Plugging emerging markets’ green funding gap
In recent years, a “new force” has emerged as funding for climate change shifted from policymakers and NGOs to include societies and institutional investors, says Frédéric Samama, Deputy Global Head of Institutional Sales at Amundi Asset Management.
While this growth has been significant, in part driven by the momentum of the Paris Climate agreement in December 2015 as well as the high rate of issuance from China-based banks and corporates, “a huge gap” persists.
Barring China, few banks in Africa, Asia, the Middle East, Latin America, Eastern Europe, and Central Asia have issued green bonds, according to Marie-Anne Allier, Head of Euro Fixed Income.
“Less than 20 percent of cities in developing countries have access to local capital markets, through for example issuing bonds to investors, and only 4 percent are deemed creditworthy enough to access international capital markets,” according to the Green Bonds for Cities report, funded by Climate-KIC, Europe’s largest public-private partnership focused on climate change.
As much as 94 percent of the flows to emerging cities to finance environmentally-friendly projects are in the form of green bonds issued by development finance institutions such as the World Bank and the Asian Development Bank.
Based on the Global Climate Risk Index 2017 less developed countries are generally more affected than industrialised countries by extreme weather conditions.
With the lack of funding in developing countries to mitigate climate risks, the World Bank Group’s private investment arm, International Finance Corporation (IFC), in April announced its partnership with Amundi to create the largest green bond fund for emerging markets.
IFC will invest up to $325 million in the new Green Cornerstone Bond Fund1, which will buy green bonds issued by banks in Africa, Asia, the Middle East, Latin America, Eastern Europe, and Central Asia. Amundi will raise the rest of the $2 billion from institutional investors worldwide and will provide its services in managing emerging-market debt. The fund aims to be fully invested in green bonds within seven years.
“This green-bond fund will lower the risk for the private sector and attract new investors – essentially creating a market where there was none,” said IFC CEO Philippe Le Houérou in a statement.
Initially, the fund will focus on countries and banks that have a high potential to issue green bonds— before spreading into other markets. IFC will also provide first-loss coverage, helping to lower the risk and mobilizing financing from the private sector. This will help ensure that the fund can operate in more challenging markets, including the poorest countries and conflict-affected areas.
The fund will contribute significantly to the World Bank Group’s climate targets and IFC’s goal of increasing its climate investments to 28 percent of investments made from its own account while mobilizing an additional $13 billion a year in private financing by 2020, according to Amundi.
1 The fund does not guarantee performance and poses a risk of capital loss.
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