Deal flow can turn back the tide of climate change

By:
Chris Wright
Published on:

The future of climate change finance lies in its ability to attract private capital. It is a complex task, but the key to its success will be in keeping products offered to investors as simple as possible.

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There is no way that the enormous sums required to address climate change in vulnerable countries can be raised without the committed involvement of private-sector capital. That is just a fact; stating it is the easy bit. The hard part is how to make it happen. 

The Paris Agreement committed $100 billion a year to climate change finance without being entirely clear about where it would all come from. The only numbers that make figures like $100 billion look digestible are those involving global asset management ($71.4 trillion, according to Boston Consulting Group) and more specifically pension funds ($36.4 trillion in the 22 biggest pension markets, according to Willis Towers Watson). Climate finance needs some of that money.

But it is money that has to turn a profit and to do so with due consideration of risk. There is no point in expecting private institutional money to go to the world’s most climate change-vulnerable places without a solid investment rationale: to do so would be a breach of fiduciary duties.

“Private capital has an absolutely indispensable role to play in climate change finance,” says Paul Tregidgo, a former vice-chairman of debt capital markets at Credit Suisse, who has spent large parts of his career advising sovereigns and multilaterals on their issuance and investor strategies. He also serves as a member of the advisory council of the Centre for Financial Inclusion. 

“My own view is, to bring private profit-seeking capital to bear on a sustainable basis, there has to be a clear line of sight on a market risk-adjusted return basis for that investment,” he says. “I would begin by thinking about specific situations where you can attract private capital to that situation.”

IN ADDITION        


The future of climate finance rests upon creating the structures and environments where this can happen with sufficient scale. It is under way, but that is all. 

“A huge amount is being done on financing,” says Jonathan Drew, managing director for the infrastructure and real estate group at HSBC in Hong Kong, “but we have to be realistic: is this model working?

“Yes it is, but I don’t think it’s working fast enough. We are nowhere near to getting to the sort of volumes that are required.”

Good name

So, how do we get there? For once, bankers might actually get a good name by facilitating it. 

“We believe that innovation is what’s going to be key to solving some of these issues and that financial capital is what fuels the innovation,” says Abyd Karmali, managing director, climate finance at Bank of America Merrill Lynch in London. “Financial institutions need to be the engine for that.” 

BAML, perhaps above all other financial institutions, is putting its money where its mouth is in this respect. It has set a series of targets for the deployment of capital in low-carbon and sustainable projects – most recently increased to $125 billion by 2025 – and has already directed $70 billion this way since 2007. It is also the founder of the Catalytic Finance Initiative, a collective of eight partners committing a total of $8 billion to financing clean energy projects, $1 billion of it from BAML itself. 

We need to be clear on what innovation means, however, and it does not mean reinventing the wheel – indeed, that would be counterproductive. 

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Vikram Widge,
International
Finance Corporation

“It is about making sure innovation is ultimately channelled into things people can incorporate into their asset allocation,” says Vikram Widge, head of climate finance and policy at the International Finance Corporation, part of the World Bank Group, “rather than having to challenge the entire way these large investors allocate capital.

“One thing we learned early is that innovation is great, but for its own sake it’s just going to put you up against the wall. To move big money, you have to align yourself with common practices in the market, with how money is already flowing.”

That means taking existing products and tailoring them in such a way that they serve a climate-related purpose. 

“It’s not finance you want to be innovative,” says Tregidgo. “It’s project structuring that you want to be innovative.

“Financial tools are relatively simple – I would argue that in order to get to scale, they should remain so. How are you going to involve a great cross-section of the world’s investors unless one can deliver them a financial product that is relatively simple, relatively easy to understand and relatively clear on risk and return? 

“We shouldn’t be looking for financial alchemy here. We should be looking for well-structured projects to achieve the scale that we want.”

Widge at the IFC talks in terms of three S’s that are crucial to attracting institutional capital: scale, safe and simple. “That really means aggregate; de-risk; securitize, ultimately into bonds and loans,” he says.

