The Kuali Fund, which is being managed by impact investor GAWA Capital, has raised €129m at first close to support a range of countries globally to build climate resilience and transition to low carbon economies.
COFIDES, the Spanish state-owned commercial company which also operates as a development finance institution, has announced the launch of the Kuali Fund, a climate mitigation and adaptation fund, which has raised €129m at first close.
The fund has received contributions of €25m from the Green Climate Fund (GCF), €12m from the European Union, and €5m from COFIDES itself. The Spanish Agency for International Development Cooperation also committed €50m in junior credit through its Fund for the Promotion of Development (FONPRODE), which “will be released as the fund size increases”, explained Agustín Vitórica, co-founder and co-CEO of GAWA Capital, the Madrid-based impact investor managing the fund.
Several European and US-based family offices also contributed to the funding round alongside a “significant” investment from an unnamed insurance company and several smaller commitments from European pension funds.
The aim of the fund is to support countries across Latin America and the Caribbean, and India in their transition to low-carbon economies and help them to build climate resilience. It will do this through investments into 25 financial service providers offering green and climate-focused financial products to both SMEs and small-scale farmers and through direct investments into companies providing climate solutions. Investees will also receive non-reimbursable technical assistance grants from the fund’s €12.25m technical assistance facility, which has been raised in addition to the fund with commitments from the EU, GCF and FONPRODE.
Attractive returns
Speaking to Impact Investor, Vitórica said the fund was an attractive proposition for private investors as it offered better protection and higher rates of return relative to other emerging market funds.
“Private investors not only benefit from the €37m in first loss from the GCF and the EU commitments but any excess cash generated above 12- month Euribor, which is the interest rate on FONPRODE’s €50m junior debt, will be distributed to them. This is equal to an investment return enhancement of 2.5 to 3% per annum,” he explained.
Vitórica said despite an internal rate of return of more than 10% per annum, the fundraising environment for emerging market funds was still challenging.
“The increase in risk free rates has been huge in the last year and many investors are demanding a premium to invest in emerging markets. Despite Kuali having everything, including a very big cushion and increased returns, a lot of interested investors were still wanting to wait until we had a first closing,” he added.
Climate adaptation and resilience
According to the United Nations Environment Programme, the annual climate adaptation finance gap is estimated to be between $187bn (€173bn) and $359bn.
“We launched the fund at an event with our investors at which we talked about climate finance, and more specifically about how the majority of climate finance has thus far been directed at mitigation with only a small portion going to adaptation and resilience and an even smaller portion being directed to vulnerable communities,” said Vitórica, who explained that to
improving the resilience and adaptation of communities vulnerable to the effects of climate change required systemic change.
Vitórica said this meant working in partnership with a broad range of stakeholders.
“The Global North has this tendency of going in and investing in companies and ignoring the rest of the system. If you want to create lasting impact, it’s about transforming all the local entities that are around these vulnerable communities,” he said.
Technical assistance facility
The fund will use its technical assistance facility to help financial institutions to develop, pilot and expand their climate-related product portfolio, particularly in support of rural communities.
“We will also involve local NGOs and foundations who have on-the-ground experience and the trust of these communities to help implement the technical assistance facility as well as to drive the adoption of solutions” he explained, adding that the fund also had the support of 11 Latin American governments.
The solutions the fund would like to see developed and adopted through its support of financial institutions, include, among other things, organic fertilisers and pesticides, regenerative agriculture, efficient irrigation and water tank storage systems, agroforestry and biodigesters.
SME investments
Vitórica said the fund also planned to invest into around 15 SMEs affected by rising climate pressures, with the first two planned for Q2 of this year. He said that SMEs in particular needed support in adapting their business models or risked being “kicked out” of international value chains because they did not meet scope 3 emission reduction targets.
“We want to support these firms through small-scale mitigation, such as financing more energy efficient machinery, through renewable energy adoption and better insulation systems. This will help make them more resilient to climate change as well,” he added.
The fund is expected to support the avoidance of over 4 million tonnes of CO2 equivalent emissions over its 10-year lifespan, while addressing the adaptation and resilience needs of 500,000 smallholder farmers and SMEs.
