Going green in emerging markets

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Green is gaining in currency with investors. ATP has just announced a €1bn investment to a fund focused on emerging markets and climate change, while the World Bank’s green bond issues have been snapped up. Nina Röhrbein reports

The DKK420bn (€56.5bn) Danish Labour Market Supplementary Pension Fund ATP made a commitment to green investments in emerging markets in December when it allocated €1bn to a new fund it has created focusing on emerging markets and climate change.

The fund has been investing in emerging markets for almost a decade because it believes in their growth story. “We have invested in two main ways: through the purchase of emerging market debt instruments, mainly sovereign bonds, and through public equities,” says Bjarne Graven Larsen, chief investment officer at ATP.

“The bonds have proven to be a wise choice because the spreads have come in and we generated some currency gains on them too. The public equities strategy has not worked as well, as the investments only appeared to mirror global equities, just with the double volatility and foreign investors deciding the price of many stocks. Therefore, we came to the conclusion that public equities were not an effective way to get exposure to the emerging markets growth story. At the same time discussions around climate change concluded that it would be impossible to continue the emerging markets growth story without decoupling into low carbon growth scenarios.”

ATP decided that energy infrastructure was likely to be an area for long-term growth due to increasing demand. It wanted to be part of that renewable investments growth in emerging markets operating on private sector conditions.

Clear frameworks and long-term international goals would help the fund line up its development plan. However, the lack of an agreement on binding emissions targets at the COP15, in Copenhagen, is now set to slow down the pace of the fund, as fewer projects are likely to go ahead. But Larsen also points out the good news; that the larger developing countries such as China, India and Brazil have started their own emissions reduction process and have created their own national action plans.

“Clearer targets at COP15 would have resulted in the likelihood of more interesting projects, which would have made it easier for us as an investor to identify profitable projects,” he says. “We want to invest in green investments in countries which demonstrate a commitment. We try to find mechanisms to reduce the risks in projects such as national action plans, clear and transparent regulations or international mechanisms set by the International Finance Corporation (IFC) or regional development banks, like guaranteed export mechanisms. The fund will invest in existing development structures with aid programmes and funds in developing countries, and presumably with organisations such as the UN, the World Bank and regional development banks.”

ATP is currently in the process of creating the fund’s framework. The small internal team responsible for the fund is considering options on how to invest, and options include undertaking the investments through the in-house team, creating a separate external entity with the possibility for other investors to join the limited partnership or hiring existing managers with the expertise to undertake some of the investment.

“The most likely scenario is that it will be a slow start-up in 2010 with maybe a handful of investments, with more action to follow in 2011 and 2012,” adds Larsen. “We will continue to hold talks with other institutional investors in the first quarter. If they are ready to join us in the investment vehicle we would be happy for them to do so. But it is more likely that we start up the fund with only one other pension fund or on our own and then wait and see whether other investors will join us later on.”

Larsen pegs the expected returns of the fund at 12-14%. “If you did not have any kind of risk reduction at all, it would probably be even higher than that,” says Larsen. “But it is not the return we are worried about, it is more about the return in relation to the risk we are taking.”

In recent years, ATP has steadily increased its sustainable and green investments. In 2009, it invested in a global renewable energy fund by Hudson Clean Energy and made its first commitment to sustainable forestry.

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