A USD9 trillion investor group has made a series of recommendations for channelling greater sums of private capital into ‘blended finance’, including projects to help emerging market countries reduce their carbon emissions.
A USD9 trillion investor group has made a series of recommendations for channelling greater sums of private capital into ‘blended finance’, including projects to help emerging market countries reduce their carbon emissions.
Blended finance projects often take initial capital from public investors, which then helps to de-risk the project and encourage buy-in from private investors.
According to Investor Leadership Network (ILN), it is essential for multilateral development banks, governments, philanthropic organisations, and other public sector actors to improve the attractiveness of these investments in order to unlock greater institutional investment flows.
Investment in blended finance initiatives is so far failing to meet the need. In July, BlackRock raised USD250 million from a consortium of ten institutional investors, governments and charities for a fund aiming to help emerging market economies in Asia, Latin America, and Africa to reduce carbon emissions.
However, emerging and frontier markets face an investment gap for their energy transition, with estimates suggesting that roughly USD9 trillion is needed for these countries to derive two-thirds of their energy from renewable power by 2050.
The Investor Leadership Network has published a ‘blueprint’ with seven steps to improve investment in blended finance, expressing the views of its members including major investors such as Allianz, Natixis, State Street Global Advisors, and Ontario Teachers’ Pension Plan.
“Private investors, particularly large institutional investors, have the financial resources – many times larger than those of the public sector – as well as the expertise to allow them to increase sustainable investments in emerging and frontier economies. But they have not done so to the extent required. Why?” reads ILN’s recent report.
“Institutional investors cite several limiting factors, including the availability of investable projects, institutional constraints, high-risk premiums, and macro-economic and foreign-exchange related factors, all leading to an unfavourable risk-return nexus.”
One of the group’s recommendations is for the creation of a rolling pool of funds that provide first or second-loss guarantees so that the private sector can cover currently hard-to-insure risks, such as regulatory risk.
A separate facility should also be established for dealing with foreign exchange risk, as ILN notes that this is one of the biggest obstacles for institutional investors.
In addition, ILN suggests creating a detailed shared database of projects being screened so that private investors can express an interest early on.
Understanding of the risks involved could also be improved by giving private investors access to the emerging markets risk database, and also building a searchable virtual toolbox so investors can more easily find risk-hedging instruments.
In addition, the group recommends expanding the ILN fellowship program to help emerging market government officials understand institutional investors’ needs and network with potential investors.
“Should the proposals noted above be adopted, private institutional investors could unlock large potential flows,” reads the report.
Estimates suggest that if the risk-return nexus were to improve materially, flows to emerging and frontier economies for sustainable investments could increase by “as much as 50 percent or more over the next two to three years; and plausibly by over 100 percent over the next three to five years, compared to the last five years.”
“Such a rise would help plug the gap that exists between the investments needed for sustainability, and those that appear to be forthcoming from the private and the official sector,” reads the ILN’s report.