A multilateral climate fund is preparing to access capital markets for the first time, as governments balk at providing the extra financing needed to cut global emissions.
The Climate Investment Funds, a US$12 billion ($16.15 billion) fund inside the World Bank, is planning a roughly US$500 million bond issuance, with proceeds intended to spur investment in renewable energy and new technologies in developing economies over the next five to 10 years.
It’s “about being smarter with our capital basis and adding significant multiplier effects,” CEO Tariye Gbadegesin told Bloomberg.
Multilateral climate funds are designed to collect funds from rich nations and distribute them to developing countries. But the national contributions needed to back that model are falling well short of the vast amounts required to fight climate change.
As the COP29 summit staggered to a close over the weekend, negotiators from almost 200 nations agreed to a new annual climate finance goal of at least US$300 billion by 2035, significantly less than developing countries are estimated to need.
“It’s a tough situation,” Gbadegesin said. “Everyone knows we need to do more but we have less” so the question becomes “how do we do more with less?”
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Against that backdrop, financing structures that create pathways to capital markets are rising in importance and popularity.
The CIF vehicle through which the bond will be issued, the Capital Markets Mechanism, has received an Aa1 rating from Moody’s Ratings. The expectation is that the mechanism “will maintain its strong capital position and very high liquidity buffer as it expands its balance sheet and accesses capital-market funding”, Moody’s said.
Abyd Karmali, managing director in environmental business advisory at Bank of America, which is acting as a lead manager, said the “advantage of CIF is it’s one of many ways for sovereigns to act now and faster and channel funds to causes important to them”.
Private investors have expressed initial interest, Gbadegesin said. One asset manager told Bloomberg the simpler the better, as such formats are easier to place in mandates and drum up more demand.
Emerging market fund managers, meanwhile, aren’t yet sure whether the vehicle would work for those portfolios.
Earlier issuances from emerging markets whose ratings were supported by credit enhancement “came at a very tight spread and didn’t necessarily fit”, said Nicolas Jaquier, portfolio manager at asset manager Ninety One.
CIF’s existing funds have benefited from contributions from rich countries. France, Germany and the UK are among governments that have contributed to its US$6 billion Clean Technology Fund, which issues loans with a tenor of up to 40 years.
The loans will back CIF’s new climate bond issuance, giving the fund access to money to invest in clean energy and new technology before 2030 climate targets kick in.
CIF will go “from being a finite pool of donor funding that you have to carve up” to a “financial institution that can respond to needs”, Gbadegesin said. CIF’s capital is willing to take on high risk levels at a low price, she said. “That is very helpful.”
In the past, CIF has been able to use existing capital to mobilise 10 times more funds, she said. Now, investors are asking it to raise that multiplier effect to 25.
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Investors are saying, “‘if we take on more risk, we want to have a higher multiplier effect, we want to have more scale”, Gbadegesin said.
It’s a form of financial engineering that the CIF CEO expects other multilateral funds, such as the Global Environment Facility and the Green Climate Fund, to follow. “This is the future,” she said.
BNP Paribas, HSBC Holdings and TD Securities also are acting as lead managers for the bond sale.