The clearest example of this idea in action is the success of the green bond market. A decade after the first issue by the European Investment Bank, annual issuance hit $81 billion under the Climate Bonds Initiative’s definitions and $92 billion by other measures in 2016, $23 billion of it from China. 

“The real attraction is it’s a fairly simple product,” says Widge – the IFC was an early issuer, seeding the market and has supported it throughout. “It’s a bond. Investors understand what a bond is. You are packing a green element alongside it – give us the money and we will channel it into financing projects that are climate-smart – but it is still a bond.” 

Within the constraints of its simple structure, green bonds continue to innovate. In April, the IFC teamed up with the European asset manager Amundi to create a $2 billion green bond fund dedicated to emerging markets, with the aim of deepening local capital markets and expanding financing for climate investments. 

Its focus is quite clear. “A huge gap persists,” says the IFC. “Few banks in developing countries have issued such bonds.” The hope is that the new fund encourages more of them to do so. 

The facility, called the Green Cornerstone Bond Fund, will buy green bonds issued by banks in Africa, Asia, the Middle East, Latin America, eastern Europe and central Asia. The IFC put in $325 million, and Amundi will raise the rest from institutional investors. It aims to be fully invested within seven years. 

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Xavier Musca, chairman of Amundi, part of the Crédit Agricole Group

“I consider this project as a game changer,” said Xavier Musca, chairman of Amundi, part of the Crédit Agricole Group, in April. “It is both an investment opportunity for institutional investors and it will have an impact on society by accelerating the shift of emerging markets toward a green economy.” 

So green bonds are a clear step in the right direction. But where next? 

“Green bonds are important,” says HSBC’s Drew. “But there’s a much bigger story than just green bonds.” 

There is a lot of work taking place around green loans, which have a slightly different approach: they may have a margin trigger linked to a borrower achieving a sustainability goal, for example. 

“There is a discussion globally as to how to create a product,” says Drew. “We are heavily involved in that. No formal position has been reached, but the aim is to make it consistent and aligned with green bond principles but tailored in certain ways.”

An example of this is the €1 billion loan ING arranged for Philips in April, whereby the movements of interest rates on the loan will vary according to how Philips scores on its sustainability, as determined by independent researcher Sustainalytics. 

Unlike a green bond, the borrower can use the money for anything; the incentive to be clean comes from the interest rate. That loan came a month after a set of green bonds from the World Bank directly linking financial returns to companies achieving the standards set by the UN’s Sustainable Development Goals.

But the single most-important structure the financial markets can bring to bear in the war against climate change is a familiar one. It was pilloried for causing, in part, the global financial crisis, so it would be quite a transformation if it ended up helping to save the world. 

“If we were to ask: what is the most important area for growth? It is, in my opinion, green asset-backed securities,” says Karmali at BAML.  


There’s no one entity that’s going to solve these issues alone, so there is a need to share – not only risk and reward but ideas too 

Andrea Sullivan, BAML

It is already happening in the developed world. Asset-backed financing provides a good source of funding for the solar industry in the US, for example, through a simple securitization of receivables. And a green ABS was built on a solar portfolio in Spain. It is perfect: it recycles capital from investors, and transfers assets to the perfect owners, institutional buyers who want to take them for the long term. 

The trick is rolling this out away from the developed world and into more vulnerable countries. 

“If you count up all of the proposed investments in solar and wind under the plans that countries have submitted as part of the Paris climate accord, it’s around 1,700 gigawatts by 2025,” says Karmali. “To scale up to that level, asset-backed securitization is really important.”

Encouragingly, there are already examples, such as the Indian Rooftop Solar warehousing facility and asset-backed security, an IFC project. 

India has a target for installing 100GW of solar power by 2022, 40GW of it from solar rooftop systems – “ambitious, by any measure,” says Widge. Indeed, by March 2016, total rooftop installation across the whole country was 740 megawatts, less than 2% of the targeted figure. “A lot of these are small, they run at half a megawatt, maybe one or two,” he says. “So how can it be financed?”

