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Investors Want to Ratchet Up ‘Blended Finance’ in Climate Fight

Markus Spiske

(Bloomberg) —

A group of the world’s biggest asset owners are proposing a dramatic escalation of joint public-private financing ventures in a bid to help poor countries weather the climate crisis.

“This is a call for 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 put forward the plan. “We need to find ways to transition these economies if we’re going to win the climate battle at all.”

Combining public and private money — so-called blended finance — is a structure designed to entice more private investors to plow funds into the developing world. But the asset owner alliance says the model needs to be scaled up considerably if it’s to draw meaningful financial commitments. The International Energy Agency estimates that the developing world needs more than $1 trillion annually to support the necessary transition to clean energy. 

The alliance is proposing a combination of financial structures, including the securitization of junk debt into tranches, whereby private investors are protected from initial losses. Such a model would represent a significant enticement for investors in regions characterized by very high levels of junk-rated debt, it said. 

“The availability of first loss is usually quite constrained,” Nikolova said.

For now, the median size of blended vehicles is a measly $65 million, less than a tenth the level it needs to be to draw in large, sophisticated investors, according to the net-zero alliance. 

The world’s poorest countries are at the drontlines of climate change. After contributing least, they’re now the most exposed to the global warming that in many cases is making their homes uninhabitable. Rich nations had pledged to provide $100 billion annually by 2020, but failed to do so. They’re now not expected to reach that target until 2023. The rich world’s failure to cough up adequate funds almost derailed climate talks at COP26 this month, with small island states in particular bemoaning a lack of support and credibility.

Read more: Green Markets Put World’s Poor at Mercy of Higher Funding Costs

The finance industry used COP26 to pledge its commitment to fighting climate change, with a group representing $130 trillion in assets across banking, insurance and investment committing to net zero emissions by 2050. Much of that, which includes the asset owners’ alliance, is needed to protect poorer countries from the ravages of a hotter planet.

But many remain skeptical toward the promises coming from global finance. African nations, for example, have said the climate crisis calls for grants, not loans. And while mitigation technologies like wind turbines or solar panels provide returns to investors, it’s less clear whether adaptation technologies, such as sea walls, will have the same allure.

“There is the expectation of a return that investors will always have,” Niklova said. “Within a portfolio you can probably afford to do some of those projects.”

Figuring out how to attract adequate funds to pay for the loss and damage caused by climate change is already set to dominate talks at next year’s climate summit in Egypt. 

“There is plenty of private capital ready to invest in the transition,” according to a report by the asset owners’ alliance. “Transition to a more sustainable, low carbon global economy will provide economic growth with new investment opportunities.”

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