Risk/return profiles need to favour private investors to escalate capital flow to emerging markets.
Financing solutions aimed at tackling environmental challenges in emerging markets require an integrated approach across public and private sectors, said Allianz Global Investors CEO Tobias Pross, speaking at this week’s Green Horizon Summit.
“We have to mobilise the public sector and co-create ESG products jointly with the private sector,” he said, speaking alongside HSBC Group CFO Ewen Stevenson, CEO of Swedfund Maria Hakansson and Alberto De Paoli, CFO of Enel.
In the discussion, panellists said private sector investors are best suited to funding highly capital-intensive low-carbon projects across emerging markets, in order to accelerate action against climate change and to align with the Paris Climate Agreement.
But they must be provided with incentives to inject capital in markets that often present higher commercial risk, they noted.
To manage risk, “[Allianz Global Investors] has waterfall structures in place, which put private investors before governments, so they will get their return on investment,” Pross explained.
The structuring of risk/return profiles in favour of private investors increases incentives to invest alongside venture capital and private equity firms in emerging markets.
“This gives us more certainty that we will get enough capital together to kickstart important green projects,” Pross said.
He said both retail and institutional investors could be offered exposure to emerging market investment opportunities if development financial institutions (DFIs) work collaboratively to help shoulder the risk.
Hakansson agreed DFIs like Swedfund can play a pivotal role in creating funding pipelines for projects as well as de-risking, thus making the market more attractive to private investors.
“Part of our role is to be the catalyst – to take the risk and invest early – and to do that on terms that are reasonable. In the long-term that helps mobilise capital,” she said.
ESG potential in emerging markets
It is important to encourage ESG-based investment in developing countries because “climate and poverty often go hand in hand”, said Hakansson. Public and private investors need to recognise the potential emerging markets can offer, she said, as they fulfil expectations outlined by the Paris Climate Agreement and the United Nation’s Sustainable Development Goals (SDGs).
Hakansson argued there are diverse attractive prospects in emerging markets, noting increasing digitisation in many countries, such as the Internet of Things (IoT) and Blockchain, which would benefit from investor backing. Technology costs are falling and there is growing demand for renewable energies – for example, solar in Africa.
“There is a huge need for investment in developing countries to continue encouraging sustainable innovations in infrastructure. [This] can help structure sustainable business models based on local needs,” Hakansson said.
HSBC’s Stevenson noted that regulators and governments can help drive risks down by working collectively with public and private sectors to come up with global standards “that are consistent, trusted and based on science”.
“Until we get there, we will continue to limit the appetite of the investment community to invest sustainably in emerging markets,” he said.