Some of the world’s biggest asset owners a proposing a joint private-public partnership to help poor countries financially in weathering climate crisis.
Nadia Nikolova, a lead portfolio manager for development finance at Allianz Global Investors, called for action. Allianz Global Investors, who are among the founders of Net Zero Asset Owner Alliance, put forward this plan saying, “In order to fight the climate battle, we need to look at ways to transition these economies.“
Blended finance, which is combined with public and private finance, is structured in a manner where more private players can plow their funds into the developing world. However, the Alliance says that the blended finance model needs to be scaled up to get more financial commitments. According to Bloomberg News, the International Energy Agency estimates that more than $1 trillion is required in order to transition to clean energy in the developing world.
The Net Zero Asset Owner Alliance proposal includes financial structures, including the securitization of bad debts into tranches to protect private players from initial losses. This model would help entice investors in regions characterized by high levels of junk debts. Nikola said that the first loss usually constrains investors.
According to the Net-zero alliance, the present blended vehicles’ median size is just $65 million, less than a tenth of the level required to attract large and sophisticated investors.
The poorest countries in the world are at the frontlines of climate change. They had invested the least in environmental protection and now find themselves exposed the most to global warming, making their homes uninhabitable.
The world’s wealthier nations had pledged to donate $ 100 billion annually by 2020 but failed. They are not expected to achieve that target until 2023. The climate talks at COP26 in November were almost derailed because of the failure of rich countries to contribute adequate funds with small island countries citing lack of credibility and support.
The finance industry reaffirmed its commitment to fight climate change in COP26, with a group having $130 trillion assets in industries liking Banking, investment, and insurance committing to net-zero emission by 2050. Much of it is needed to protect poorer countries from the destruction caused by a hotter planet.
However, many countries remain skeptical about the promises of global finance. For example, African nations have pointed out that they need grants, not loans, to tackle the climate crisis. While mitigation technologies like solar panels and wind turbines provide ROI to investors, it is unclear whether technologies like sea walls have the same attraction.
Nikolova said that there is always an expectation of some return on investment. Still, within a portfolio, an investor can do some of these projects.
The following year climate summit in Egypt is expected to have talks on how to offset losses caused by climate changes by attracting adequate funds
According to a report by the Alliance, there is already plenty of private finance ready to invest in this transition to a sustainable, low-carbon global economy.