The IFC is working with three project developers using standard underwriting criteria. They will begin with an aggregation phase, in which a loan book is built from these projects, using a standard warehousing mechanism common in asset-backed deals. Then, once that portfolio is ready, or ‘seasoned’ as the terminology has it, the mobilization phase starts, which means securitizing the deals and issuing green securitized bonds. The plan is for them to be sold in the domestic markets, “which has its challenges,” Widge says, “where you have to work with regulators in countries which have large domestic capital markets but can be fairly restrictive. But that is part of the process.”

On a different scale, the IFC is also participating in a portfolio of infrastructure projects with a climate angle, providing some level of risk mitigation so institutional investors (in practice, mainly insurance-related asset management groups) get credit enhancement when they invest in them. 

“It’s not quite securitization, yet,” says Widge, “because these are obviously single investor pools, but it goes to the heart of the aggregation part of the equation.”

Potential

If you look hard enough you can see the potential for things like this all over the climate-threatened world. 

One example is M-Kopa, the Kenyan solar energy company, whose founders include Nick Hughes, the man who set up the revolutionary M-Pesa mobile banking system. The model is this: customers pay a deposit – typically around KSh2,999 ($29) – for a home solar system and pay KSh50 a day for a year to own it. They make their daily payments through M-Pesa and their solar power slowly offsets the cost of the system. 

The idea is that it replaces the use of kerosene burners in places that are off Kenya’s electricity grid. As of May 2017, M-Kopa says it had connected over 500,000 homes to solar and is adding about 500 a day; it says existing customers will save $375 million over the next four years.

M-Kopa has estimated that 80% of its customers live on less than $2 a day. This suggests that even the very poor are capable of generating a revenue stream suitable for securitization, because the cost, at least in theory, makes them wealthier.

It is not charity. “If you don’t pay me, my technology enables me to shut you off immediately,” says one person familiar with the business, but not an employee. “But you do pay, because you can light your small business and your kids can do their homework. And then I have a credit rating, for you and all the hundreds of thousands who are using similar technologies. And that data is eminently financeable.”

The M-Kopa model has not yet been securitized, “but,” that person adds, “I’m sure it could be. The whole discussion of technology, in terms of what it enables you to do in accessing previously unknown data for financial streams, is of incredible importance in scaling this market.”

Indeed, technology is one of the things that makes securitization achievable, because of the richness and accuracy of data it can provide and the speed with which analysis can be conducted. 

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Paul Tregidgo, a member of the advisory
council of the Centre for Financial Inclusion

“The ability to gather data from multiple points and to analyze and aggregate at scale and speed means we can structure financings in ways that simply were not available when analysts were banging out spreadsheets manually to finance automobiles in developed markets,” says Tregidgo. 

He notes that businesses are being built around the internet of things to develop infrastructure services in previously unserved communities. “Those businesses bring data that can inform the construction of financial products suitable for the needs of these communities in ways that could ultimately be financed by private markets,” Tregidgo says.

The capital markets are, gradually, trying to do their bit for climate need and the examples are beginning to multiply. 

Look, for example, at the P10.7 billion ($225 million) local currency bonds issued in February 2016 for the Philippine firm AP Renewables, a subsidiary of AbiotizPower Corporation, which is developing the Tiwi-MakBan geothermal energy facilities. 

With the help of credit enhancement from the Asian Development Bank (ADB), certification from the Climate Bonds Initiative and underwriting from the Bank of the Philippine Islands through its BPI Capital subsidiary, Asia gained its first climate bond; one that was achieved without having to go anywhere near the dollar markets. 

Karmali highlights the $475 million bond for the special purpose vehicle Neerg Energy, whose proceeds were then invested in masala bonds issued by ReNew Power, an Indian solar and wind power developer whose investors include Goldman Sachs, the Abu Dhabi Investment Authority and the Global Environment Fund. BAML was a lead on the deal, along with Goldman, HSBC, UBS and JPMorgan. 

That deal caused some commotion in India, side-stepping a Reserve Bank of India measure to restrict the sale of high-yield offshore debt, but to Karmali (and the other bankers) it represents progress. 

