Celine Herweijer,
who is the bank's chief sustainability officer.
Recognizing that traditional MDB financing, which is spread
across a number of infrastructure projects, has often been
difficult to secure, Herweijer said HSBC is now working with
high-profile MDBs to standardize processes that will allow project
developers and risk-averse investors to leverage MDBs' balance
sheets to raise funds.
In partnership with the World Bank's International Finance
Corporation (IFC), the Organisation for Economic Co-operation and
Development (OECD), and others, HSBC is creating a financing
platform that includes a "fast infra" label that she said will give
investors more comfort with the kinds of projects they are
investing in and improve access to blended financing by project
developers. Blended financing refers to combining public funds with
the private capital to back sustainable development, while
providing financial returns to investors.
Pooling infrastructure investments
Building on Herweijer's comments, Maasdorp suggested MDBs pool
infrastructure investments into a portfolio that will draw more
institutional investors instead of asking them to finance a single
solar project in Egypt or South Africa. The IFC has such a platform
as does the EBRD, he said.
The IFC inked its first certified green loan in Africa in May,
which will boost funding for biomass and other renewable projects
in South Africa.
Another multilateral agency sought to ramp up climate change
adaptation-related investments in Africa earlier this month. Africa
Finance Corporation (AFC) plans to raise $2 billion over the coming
three years for direct investment in infrastructure projects across
the continent that the multilateral agency sees slowing the impact
of climate change, it said 14 September.
Banks' role will change
The panelists also agreed that the transition to a net-zero
economy will neither be cheap nor easy for emerging and developing
economies. And, HSBC's Herweijer noted, it won't be easy for banks
that have committed to net zero because that will require a
wholesale change in business practices. It will mean engaging with
institutional clients about their climate transition plans, judging
their plans, plus advising them on what investments to make and
where, she added.
In emerging countries, she said, the challenge increases
exponentially when conversations revolve around the changing energy
mix. "How do you retire coal assets in Asian economies that in some
cases are just 10 years old?" Herweijer said.
Although the investment community has made strides to
incorporate climate risk into its decision-making, it is still
missing a key piece when it comes to energy transition, and that is
social inequity, Maasdorp said.
"Social inequity is not seen as a systemic risk going forward,"
Maasdorp said.
As a South African native, Maasdorp pointed to his country's
official unemployment rate, which is hovering around 34.4%, and
said the provinces where coal mining and coal-fired generation is
the mainstay would be hit hard by the transition to a fossil-free
economy.
"I can just see dislocation, the immense economic and social
impacts that the climate transition will have in the country where
I am from," he said, calling on MDBs to work with developing
countries towards a "just transition."
The question is no longer whether the transition to net zero
will occur, but rather how quickly, who will lead, and who will be
left behind, John Morton, climate counsellor to US Secretary of the
Treasury Janet Yellen, observed in his opening remarks at the WEF
discussion. "And these are questions not just of environmental
consequence, but of tremendous economic consequence," he said.
Posted 27 September 2021 by Amena Saiyid, Senior Climate and Energy Research Analyst
{"items" : [
{"name":"share","enabled":true,"desc":"<strong>Share</strong>","mobdesc":"Share","options":[ {"name":"facebook","url":"https://www.facebook.com/sharer.php?u=http%3a%2f%2fcleanenergynews.ihsmarkit.com%2fresearch-analysis%2fdevelopment-banks-can-use-their-robust-credit-ratings-to-help.html","enabled":true},{"name":"twitter","url":"https://twitter.com/intent/tweet?url=http%3a%2f%2fcleanenergynews.ihsmarkit.com%2fresearch-analysis%2fdevelopment-banks-can-use-their-robust-credit-ratings-to-help.html&text=Development+banks+can+use+robust+credit+ratings+to+help+move+developing+nations+to+net+zero++++++%7c+IHS+Markit+","enabled":true},{"name":"linkedin","url":"https://www.linkedin.com/sharing/share-offsite/?url=http%3a%2f%2fcleanenergynews.ihsmarkit.com%2fresearch-analysis%2fdevelopment-banks-can-use-their-robust-credit-ratings-to-help.html","enabled":true},{"name":"email","url":"?subject=Development banks can use robust credit ratings to help move developing nations to net zero | IHS Markit &body=http%3a%2f%2fcleanenergynews.ihsmarkit.com%2fresearch-analysis%2fdevelopment-banks-can-use-their-robust-credit-ratings-to-help.html","enabled":true},{"name":"whatsapp","url":"https://api.whatsapp.com/send?text=Development+banks+can+use+robust+credit+ratings+to+help+move+developing+nations+to+net+zero++++++%7c+IHS+Markit+ http%3a%2f%2fcleanenergynews.ihsmarkit.com%2fresearch-analysis%2fdevelopment-banks-can-use-their-robust-credit-ratings-to-help.html","enabled":true}]}, {"name":"rtt","enabled":true,"mobdesc":"Top"}
]}