Development banks eye pension funds in new climate finance drive

Manager of Climate Investment Funds says it wants to de-risk low carbon projects in developing world, unlocking trillions from institutional investors

Manila, Philippines (Pic: travel oriented/Flickr)

By

Leading development banks are seeking to tap into the vast assets run by pension and fund managers as they try to ramp up low carbon investments in emerging markets.

Demand for clean energy, transport and infrastructure solutions in developing countries is soaring, the head of the World Bank-affiliated Climate Investment Funds (CIFs) told Climate Home.

Since last December’s UN climate deal in Paris the CIFs had “more countries expressing interest than we could accommodate,” said Mafalda Duarte.

Launched in 2009 and backed by five of the world’s largest development banks, the $8.3 billion CIFs support projects to protect forests and boost clean technology, renewables and climate resilience.

But with major donor countries unwilling to dig deeper and an estimated $3.5 trillion needed by 2030 to implement climate plans in developing countries, banks are looking elsewhere for support.

“We have started to have discussions with some pension funds,” said Duarte.

“They are quite risk averse, but what they have told me is they do want to expose themselves more but are having a hard time finding the right [investment] vehicles.”

Report: Prince Charles urges ‘ethical investment’ of pension funds
Report: Bloomberg climate risk initiative targets secret polluters

Long a target for climate campaigners who have urged them to ditch fossil fuels holdings, the world’s pension fund managers sit on assets worth $35.4 trillion, according to 2015 figures.

In theory developing countries are a ripe opportunity for green-tinged investors.

For the world to avoid dangerous levels of global warming, experts say new cities across Africa, Asia and Latin America must maximise efficiency and minimise energy and water use.

With the global population expected to grow 2 billion by 2050, roads, railways, ports, waste and telecommunication facilities valued at $90 trillion need to be constructed in coming decades.

But weak governance and a lack of policy stability make many countries too volatile for pension managers, who look for stable investments that can pay dividends for decades.

Analysis: City slickers eye up growing climate finance sector

According to one investment analyst, specialist emerging markets infrastructure funds “have a lot of dry powder” due to a dearth of bankable projects.

Given many institutional investors already backing the fast-growing green bond market, Duarte said the CIFs are “working on a vehicle” to allow them to invest in higher risk developing countries.

Kenya, Egypt, Morocco and South Africa were all calling for more support to develop their clean energy plans, but needed easier access to low cost capital, said Duarte.

The projected growth of the Green Climate Fund, which was chosen by the UN to “serve” last year’s Paris climate deal, means the CIFs need to be more “creative” over funding sources, she added.

“How do we go on this mission without going back to [donor] countries and ask for big amounts of public finance?

“I think that’s the direction we are moving towards. We are looking at how to maximise out use of assets, and structure vehicles that will become self-sustaining.”

Read more on: Climate Finance | Climate finance | Green bonds | Green Climate Fund