Deutsche Bank is the latest bank to join the Green Guarantee Company as the specialist guarantor seeks to boost financing for developing and emerging markets infrastructure.
It is part of the attempt to close the funding gap on the agreed annual target of US$100bn of climate finance that was identified at the UN's COP26 climate meeting in November.
GGC provides guarantees that give green bonds and loans for sustainable projects in emerging and developing countries an investment-grade profile that is more appealing to a broader group of investors.
It is managed by the Development Guarantee Group, which launched GGC at COP26 in Glasgow with the Green Climate Fund and the support of the UK’s Foreign, Commonwealth & Development Office.
"We want to create a transformation in terms of understanding and changing risk perception in the global capital markets towards climate infrastructure in developing countries," said Lasitha Perera, managing partner at the Development Guarantee Group.
Private capital needed
Climate financing from developed countries to developing countries is essential to meet the goals of the Paris Agreement to limit global warming to two degrees or less by 2050, and most of this needs to come from private capital.
More than 70% of the funding needed to decarbonise the growth and emissions in emerging markets is assumed to come from the private sector, according to the International Energy Agency’s climate scenarios.
"A large number of capital markets investors want to support emerging market climate mitigation and adaptation needs, but are limited by their investment mandate to participate in these more risky debt instruments,” said Claire Coustar, Deutsche's global head of ESG for fixed income and currencies.
"This is a first step in mobilising capital because it allows investors to go into emerging markets in a way they're more traditionally used to in the investment-grade space, where they're effectively protected against typical emerging markets risks such as geopolitical and macroeconomic risk."
The guarantees are designed to build capacity and scale up financing by helping global investors to understand the risk better so that they can price it more affordably and ultimately no longer need to rely on guarantees.
“These types of credit enhancement products provide credit protection, but investors will still perform due diligence on the underlying project and country and, over time, that investment track record will migrate into partially and non-credit enhanced transactions," Coustar said.
Credit enhancement
The GGC is talking to ratings agencies and seeking to secure an investment-grade rating that it will then offer to sub-investment-grade borrowers in developing and emerging markets for environmental projects relating to climate change mitigation and adaptation.
It will guarantee climate bonds issued and listed on the London Stock Exchange and other global exchanges and will also encourage borrowers to improve reporting standards while helping borrowers from some of the poorest countries to access hard currency borrowing.
As an origination partner, Deutsche will source and arrange transactions, while GGC provides the credit enhancement with guarantees. MUFG and Standard Chartered Bank are also origination partners and DBS Bank is offering origination insights and project pipeline preparation.
"When it comes to emerging markets, there is an absence of a guarantor dedicated to looking at wrapping fixed income instruments for institutional investors in global capital markets, and this is really the gap that we are looking to step in to," said Perera.
Deutsche is seeking to leverage its global emerging markets platform across Latin America, EMEA and Asia to bring opportunities on the origination side in clean infrastructure and its global institutional client network to bring capital markets investors into the financings.