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COP29 seeks to scale up finance to developing countries

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Richer countries want private investors to play leading

role

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Opaque data, MDB culture, risk-shy investors hamper goal

By Virginia Furness, Karin Strohecker, Simon Jessop

BAKU, Nov 19 (Reuters) - As officials from around the

world strive this week to reach a deal on funding for poorer

countries to tackle climate change, investment manager Rob

Drijkoningen is the sort of person they're hoping will help get

them there.

Drijkoningen is head of emerging market debt at U.S. asset

manager Neuberger Berman, which holds $27 billion in sovereign

and corporate debt from developing countries. He should be a

natural partner for multilateral development banks (MDBs)

looking to find private sector investors for projects to slow

climate change or cope with its effects.

Boosting private sector investment is, for rich nations, a

crucial part of clinching a deal at the COP29 climate talks in

Azerbaijan this week on a global commitment for annual funding

to fight climate change - dubbed the New Collective Quantified

Goal.

Development banks committed to increase their lending to poorer

countries to $120 billion a year by 2030. They also pledged to

bring in an additional $65 billion annually in private sector

cash to those nations.

But Drijkoningen, after speaking with the European

Investment Bank (EIB) and European Bank for Reconstruction and

Development (EBRD) about potential deals this year, decided

there were too many hurdles to investment.

Development banks, he said, are not willing to open their

books and share enough information about investments' risks. Nor

do they allow private investors to pick and choose the projects

that interest them. For asset managers already facing limited

appetite from clients for long-term infrastructure assets in

developing nations, those obstacles make investment

unappealing.

"We would need to get a true sense of a level playing field:

of getting equal access to information so that we can

appropriately assess the merits," Drijkoningen said. "That's a

cultural issue that I doubt we have come close to changing."

Cash-strapped Western governments are pinning their hopes on a

massive increase in private sector investment to reach the $2

trillion-plus needed annually to help poorer countries move to

greener energy and protect against the impacts of extreme

weather.

After a resounding win by climate denier Donald Trump in

this month's U.S. presidential election, worries are rising that

the financing gap will steadily widen if Washington - and its

dollars - pulls out of the global climate fight.

An ongoing, two-year reform of multilateral institutions like

the World Bank - aimed at overhauling the way they lend to make

more use of their money - helped drive a 41% increase in the

mobilisation of private sector funds to low income countries in

2022 across 27 development banks, a report this year showed.

The head of the EBRD, Odile Renaud-Basso, told Reuters the

bank was working hard to provide more information to the private

sector, but there were some limits to what could be made public.

But a Reuters analysis of lending data and interviews with

two dozen development banks, climate negotiators, private sector

investors and non-profits showed that change at multilateral

lenders needs to accelerate significantly if the private sector

is to fulfil its hoped-for role.

The analysis of total aggregate lending last year provided

by 14 of the world's top development banks showed that for each

dollar invested across all markets just 88 cents of private

money was sucked in.

And that fell to just 0.44 cents of private money to poorer

countries. Here, the banks made climate finance commitments of

$75 billion and mobilised $33 billion of private investment.

A report by a group of independent experts for the G20 group of

industrialised nations last year on how to strengthen

multilateral development banks said the target that needed to be

hit was $1.5 to $2 for every $1 of lending.

SLOW PROGRESS

Governments - which bankroll development banks - are pushing

them to go reform faster. That should result in a more ambitious

funding target in Baku - and help countries to skirt a

politically contentious discussion on increasing the banks'

capital.

The EBRD now delivers $3.58 of private money for every $1 it

invests across its portfolio, up from $2 dollars three years

ago. IDB Invest - the private sector arm of the Inter-American

Development Bank (IDB) - has also embarked on an overhaul of its

business, helping to increase IDB Group's mobilised private

capital fivefold from 2019 to 2023 to $4.4 billion.

There are various ways for multilateral lenders to pull in

private sector cash. The most established one is parceling up

parts of their own loans and selling them to private investors,

freeing up money to lend again. These so-called B-loans have

been around for more than six decades.

