Development finance institutions (DFIs) and multilateral development banks (MDBs) should publish the recovery rates of their portfolios to help mobilise more private capital for climate finance in emerging markets, according to the UN-convened Net-Zero Asset Owner Alliance (NZAOA).

The move is recommended in a new discussion paper on scaling up blended finance, which the Alliance has identified as one of the most efficient ways to de-risk investments in climate solutions and in market segments that currently do not have the risk-return profiles to attract large-scale institutional capital.

“Scaling up the use of the blended finance vehicles is therefore a priority, by removing barriers and overcoming existing obstacles,” the Alliance said in its report.

The paper follows discussions carried out in connection with a “call to action” from the NZAOA for asset managers to design blended finance vehicles that would help the group’s members to dramatically ramp up investments supporting the fight against climate change.

“We realise that building blended finance vehicles is not as straightforward and we of course asked what needs to change in order for us to see the scale that we want to see and invest,” said Nadia Nikolova, lead portfolio manager, Allianz GI development finance and one of the paper’s authors.

“To the best of my knowledge this is one of the first private sector engagements on blended finance,” she told IPE. “Usually it works the other way around.”

The paper discusses a range of barriers to scaling blended finance, such as donor capital often having a narrow focus and/or “national component” requirements, and lack of capacity and experience in emerging market economies but also among the smaller asset managers that manage many blended finance vehicles in the market.

Data as catalyst

Another barrier, however, according to the NZAOA, is that of availability and access to data.

“One of the things the development community has been saying is that perceived risk is higher than actual risk,” said Nikolova. “We need the data to prove that.”

In its report, the NZAOA noted that the Global Emerging Markets (GEMs) Risk Database Consortium recently published details of default rates of MDBs’ and DFIs’ portfolios, but that recovery rates were not included.

“That is what investors care about and that information is just not available,” said Nikolova. “Development banks have that data, they have a 30-40 year track record on their own books, and it just needs to be published.”

In the paper, the NZAOA notes that infrastructure debt has established itself as a must-have allocation for most investors in part because of a default study from credit rating agency Moody’s that showed lower historical losses of the asset class from the 1980s to 2019.

Nadia Nikolova Allianz GI

Nadia Nikolova, Allianz GI

That study was “phenomenally helpful,” said Nikolova. “It gave investors confidence that this is actually a good asset class to be investing in, but that data was absolutely a cornerstone.”

In its paper, the NZAOA also called for the transparent sharing of “impact data” in emerging markets.

“Consistent impact data on individual projects is a key requirement for many private investors to enter this space,” the authors wrote.

“As counterintuitive as it may sound, many DFIs have historically not collected and monitored impact data. If investors do not have such data, they cannot report such investments as “impact” (given regulatory requirements), reducing their incentives to consider complex products such as blended finance funds.”

The NZAOA said it warmly invited feedback to the questions it raised in its position paper, and said it would review the responses and discuss how to proceed further in scaling blended finance. Depending on feedback, a roundtable dialogue may be covened to futher the discussion, it said.

The NZAOA paper can be found here.

For more on blended finance see IPE’s special report on impact investing

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