AsianInvesterAsianInvester

Norway’s climate fund targets Asia investments

Climate Investment Fund, the state-backed development fund focussed on climate related investment, will invest up to $653 million in Asia over the next three years.
Norway’s climate fund targets Asia investments

Norway’s Climate Investment Fund, will invest up to $653 billion by 2027 in emerging market climate projects – the majority of it in Asia.

“The mandate is to help emerging markets in their transition to renewables and this has meant a tilt to Asia,” said Mark Davis, executive vice president at Norfund, Norways $4 billion development fund, which was tasked with managing the CIF since its inception in 2022.

The fund invests in renewable energy, storage and transmission in emerging markets with large emissions from coal and other fossil power production.

Target countries are selected using a ranking of countries by carbon intensity, with special emphasis on how much power was currently generated by coal, Davis noted.

Mark Davis
Norfund

“To get the biggest bang for your buck, this leads you to middle income countries, such as – in Asia – India and Indonesia,” he said.

Currently the majority of CIF’s allocations are in India and South Africa, with a smaller amount in Sri Lanka.

The fund is now actively diversifying across five other Asian countries: Vietnam, Philippines, Cambodia, Indonesia, and Bangladesh.

Individual investments are between $50 million and $150 million, making them larger than those of Norfund, which are between $4 million and $50 million.

CIF limits any single country’s share to 25% of the fund’s total assets.

CIF’s largest investment was made last year in India, when it placed $110 million into SAEL, a company that produces renewable energy based on solar and biomass.

It also made a large investment in Fourth Partner Energy, one of India’s leading renewable energy solutions platforms

In July, it announced a total of $30 million of investments in Indonesia, a country currently heavily dependent on coal for its power.

KEY THEMES

“The key themes are traditional wind and solar – large scale renewable plants, such as those we already have in India and South Africa,” Davis said.

He explained that such projects were fairly standardised throughout the region, producing between 100MW and 200MW and built with guaranteed long-term contracts to buy the power with sovereign or sub-sovereign utility companies.

“The second leg is commercial industrial, providing a power supply directly to commercial or industrial users,” he added.

Such arrangements are increasingly popular in Asia and beyond, as markets liberalise and governments hand over power generation, transmission and distribution to private players.

“It has emerged as a strong theme in India, and there are some examples in Vietnam and Indonesia,” Davis said, adding that this trend had been slower to emerge in other parts of Southeast Asia.

In 2023, Norfund's commitments financed 4,244 MW of renewable energy and avoided an estimated 8.5 million tonnes of emissions annually (based on forecasts). 

Climate investment contains particular challenges when it comes to measuring the social and governance dimensions.

The fund collects data from investees, including job creation, amount of taxes paid, wage levels, the amount of purchases made from local companies, said Karoline Teien Blystad, senior manager for climate and impact at Norfund.

"When it comes to job creation she said, direct employment in energy projects are a small number of people, mainly those responsible for maintenance, and the real impact is how the electricity is being used in wider society, so we do studies about [this]," she said.

“The real impact is how the electricity is being used in wider society, so we do studies about [this],” she said. 

CLIMATE INVESTMENT RISK

The risk posed by the world’s changing climate is an increasingly important part of the investment process for Norfund.

Teien Blystad pointed to a small hydro plant currently under construction in Uganda, under Norfund’s development mandate, which had faced large scale flooding following unseasonably high rainfall.

Karoline Teien Blystad
Norfund

“Unreliable rainfall can also impact the power available from a new hydro plant,” she said.

She also noted the impact of giant hail, an increasingly common phenomenon in South Africa, on agricultural yields.

Measuring climate-related risk is an increasingly important part of the main fund’s investment process analysis, changing how it values companies and the strategic priorities it considers for investees.

Like many development banks, Norfund favours financial services companies among its core allocations, including banks and non-bank lenders, which account for a third of its target allocations.

These help distribute capital between small and medium enterprises that would be too small to receive direct fund investments but which lie at the heart of many Asian economies.

However, the fund has less oversight or control when it comes to how these financial services investees measure climate risk of the companies they lend to.

“But we’re asking do they understand climate risk and do they integrate it into credit risk [measures],” she said.

This story has been updated with new quotes.

¬ Haymarket Media Limited. All rights reserved.