A group of the world’s largest asset owners is proposing a dramatic escalation of public-private joint financing ventures in a bid to help poor countries weather the climate crisis.
“This is a call to action,” said Nadia Nikolova, lead portfolio manager for development finance at Allianz Global Investors, one of the founders of the Net Zero Asset Owner Alliance, which presented the plan. “We need to find ways to transition these economies if we want to win the climate battle.”
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The combination of public and private money, the so-called blended finance, is a structure designed to attract more private investors to invest funds in the developing world. But the Asset Owners Alliance says the model must be scaled up considerably to generate meaningful financial commitments. The International Energy Agency estimates that the developing world needs more than $ 1 trillion a year to support the necessary transition to clean energy.
The alliance proposes a combination of financial structures, including securitization of junk debt in tranches, whereby private investors are protected from initial losses. Such a model would represent a significant attraction for investors in regions characterized by very high levels of junk-rated debt, he said.
“The availability of the first loss is usually quite limited,” Nikolova said.
For now, the median size of combined vehicles is a paltry $ 65 million, less than a tenth of the level needed to attract large, sophisticated investors, according to the net-zero alliance.
The world’s poorest countries are on the front lines of climate change. After contributing the least, they are now the most exposed to global warming, which in many cases is rendering their homes uninhabitable. Rich nations had pledged to provide $ 100 billion annually by 2020, but failed to do so. They are now not expected to reach that goal until 2023. The rich world’s failure to disburse adequate funds nearly derails the climate talks at COP26 this month, with small island states in particular lamenting the lack of support and credibility.
The financial industry used COP26 to commit to fighting climate change, with a group representing $ 130 trillion in banking, insurance and investment assets committed to net zero emissions by 2050. Much of that, including the homeowners alliance of assets, it is necessary to protect the poorest countries from the ravages of a warmer planet.
But many remain skeptical of the promises coming from global finance. African nations, for example, have said that the climate crisis requires grants, not loans. And while mitigation technologies such as wind turbines or solar panels provide benefits for investors, it is not as clear whether adaptive technologies, such as levees, will have the same appeal.
“There is an expectation of a return that investors will always have,” Niklova said. “Within a portfolio, you can probably afford to do some of those projects.”
Finding out how to attract adequate funds to pay for the losses and damages caused by climate change will already dominate the talks at next year’s climate summit in Egypt.
“There is a lot of private capital ready to invest in the transition,” according to a report by the asset owners alliance. “The transition to a more sustainable, low-carbon global economy will provide economic growth with new investment opportunities.”
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