“The innovation was bundling a whole series of cash-flow from operating renewable assets into an SPV that issued a dollar-denominated bond, but benefiting from the rupee cashflows coming from seven different projects,” he says. “Multiple things were accomplished: the operating company was refinanced, the FX hedge was done in a cost-effective way, we were able to distribute it to a mix of clients and they perceived it as much lower risk than it would have been to go onshore in India.”

Market mechanisms

Karmali also talks of structuring green guarantees on issues from Kenyan geothermal and Chilean solar projects to get investors comfortable with the risk involved. 

“It showed that US investors can be interested in Kenyan geothermal,” he says. “It was distributed from our main debt capital markets platforms, to all the usual larger US institutional investors who have an interest in increasing exposure to clean energy.” 

He says that over the years, deals have been done in Mozambique and Rwanda, involving clean cooking stoves and rechargeable LED lights: “If you have the right market mechanisms, we can deploy capital, so long as those market mechanisms have the right credibility with investors.”

Elsewhere there is the Starbucks sustainability bond, which BAML, sustainability and structuring agent on the deal, says will help local farm resource centres in Ethiopia, Guatemala and Kenya. This is not purely altruism: resilience of the supply chain is enormously important to Starbucks. 

Another potential area is so-called blue bonds, focused on improving water-based resilience. The Nature Conservancy (TNC), a non-profit that partners with BAML on marine resilience, last year supported the first ever climate adaptation debt restructuring between the government of the Seychelles and its Paris Club creditors, introducing impact investment into debt restructuring. The financing supports adaptation through improved management of coasts, coral reefs and mangroves, and implements a Marine Special Plan for an area about 3,000 times the size of the islands themselves.   


As the market moves away from government subsidies and guarantees, stable revenues are still required to maintain the levels of private-sector investment required 

Mark Dooley, Macquarie Capital Europe

The restructuring uses a combination of investment capital and grants: TNC raised $15.2 million in impact capital loans and $5 million in grants to buy back $21.6 million of Seychelles’ debt. The cash flow from the restructured debt is payable to, and managed by, an independent public-private trust fund. Debt service payments fund three streams: one for the coasts, reef and mangroves, one to repay investors and the third to capitalize an endowment.

“It also provides Seychelles with an innovative financial tool to restructure its debt and allow its national government to free capital streams and direct them toward climate change adaptation,” says TNC, “and ultimately the livelihoods of their citizens. 

“This combination of public and private funds – each leveraging the other – creates a new model for public/private co-investment debt restructuring.”

Other promising structures include the World Bank pandemic bond and a forestry bond from the IFC, basically a regular IFC bond but where the coupon is channelled into a reforestation project in Kenya. 

Two camps

So there is progress, but these are, in the main, one-offs. 

“You can talk all you want about aggregating and re-risking,” says Widge. “But you need deal flow. How do you help generate quality deal flow you can feed into the rest of the financing value chain?”

The problem is that there are certain places private capital is likely to be willing to address – chiefly renewable energy generating a reliable and predictable income stream – and certain places where it is unlikely to go at all.

Climate change projects divide broadly into two camps: mitigation, which means doing something to limit carbon emissions, such as building a wind farm; and adaptation, which means accepting the new reality and building infrastructure to make the best of it, such as a sea wall.

Adaptation is every bit as crucial as mitigation, but it is a lot harder to get private money in there.

“The challenge is, from a private-sector perspective, adaptation doesn’t pay off in the timeframes that private capital tends to analyze its investments within,” says Widge. “There’s no revenue stream usually associated with adaptation.” 

The private sector might build a sea wall on a contract basis, but it will not invest in it because there is no income, unless a mechanism is devised whereby private property or hotels contribute a levy in order to fund it. That is not inconceivable. 

“That was the issue with solar in the old days: you couldn’t ask people to pay for 20 years of electricity up front,” says Widge, but the market then evolved. 

Where, then, are the lines drawn between what institutional investors will and won’t commit money to?