But Nazmeera Moola, chief sustainability officer at asset

management firm Ninety One, said that a raft of issues -

including long lead times and returns that were sometimes

unattractive - had diminished the appeal of these assets.

Meanwhile, many large institutional investors, such as

pension funds or insurance companies, think of direct investing

through corporate or project finance lending in emerging markets

as "scary stuff", she added.

Harmen van Wijnen, chair of the board of Dutch pension fund ABP,

which has invested 1 billion euros in B-loan funds managed by

development finance specialist ILX, said that taking the leap

into unfamiliar risks - like project finance in emerging markets

- would need to be mitigated by guarantees from multilateral

lenders.

Some MDBs are already providing guarantees or structures

that help reduce the risks, for example by hedging the risk of a

collapse in the local currency.

At COP29, some banks have flagged new initiatives including a

move by the United States to guarantee $1 billion of existing

loans to governments by the Asian Development Bank so it can

lend a further $4.5 billion to climate-friendly projects.

The EBRD's Renaud-Basso told Reuters it was also looking to

guarantee sovereign lending to free up more money, without

providing further details.

Guarantees aside, the reluctance of some development banks

to play the junior partner in project lending, amid pressure to

land big deals and maximise their own returns, was leaving them

in competition with private sector investors, according to half

a dozen sources in the industry.

Gianpiero Nacci, EBRD Director for Sustainable Business and

Infrastructure, said that while MDBs were starting to change

their culture and structures to make them more focused on

attracting private sector investment, it was a "work in

progress".

"We're increasingly incentivising our banking teams to focus

on mobilization," he said, noting the EBRD is introducing

internal targets beyond its own direct investment.

Given the scale of the climate challenge, some development

experts are choosing to go it alone, among them Hubert Danso,

chief executive of Africa Investor, a platform that connects

private investors with green infrastructure projects on the

continent.

"We have an MDB market failure which is incapable of

crowding in the private capital required," he said.

CULTURAL HURDLES

In an August document, the Organisation for Economic

Cooperation and Development (OECD), which tracks the climate

finance efforts of multilateral institutions, found lack of data

was a "major obstacle" to raising private investment to the

required levels.

The previously unpublished report, reviewed by Reuters, said

a shortfall in transparent data was leading to private investors

mispricing investment risk.

"For efficiency of markets, data is critical," said Haje

Schutte, a deputy director at the OECD. "There is an ethical and

fairness dimension to that: these public sector institutions

have a role to beyond their institutional self-interests."

Some development banks are worried about sharing their

proprietary information and require the OECD to sign

non-disclosure agreements, Schutte said.

Alert to the criticism and following an investor

consultation, MDBs have increased the credit risk data shared in

a database called GEMs, originally designed to be used for

information exchange between the banks themselves.

Since March, some data on recovery rates for public as well

as private lending has been made available and, in October, more

historic data was offered. But some investors are demanding more

granular risk information.

Erich Cripton, a director at Canadian pension fund CDPQ Global,

which has over $300 billion in assets under management, said

investors have been pushing for MDBS to publish more data in the

GEMS database.

He said the released data reflected the MDBs preferred

creditor status meaning that for a private investor, the risk

was higher.

For Nadia Nikolova, lead portfolio manager at Allianz Global

Investor, who has raised over $3.5 billion in development

finance and impact credit strategies, the lack of information

hampers her ability to raise and invest capital in developing

economies.

"Institutional investors have a fiduciary duty to invest

money responsibly," she said. "If I don't have that information,

I can't price the risk."

Abdullahi Khalif, Somalia's chief climate negotiator,

acknowledged on the sidelines of the COP29 talks that investing

there was riskier than in industrialized economies, but added

those who did so had opportunities for good returns in areas

including renewable energy and irrigation.

"The only private sector that can come is a private sector

that is really looking forward to taking the risk."