Large climate projects in developing countries struggle to attract affordable financing. New initiatives like the Green Guarantee Company and the EU’s Global Gateway aim to encourage investors to move into more challenging markets
Green bonds and loans are hugely popular among investors. Developing countries however are not experiencing this trend in the same way nor reaping the same benefits as the developed world.
In the South Asia region, only India has issued green bonds, and so far African issuance of green bonds only represents approximately 2% of the total cumulative global issuance. This means that green bonds barely contribute to the circa $500bn of investment that, according to the UN, developing countries need every year to meet their climate adaptation and mitigation infrastructure needs.
The reasons for this range from supply constraints, transparency issues, and a lack of awareness and know-how, to stability and liquidity issues. And this is where green guarantees come in.
Green guarantees can act as a strong de-risking mechanism, which can catalyse the influx of private capital into climate mitigation and adaptation projects in developing countries.
The interest in this blended finance tool is growing strongly. At the recent annual meeting of the World Economic Forum in Davos, USAID administrator Samantha Power announced that one of the first beneficiaries of the new Enterprises for Development, Growth, and Empowerment (EDGE) Fund will be the Green Guarantee Company.
The Green Guarantee Company is the first ever global guarantor dedicated to providing guarantees for climate bonds in developing countries. It emerged from the Development Guarantee Group, which has Cardano Development as an institutional shareholder.
In a press statement, Lasitha Perera, managing partner and co-founder of the Development Guarantee Group, argued that the “true power of the guarantee is not in the financing that it mobilises on a transactional basis but rather the capacity it creates amongst investors to learn about an asset class and build their confidence to invest without guarantees in the future”.
With the investment announced in Davos, USAID joins other partners supporting the Green Guarantee Company such as the UK’s Foreign, Commonwealth and Development Office, which provides technical assistance through its Mobilist Global programme.
Also, the Green Climate Fund – the world’s largest climate fund – recently approved an initial equity investment of $40.5m, with further investments of up to $82.5m as the Green Guarantee Company scales up.
In return, the Green Guarantee Company will provide guarantees to mobilise more than $1.6bn of climate finance in the Green Climate Fund’s host countries – leveraging the fund’s investment more than twentyfold. These bonds will finance climate adaptation projects such as flood protection, and climate mitigation initiatives such as electric buses or renewable energy.
Last December, Amsterdam-based The Currency Exchange Fund (TCX) – which provides solutions to currency risks and protects the financial stability of borrowers in emerging markets – announced that the EU had approved financial guarantees of €325.75m.
This was followed by another announcement in January of a new EU allocation of €80m. Together with an already existing European credit facility, the overall EU financial contribution to TCX now amounts to around €570m.
The new financial support allows TCX to significantly increase its capital base and implement the European Commission’s policy objective to increase the share of local currency funding in development finance.
The EU financial guarantees will be used to make currency risk protection more affordable, especially for financing to reduce energy poverty. According to Ruurd Brouwer, CEO of TCX, “in today’s volatile market conditions, it is more important than ever to protect borrowers in the poorest countries from currency risk. Especially now that significant investments will have to go into climate finance, these investments have to be financially sustainable. The guarantee increases our capacity to do so”. TCX often sells part of the risks to private investors.
The support for TCX is part of a €6.05bn package in financial guarantees that the European Fund for Sustainable Development plus (EFSD+) has approved to de-risk activities and leverage private investments in low and low-middle income countries.
The EFSD+ is the main financial tool to mobilise investments under Global Gateway – the EU strategy to narrow the global investment gap in infrastructure. It is seen as the European answer to the Chinese New Silk Road, with which China has increased its influence in the world since 2013.
The billions in financial guarantees are meant to support 40 investment programmes in Sub-Saharan Africa, Latin American and Asia Pacific. The programmes will be implemented by European financial institutions, such as the European Investment Bank, the European Bank for Reconstruction and Development (EBRD), and national development banks. In total, 20 financial partners participate in the EFSD+ guarantee programme, seven of which are doing i for the first time.
The EFSD+ guarantees are offered on favourable, highly competitive conditions. Because the fund covers a share of the risks, the EU’s development finance partners can match the guarantees with their own resources, which in turn will attract additional investors.
“The guarantees are expected to generate more than €50 billion in investments in key sectors of Global Gateway”, writes the EFSD+ on is website, “such as renewable energy, digital infrastructure and climate resilience and health.” The package also includes a new green bond programme.