Macquarie Group is one of the best institutions in the world to ask. First, it is an investment bank of renowned innovative zest; second, it is now one of the world’s largest investors in international infrastructure; and third, it has a stated focus on renewable energy and led a consortium that acquired Green Investment Bank (GIB) from the UK government for £2.3 billion ($2.97 billion) in April. 

GIB, which answers to a group of independent trustees, aims to make £3 billion of investments in green-energy projects over the next three years. 

“We have a big global focus on renewables and a large team in Macquarie Capital chasing those projects around the world,” says Nicholas Moore, chief executive of Macquarie.

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Mark Dooley, head of energy and infrastructure for Macquarie Capital Europe

What, from its perspective as a big institutional investor, makes a project investable and attractive? Mark Dooley, head of energy and infrastructure for Macquarie Capital Europe, says there are three factors. The first is technology. 

“The sector continues to be characterized by fast-evolving technical solutions delivering greater efficiency, but potentially also requiring investors to rely on less-established technology,” he says. Investors are getting used to that, he adds, provided there are good data and reference projects available to demonstrate the performance of each technology.

Next is partnership: “Having the right people in place with the depth of knowledge and sector expertise to drive development, construction and operations of projects,” says Dooley.

Third, of course, is the return. 

“Investors need to see an appropriate revenue model, with risks that correspond to the expected return level,” says Dooley. 

This needs to keep pace with movements in policy. 

“As the market moves away from government subsidies and guarantees, stable revenues are still required to maintain the levels of private-sector investment required,” he says.

“This is all about the evolving balance between locked-in revenues and merchant risk, as governments reduce support and investors increase their tolerance for merchant risk.”

This raises two other themes: enabling frameworks from local governments and the role multilaterals can play in getting private capital comfortable. 

Private-sector capital simply will not go where it is not welcome – and that applies at a country, as well as a project level. Governments need to implement the right policies if they want to attract investment. 

“The role of the public sector and policymakers, through the creation of a sound, predictable regulatory and legislative environment, is pivotal,” says Tregidgo. “If populations are being asked to substantially change the way they behave and proceed with their economic lives, institutional incentives to do so are critical.”

Frank Rijsberman leads the Global Green Growth Institute, an international climate group based, like the Green Climate Fund, in Seoul. One of its roles is to try to get institutional capital to go to places it would not ordinarily be comfortable going and to work out how to make it palatable. 

“De-risking, in all its forms, is the key thing our people think about,” he says. “The specific risks that prevent finance entering and how do we alleviate that.”

One of the risks, clearly, is the threat of inexact or unwelcoming policy in emerging markets. The Danish pension fund PensionDanmark, for example, has funded renewable projects in Denmark and is now doing so across the EU and the US, but not further afield. 

“I sat with their CEO, and he said that when you go to emerging markets, there’s just that extra risk in foreign exchange and the policy environment,” Rijsberman recalls.  


Our guarantee enabled the raising of $225 million from local capital markets. This is part of a new wave of mobilizing capital markets for climate finance 
 - Preety Bhandari, Asian Development Bank

In energy, for example, that means a legislative environment that allows for a power purchasing agreement. In funding, it means making sure that pension funds and insurers are not impeded from investing in these assets. 

Ultimately, decisions come down to practical economics, but policy can help with that. Cesar Purisima, founder of the Vulnerable Twenty (V20) group of nations and former secretary of finance of the Philippines, recalls how getting a feed-in tariff through for solar and wind power was crucial in getting people to shift from coal to renewables there. 

“Without that, it would never have taken off,” he says. “It made the economic choices more or less competitive.”

The other side of that coin is phasing out subsidies for coal and fossil fuels, which are still common – they amounted to $5.3 trillion in 2015, according to the IMF. Change the equation and you can change the fuel. 

“Policy,” says Purisima, “changes behaviour.”

Solar and wind have already entered the mainstream of power supply, particularly in the west, but another transformative measure that policy could assist has to do with the way electricity is transmitted after generation. 

