Why green infrastructure needs innovative finance to thrive | Asset owners
Asian governments will only be able to take full advantage of the growing interest of asset owners in green infrastructure projects if they can generate a longer pipeline of bankable projects.
This will likely require more innovative forms of financing, ranging from debt-financed greenfield funds to green securitization, according to experts from multilateral institutions.
Funds from asset owners will become increasingly essential to support regional infrastructure. The Asian Development Bank (AfDB) estimates that Southeast Asia alone needs $ 210 billion per year in vital climate-compatible infrastructure between 2016 and 2030. For Asia more broadly, the figure is $ 1.7 trillion.
The financing of green bonds is today the preferred means of financing environmentally friendly projects. But Anouj Mehta, head of the innovative and green finance unit at the AfDB said AsianInvestor there are not enough projects to support a sharp increase in green bond funding.
“Everyone is talking about the need to increase green bond issuance – that’s not the problem. The problem is, where are the bankable green projects that this money is going to be invested in? “
Mehta thinks governments should focus on issuing green bonds at the city or municipality level.
“If you really want to make a change, should a government do it at the national level? Or should it be 30 different municipal governments? Suddenly you have a lot more shows, ”he said.
Another advantage of this is that local governments could use the proceeds to create and finance their own risk reduction funds, which provide initially risky funding for new projects.
“The government creates a green bond and puts it in their risk reduction fund, and the fund finances the project just to the point where the income hits a certain level,” Mehta said in explanation. “So you run this project; you made it look bankable. Now it can attract six times as much dollars as the government put out of your pension funds, etc.”
Mehta leads the AfDB’s Asean Catalytic Green Finance Facility (ACGF), launched in 2019 to make projects deemed unbankable or ‘on the verge of becoming bankable’ commercially viable through knowledge and capacity building, assistance technical or loans to finance up-front costs.
In 2020, the unit helped Thailand’s Ministry of Finance develop a bond framework for issuing bonds first sustainable sovereign bond post-Covid-19. He raised $ 964 million in private capital, although Mehta declined to disclose which institutions invested.
Green securitization is another potential way to finance environmentally friendly infrastructure. This is the goal of one of the latest initiatives of the Asian Infrastructure Investment Bank (AIIB).
“One of our visions is to help support the creation of emerging market infrastructure as an asset class,” said Stefen Shin, chief investment officer at AIIB. AsianInvestor.
In 2019, the AIIB partnered with Singapore-backed Clifford Capital (CCH) to launch the Bayfront Infrastructure Management (BIM) debt vehicle. It intends to acquire $ 400 million to $ 500 million in contaminated site loans from around 20 regional banks that it will securitize – that is to say repackage into a negotiable instrument that institutional investors can buy.
BIM aims to conduct its first securitization issue this summer and, from there, to conduct one such transaction per year. “It’s the creation of a market that supports institutional investors. And from my conversations with them, they’re really excited about it, ”Shin said.
AIIB owns 30% of BIM; the remaining 70% is held by CCH, in turn 40.5% by Temasek. Other shareholders include Prudential Singapore, Sumitomo Mitsui Banking Corporation, Standard Chartered, DBS and Manulife. In September 2020, AfDB took a 10.8% stake in CCH for $ 95 million.
BIM’s model follows a pilot infrastructure finance securitization launched by CCH in 2018. The first of its kind in Asia, the portfolio included 37 loans valued at $ 458 million. It has generated strong demand from global asset owners: 39% has been sold to life insurers and pension funds; 21% to asset managers; 7% to private banks; and the remaining bank treasury, Shin said.
While the first program focused on lending for traditional infrastructure projects such as power, transport and transmission, the new portfolio has “a strong renewable angle,” Shin said. “It’s a reflection of both where BIM thinks investor demands are located, and also where new loan creation is really gaining momentum.”
To guarantee the quality of the loans, the loans will come from banks such as ING, HSBC, Société Générale and BNP Paribas which adhere to the Equator Principles – a widely accepted framework for determining environmental and social risks in projects.
Part of AfDB’s and AIIB’s efforts also include the development of standards for the issuance of green bonds. However, these will add to a myriad of frameworks, including the EU green bond standard, the Asean Green Bond Standards, as well as national standards adopted by jurisdictions such as China and Singapore.
The standards aim to simplify the review process for investors, but there is a risk that they will create confusion and lead to greenwashing. An example of this is the Spanish oil and gas refiner Repsol 2017 green bond issue, which the company says would fund energy efficiency projects, but has instead been used to increase the efficiency of existing fossil fuel refineries.
There is also a lack of consistency when it comes to scoring green projects, says PC Chakravarti, Southeast Asia banking manager at Accenture.
“It’s like the Wild West of ESG ratings right now,” he says.
Chakravarti points to a 2019 MIT Sloan Study, which showed that the correlation between ESG ratings of the same company on different vendors was 0.61 on average – compared to a correlation of 0.99% between credit ratings.
“Somehow over the years we’ve figured out how different independent agencies can rate the same business fairly consistently on credit terms, but we haven’t done that for ESG yet. . “