• Home
  • WIPO: Technology Scouting and Deployment
  • GSS 2019
    • Agenda -- GSS 2019
    • Speaker Presentations
    • Sponsors and Partners
    • Speaker Bios
    • Registration
  • GSS 2018
    • Background Discussion Note
    • GSS Program
    • Presentations
    • Speaker Bios
    • Sponsors and Partners
    • Innovators
    • Registration
  • GSS 2016
    • Program -- 2016
    • Presentations -- Day 1
    • Presentations -- Day 2
    • Speaker Bios
    • Institutional Partners
    • Local Partners
  • GSS 2014
    • Speaker Bios
    • GSS 2014 Agenda
    • GSS 2014 Partner Organizations
    • GSS 2014 Presentations
    • P-80 Group Foundation
  • Blog
  • P80 Group Foundation
  • Contact
  • Nobel Prize Summit
Contact Us:

Forging New Financial Conduits for Green, Climate Friendly Investments

1/12/2015

1 Comment

 
The past year was a banner period for green, climate friendly financial innovations.  When the P80 got started in 2006/2007, financial support from pension funds, sovereign wealth funds and other large institutional investors for sustainable investment projects was in its infancy.  That's clearly not the case seven or eight short years later, when all sorts of "green" or "climate friendly" financial market innovations are coming online, scaling up rapidly, and developing new conduits for mobilizing financial support from institutional investors. 

A case in point is the recent announcement  that the Ontario Teachers’ Pension Plan (OTPP)with C$140.8 billion in net assets as of December 31, 2013 and Canada’s Public Sector Pension Investment Board (PSP) with C$99.5 billion of net assets under management are teaming up with Spain’s Banco Santander S.A.  Pursuant to the terms of their agreement, Banco Santander will identify, prepare, and evaluate potential wind, solar and water infrastructure investments and the two Canadian pension funds will serve as a de facto in-house financing arm for at least a portion of the total project cost.  The first round of projects financed under this scheme is valued at $2 billion, but “significant additional amounts” are expected to be invested over the next five years.

  • “This investment directly supports our focus on investing in platforms that provide access to development opportunities globally," said Andrew Claerhout, Senior Vice-President, Infrastructure at Teachers.  
  • "This investment fits well with our strategy of deploying capital in sizeable opportunities that offer long term revenues and growth potential along with solid partners. It also allows PSP Investments to continue to develop its portfolio of private energy assets while contributing to environmentally sustainable energy production," said Bruno Guilmette, Senior Vice-President, Infrastructure Investments at PSP Investments.

This seems to be an ideal division of labor. The pension funds will focus on their comparative advantage which is providing long term capital.  At the same time, the pension funds will outsource the project identification, preparation and monitoring to Banco Santander, which has the requisite in-house skills for these tasks, skills which are noticeably missing from pension fund staffs. 

Green bonds, aka climate bonds, are another interesting innovation which seems to have come of age in 2014.  Total green bond issuance was $11 billion in 2013, $36 billion in 2014, and is expected to be close to $100 billion in 2015.  Compared to today's green bond market, the first green bonds issued by the World Bank in 2008, designed in partnership with Skandinaviska Enskilda Banken (SEB), were a relatively timid affair, albeit path breaking for their time.  Institutional investors channeled their money to the World Bank which used the proceeds to finance green investments identified, prepared, and supervised by the World Bank.  Pension and sovereign wealth funds were taking World Bank AAA credit risk; rather than the credit risk of the individual green projects which were the ultimate beneficiaries of their capital.  They were financing the World Bank in the first instance and green projects only indirectly. 

From those rather modest beginnings, the green or climate bond market has grown rapidly into a financial market juggernaut.  Today, all sorts of institutions ranging from private companies, to multilateral organizations like the EIB and IFC, to states and cities to universities are issuing their own green bonds to finance green projects identified and prepared by the issuers.  Repayment is coming from a variety of sources, ranging from the issuer's balance sheet to revenues generated exclusively from the green projects themselves.  

What is so innovative and important about these recent financial market innovations?  Two features seem especially important.  First, these financial instruments are generating new conduits for channeling funds from institutional investors to green projects.  Second, they are bundling groups of small projects into larger scale financial packages which are inherently more interesting to large institutional investors.  

When Prince Charles convened the initial P8/P80 meetings in 2006, pension and sovereign wealth fund representatives explained that they didn't have the ability to find, evaluate, and monitor smaller scale projects.  They also explained that they needed to invest relatively large chunks of money and couldn't be bothered financing a large number of comparatively small projects.  

Fund-of-funds mechanisms like the IFC's Catalyst Fund  and the EIB’s Global Energy Efficiency and Renewable Energy Fund (GEEREF),  were developed in part to address this concern. Pension and sovereign wealth funds would invest large amounts in a fund of funds which, in turn, would invest relatively smaller amounts in a variety of smaller scale private equity funds, which at the end of the day, would invest in individual green projects. This was a disaggregation financial mechanism -- funds of funds would disaggregate large investments from institutional investors into a larger number of smaller investments.  For a while, funds of funds seemed to be the dominant game in town. 

However, as the green bond and Canadian pension fund examples suggest, the financial markets have been innovating and finding new ways to aggregate or bundle smaller investments into larger financial package.  Moreover, instead of putting the project identification and due diligence burden on pension and sovereign wealth funds, a task for which they are singularly ill equipped, issuers are taking responsibility for identifying, preparing and evaluating projects, which independent third parties then certify meet the investors' "green criteria. 



1 Comment
Burt Hamner link
1/26/2015 03:54:44 am

I really like this distinction of financial "aggregators" and "disagreggators" and the goal of "meet in the middle" making deal flow and size attractive to "main street" co-investors.

I also like the focus on technologies for carbon reduction of cities. That's where much of the use is, and cities and mayors are customers who can bring tech out to scale fast, providing appropriate returns for big investors.

One aggregator channel of interest is Cleantech contests leading to cleantech angel investors then to VCs and funds. Contests get strong social media push, which is important simply to publicize that Cleantech contests exist! Angel investment groups with organized due diligence, like http://www.element8angels.com/, or Investors Circle, are excellent filters. They review hundreds of "impact" early-stage companies every year. Also, in my experience, they know little or nothing about cleantech investment in other countries or by multi laterals.

So: A solution area is to search among "sustainable business" contests and angel investor groups for early-stage companies with technologies for urban carbon reduction. Create model portfolios (aggregates) with variable mix of such companies and simulate different market scenarios for investing in them. Then take most likely portfolios to big funds and syndicate deals, while also marketing the portfolio technologies to Mayors and governors.


Reply



Leave a Reply.

    Author

    Alfred Watkins is Founder and CEO of the Global Solutions Summit and a member of the Governing Council of the UN Technology Bank for the Least Developed Countries.  Prior to these assignments, he worked for more than 23 years at the World Bank.  A complete biography is available here

    Picture

    Archives

    July 2020
    June 2020
    March 2015
    February 2015
    January 2015
    December 2014
    October 2014
    September 2014
    August 2014
    July 2014

    Categories

    All
    Brookings Blum Roundtable On Global Poverty
    Clean Drinking Water
    Club De Madrid
    G 77
    G-77
    Global Solutions Summit
    Little Rock Accord
    P80 Group Foundation
    Renewable Energy
    Sustainable Development
    Technology Deployment
    Technology Transfer
    World Bank Global Forum Action Plan

    RSS Feed

    Sign up for our latest updates & blog posts:

Submit
Picture

© 2018 Global Solutions Summit | Washington, D.C.  | alfred.watkins07@gmail.com