World’s largest climate fund plans up to 40 investments in 2024
An investment fund set up under a United Nations convention for driving climate action plans to invest in multiple opportunities this year and potentially via new kinds of partnerships, its chief investment officer told AsianInvestor.
The fund plans to commit up to $2.3 billion in 2024 across potentially 40 different investment opportunities, said Henry Gonzalez, deputy executive director and chief investment officer of the Green Climate Fund (GCF).
“Our next frontier is partnerships with institutional investors such as asset owners. I believe there is a lot of appetite for blended finance and impact investing among these investors,” Gonzalez told AsianInvestor.
The fund does not invest directly and invests via accredited entities and partnerships.
Impact investments refer to investments made with the intent to generate positive social and environmental impact alongside a financial return.
Blended finance refers to the use of development finance and philanthropic funds to mobilise private capital flows into innovative ideas to solve socio-economic challenges.
The Green Climate Fund (GCF), the world's largest dedicated fund to help developing countries respond to climate change, was established within the framework of the United Nations Framework Convention on Climate Change (UNFCCC).
GCF, based in Incheon, South Korea, was established in 2010 by 194 sovereign governments party to the UNFCCC.
Asia is the fund’s second-largest region of exposure – accounting for 34% of the portfolio -- after Africa.
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The fund recently adopted a new strategic plan for 2024-2027, and Gonzalez said there are plans to increase its footprint in the Asia Pacific.
The institutional investor is working on climate adaptation projects in the Pacific islands and there is lot of interest among Asian investors in helping on these projects, Gonzalez said.
The fund has committed about $14 billion of the $30 billion raised from member countries since it was launched, although these investments are very long-term investments.
The fund’s investments take on all forms – from grants to concessional lending to venture capital and private equity.
Examples of its investment partners include Acumen fund, a New York-based impact investment fund, and Avaana Sustainability Fund, a venture capital fund that invests in early-stage climate technology companies in India.
SEEKING NEW PARTNERS
While the fund is keen to partner with institutions, it acknowledges there are challenges to these investors embracing blended finance or impact investing projects.
“A lot of these institutional investors, because of their fiduciary responsibilities, are not always ready to go to frontier markets or untested territories. They like to go to growth markets and they like to go to proven technologies,” he added.
Sometimes, the size of the cheques these investors can write is also higher than what many yet-to-be-scaled impact-driven projects can absorb.
“We can help with facilitating and structuring the deals. Still, it also requires more innovation in deal structuring and attractiveness if we have to bring these deals to these investors,” added Gonzalez.
Dealing with climate financing, however, also requires a level of expertise in private asset markets.
“A lot of what happens in climate financing happens in the alternative markets," noted Gonzalez.
“So, we need to work with asset owners that are comfortable dealing with real assets, private equity and private debt.”
He singled out Australian super funds and Dutch asset owners for leading the charge on climate financing, adding that Asia is still in the very early stages of impact investing and blended financing.
He added that the fund is also speaking with asset managers and is in the middle of negotiating with a European asset manager to structure an impact investment transaction.
“Within mainstream finance, investors still tend to be a bit binary on risk-reward. We still have a lot of work to do in quantifying impact and addressing the point that if you have high impact, can that mitigate concerns over slightly lower returns?” he said.
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OVERCOMING CHALLENGES
While institutional investors are sitting on cash and want to put that money to work, the nascent track record of blended finance and impact investing projects makes them wary of making such investments.
“Institutional investors want to see more hard data before they commit funds to such investment,” said Gonzalez.
“It is an exciting point in time to be involved in such investments but equally, when there is a hiccup along the way, everyone panics,“ he added.
He suggests that investors look at climate finance the way they do infrastructure finance.
“Infrastructure from a returns perspective is similar to fixed income. But from a structuring perspective, it is more like private equity,” he said, adding that carving out some funds dedicated to impact capital might be the best way to go for institutions experimenting with the concept.
“Investors worry about writing off impact assets, but that is a risk an investor takes even when they invest in mainstream financial products and assets. A venture capital investment can go awry, for instance,” Gonzalez added.