Happy Friday.
Public money has driven most of the past decade’s growth in climate-related funding to poorer countries, according to the OECD, and loudly advertised efforts to raise more private finance have repeatedly been let-downs.
The launch by Anglo-South African asset manager Ninety One of a new $400mn fund, focused on green investment in emerging markets, is a welcome move. But when US officials rushed to cheer for what is a moderate investment, set against the trillions required in this space, it prompted some scepticism. Has the dam really burst on flows of climate investment for poorer countries?
On Monday, we’ll follow up with an idea from a leading development economist that could help raise funds at greater scale.
EMERGING MARKETS
New fund highlights scale of green finance challenge
In Rio de Janeiro this week, US Treasury secretary Janet Yellen was full of praise for the launch of Ninety One’s new $400mn Emerging Markets Transition Debt fund.
The initiative — which will target clean infrastructure and technology projects in emerging markets, as well as the energy transitions of the region’s heavy emitters, with both listed and unlisted investments — “advances key Treasury priorities”, Yellen said, such as promoting “economic growth, stability, and resilience”.
Officials cheered the fund as a sign of more to come in climate investment flows to developing countries. But for others, the fanfare had the opposite effect.
Critics said that while the $400mn commitment was welcome, it was too soon for governments to celebrate. To hit net zero by 2050, emerging markets and developing economies will need about $2tn in annual investment by 2030, according to the International Energy Agency.
Set against the scale of demand, according to Richard Kozul-Wright, former chief economist at the UN’s trade and development arm, “400mn is just not a serious number, is it?”
“It’s not that initiatives of this scale should not be promoted,” he told me. “But if you’re worried about the geopolitics of climate — and clearly, the American policy class is very worried about emerging markets, not least in Africa, where these investments are urgently needed — the disconnect is staggering.”
Nazmeera Moola, Ninety One’s chief sustainability officer, said that funds such as the EMTD alone would not meet the scale of demand for transition finance in developing economies.
“I think a structural solution is ultimately going to be required. But there are portions of the energy transition that can be privately financed, that are offering commercially attractive risk adjusted returns, and there are portions that are going to need some sort of conditionality and support,” she told me. “We’re just trying to address the first part.”
A strategy that ‘will be as easy to digest as possible’
Development economists have argued that cross-border flows of energy and climate-related finance to developing countries, which topped $115bn in 2022, according to the OECD, are an order of magnitude below what is needed.
Total foreign direct investment to developing economies last year, across all industries, was $841bn, according to Unctad. Leaving outflows to China and India, however, the picture is bleaker. Total FDI to South America last year was just $150bn, and flows to sub-Saharan Africa stood at just $36bn.
Ninety One is the largest asset manager in South Africa and has a large footprint across the continent. But while Africa’s larger developing economies, such as Ghana and Zambia, have attracted more investor interest following recent debt restructuring, the EMTD fund will be aimed primarily at more advanced markets across Asia, Africa and Latin America.
Due to “institutional reticence” about investing in emerging markets, Moola said, “we’ve deliberately structured a strategy that we hope will be as easy to digest as possible. Therefore the focus on middle-income.”
A private transaction in EMTD’s pipeline is a desalination project using “the least environmentally impactful” approach for water treatment, she said. Ninety One is also in talks with a lower-carbon building materials company.
The pitch has worked on CDPQ and Omers, two of Canada’s biggest pension fund managers, as well as £1.2tn asset manager Legal and General Investment Management and the £3.1bn Wiltshire Pension Fund, which have piled into the EMTD.
Jennifer Devine, head of the Wiltshire Pension Fund, said that it liked the exposure to unlisted renewable infrastructure in emerging markets. Plus, she said, financing the energy transition for polluters in poorer countries was only fair: “In the western world, we’ve outsourced a lot of our manufacturing, so those emissions have just ended up in the emerging markets.”
‘They’ve been talking for a decade’
Yellen has made reforms to multilateral lending a key plank of her agenda. This particular fund is the outcome of talks hosted last summer by the Rockefeller Foundation at its scenic Bellagio retreat on Italy’s Lake Como shoreline.
Omers, CDPQ and Ninety One attended the Bellagio talks as members of the Investor Leadership Network, formed in 2018 when Canada chaired the G7, and the resulting initiative has adopted the formidable title “Bellagio Private Capital Mobilization Consortium”.
It is one of a bevy of similar initiatives from rich countries. But critics accuse these well-intentioned commitments of failing to mobilise much spending. The projects are meant to convey that western countries will pull their weight in the global transition, so a failure to deliver substantial results can be actively counter-productive, critics say.
Ninety One’s fund, importantly, is not a blended finance initiative with government support. It is a commercial venture promising attractive returns to clients. If more asset owners were willing to take exposure to emerging markets, substantial headway might be made to cut pollution.
But critics said the praise from rich countries for such initiatives, which have long underdelivered on pledges to mobilise more private capital, was grasping at straws.
“Obviously, the talk is about the potential this signals for further investment, but they’ve been talking for a decade, since [COP21 in] Paris, about bringing in the private sector,” Kozul-Wright said. So far, he said, “it just hasn’t worked”.
Of the $400mn headline sum, he added, “I find it odd geopolitically, because whatever you say about the Chinese, they don’t play around with these kinds of figures”.
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