Rijsberman talks about a long-term trend to move away from centralized grids to a larger number of smaller local grids, or battery power that is not part of a broader grid at all. 

“Right now diesel is cheap,” he says. “In three years, batteries will likely be cheaper. And as soon as that happens, you can seriously think about not expanding the grid anymore.”

Long-term thinking like this takes you to some interesting places. 

“Would you still build a subway system that has to pay off over the next 25 or 30 years when halfway through you might have autonomous electric vehicles doing a much better and cheaper job?” asks Rijsberman. 

But that is not the way governments think, particularly in democracies, which does not help with climate policy and with infrastructure. 

Preety Bhandari, director of the climate change and disaster risk management division at the Asian Development Bank, uses the example of building a road. Building it for better connectivity and trade is great, but not if you do not allow for the possibility of it flooding as sea levels rise. 

But adapting for future climate scenarios is a challenge, “because governments make decisions here and now,” Bhandari says. “Pushing them into thinking of the longevity of the infrastructure and the fact that they may need to borrow more for the same infrastructure in order to climate-proof it is an intense dialogue which needs to take place.”

“Countries are going to have to use their own resources to meet the financing gap,” says Rachel Kyte, chief executive of Sustainable Energy for All and special representative of the UN Secretary-General for Sustainable Energy for All. “They need to use their tax bases better, they need to stop illicit flows out of the country.

“Many countries invest far too little of their own domestic resources into their own critical infrastructure,” she says. “That’s going to have to change, and the investments in infrastructure are always going to need to be resilient to projections of climate change impact in the future. You have to build electricity pylons to withstand a category 5 instead of a category 4 [typhoon], things like that.”

Multilaterals

The other important point about removing risk in order to entice the private sector is the role of multilaterals. Perhaps that it is too specific a constituency; Tregidgo prefers the term ‘patient capital’, “whether it be from development banks, multilaterals, foundations or not-for-profits,” he says, “the term covers a variety of actors. But engaging those actors in putting their form of patient capital in customized and project-specific forms is key to developing the financial infrastructure.”

What this means, in practice, is getting Tregidgo’s patient capital to go into parts of the capital structure where the private sector will not go, taking risk that the private sector is not ready for. Patient capital is crucial to the proposals Spencer Lake has put forward for the V20. 

Of all the multilaterals, the IFC is the one with the clearest priority to use itself to leverage private capital in this way. 

It has some big ambitions, announced in its Climate Implementation Plan in 2016: to scale climate investments to reach 28% of IFC’s annual financing by 2020; to catalyze $13 billion in private-sector capital annually by 2020 to climate sectors; to maximize its impact from greenhouse-gas emission reductions and to account for climate risk.

In truth, all the multilaterals want to do more of this. In climate terms, the headlines around the ADB have been about its commitment to scale up its climate financing to $6 billion by 2020, $4 billion for mitigation and $2 billion for adaptation. By then climate change will account for 30% of the ADB’s overall financing. It is on track: it approved $3.7 billion in climate finance investments in 2016, up 42% on the previous year. 

But beneath those big numbers one can see some of the same priorities around smoothing the path of private capital. In 2016, the bank mobilized $701 million from external sources ($595 million mitigation, $106 million adaptation). 

“As MDBs our resources and investments are minuscule if you look at total climate finance needs,” says Bhandari at the ADB. “So it’s a question of how we leverage, not only with bilateral financings but the private sector.”

The standard method of doing this is through guarantees, taking some risk off the table to help a project get ahead. The ADB’s support of the geothermal project in the Philippines mentioned earlier was a good example. 

“Our guarantee enabled the raising of $225 million from local capital markets,” says Bhandari. “This is part of a new wave of mobilizing capital markets for climate finance.”

Other examples include a partnership between the ADB and the government of Canada to establish a new trust fund to support greater private-sector participation in the bank’s climate-change mitigation and adaptation programmes, with the Canadians putting in C$200 million ($161 million) and targeting climate projects that promote the empowerment of women and girls. The ADB administers and manages it on their behalf. 

Another example is the agreement between the ADB and the Japan International Cooperation Agency (Jica) to establish a fund to support private infrastructure investments called the Leading Asia’s Private Infrastructure, or LEAP, capitalized by $1.5 billion in equity from Jica and managed by the ADB’s private-sector operations department. Its first practical contribution was to a $390 million financing package for ReNew Power to develop renewable energy projects in India. 

Elsewhere, Rijsberman’s GGGI is trying similar approaches. 

“Too much climate finance is plain old grants. That’s not going to do it,” he says. A better option, he says, is illustrated by the group’s work with the Access to Clean Energy facility in India, designed to address debt financing needs for renewable energy sources there. 

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Andrea Sullivan,
BAML

There is no shortage of off-grid energy companies in India, but they cannot scale up operations because of high upfront costs, high operating capital requirements, small revenue ticket sizes and irregular payment cycles. GGGI has helped by seeking a first-loss instrument from the Green Climate Fund, combined with a revolving credit facility to catalyze lending from Indian banks and other sources of debt to the sector. 

“Those are the deals we need to see to have climate finance have its intended impact,” says Rijsberman.

Those in the private sector want the multilaterals to be doing more of this – and faster. Asked what he thinks multilaterals should be doing, Tregidgo says: “In one word, leverage. Leverage their deep technical and development expertise, leverage their global reach to populations, which other institutions cannot and do not reach, leverage their connectivity with policymakers, leverage their financial standing to catalyze private-sector capital, and apply that leverage to transactions that are scalable and repeatable.”

The answer, ultimately, will be not only money but teamwork on an unprecedented scale. On this, at least, all agree. 

There is a recognition that we have to work together,” says Andrea Sullivan, head of international environment, social and governance at BAML. “There’s no one entity that’s going to solve these issues alone, so there is a need to share – not only risk and reward but ideas too.”


Insurers need to come to the party

Insurers will be vital to bringing private capital to climate change finance. Former Philippines finance secretary Cesar Purisima has spoken at length about the challenges of gaining catastrophe insurance to reduce the Philippines’ fiscal exposure. 

It is a common problem. 

“In the Asia-Pacific area, the issue of climate risk insurance has not really been established yet,” says Hans-Joachim Fuchtel, governor for Germany at the Asian Development Bank (ADB), and the parliamentary secretary of the federal ministry of economic cooperation and development in Germany. “It is hardly available.”

Fuchtel says that in Asia in 2016, $83 billion of damage was done by natural disasters and that only $9 billion of it was covered by insurance. “That is something we want to change.”

Fuchtel was speaking at the launch of the Asia-Pacific Climate Finance Fund at the ADB annual meeting, an attempt to leverage public- and private-sector investment through innovative co-financing measures, which, unusually, include climate risk insurance. 

It depends on insurers playing the game – and they are making positive noises. 

“Our doors are open,” says Peter Höppe, head of geo risks research and the corporate climate finance centre at Munich Re. “You need to put these things together. If you prevent losses, then the premium can go down and insurance becomes affordable and can be more involved.”

Insurers are clearly no stranger to risk. Munich Re first communicated on climate change risk in 1973, and it, like all insurers, has done intense analysis ever since. Asia is the continent with the steepest increase in risk. “Since 1980, the number of loss weather events has quadrupled,” says Höppe.

“We have offered our engagement, we offer our data and the next step is we are prepared to add insurance capacity.” It has done so, he says, with catastrophe risk facilities in the Pacific, Africa and the Caribbean. “These are important. But they are mostly sovereign tools. We also need micro-insurance systems, which directly go to the people affected.”

But commercial insurers are not charities and have to work within certain parameters. “The most important thing which makes things fit for insurance,” Höppe says, “is that it is for events which are not foreseeable. There, we have a problem with sea level rises, because it is foreseeable. But a storm surge event is insurable.

“The second precondition is adequate premium. It’s not that we think of making a profit by getting insurance in the developing countries, but at least we need to get the loss we pay out on an average basis back by premium.”