Category: Investing in the Energy Transition

Unbundling Attributes to Reveal More Value

At the end of August, standard setter Verra issued a different sort of methodology from its norm. Rather than setting the rules for funding an activity that lowers carbon emissions, this new Verra methodology lets a developer seek funding for saving time. The activity, supplying more efficient cookstoves, has been used for carbon avoidance crediting. But by isolating a separate benefit of the same activity, the new methodology highlights that there is other value in many carbon projects that is very likely being under-recognized.

Verra’s methodology, called Time Savings From Improved Cookstoves, captures the hours per day saved in both gathering firewood/biomass and cooking (more efficient cookstoves require less fuel and cook faster). The freeing up of such time allows (primarily) women to pursue other activities of greater economic, societal and personal value. The methodology was written by C-Quest Capital, one of the largest carbon project developers globally.

The idea that carbon emission avoidance activities have other benefits is not new. These so-called “co-benefits” are customarily denoted as progressing United Nations Sustainable Development Goals, or SDGs. Cookstoves, for example, are thought to advance SDG 3 (improved health), SDG 5 (gender equality), SDG 7 (modern energy and increased energy efficiency), and SDG 8 (enhancement of job opportunities). Thus, a buyer of carbon offsets can choose credits that have specific SDGs, or that have a minimum number of SDGs, to make a societal contribution beyond climate mitigation.

Carbon offset credits with SDGs frequently carry a premium to those without. For example, ACX Exchange-traded Global Nature Tonne Plus (GNT+) series contracts, which have certified co-benefits, currently trade at a ~$5/ton premium to ACX’s GNT contracts of similar vintage (note: with a contract one is buying credits selected by the exchange from projects that have specified attributes rather than from a specific project).

Yet, it is almost impossible to imagine that such premia reflect a true market assessment of the value for these SDGs. That’s where unbundling these different attributes comes in: it spurs independent analysis of their value. Admittedly, assessing that value may not be easy. For example, for time savings, it is plausible to quantify hours (the Verra methodology relies on surveys), which lends itself to a crediting methodology. However, academic literature has shown both a wide range in estimates for hours saved and acknowledged that more work must be done to value them.

With focus, the net effect of adding a time-savings consideration is most likely that it will put greater value overall on the activity. It may well be that this “value of time” largely remains ‘bundled” with carbon offset crediting, as opposed to widely trading as a separate security. But the point is that through the act of unbundling, it will have fostered a process to accord value to an activity more consistent with its societal impact.

To date, unbundling has been introduced “the other way”, i.e. to give value for environmental attributes of commercial products. Examples include Renewable Energy Credits (RECs) and, more recently, the crediting mechanisms for differentiated natural gas from Xpansiv (Methane Performance Credits) and EarnDLT (Certified Emissions Tokens). These gas crediting mechanisms are allowing society to put a value on avoided methane, which is now finding its way into buyers’ RFPs for “bundled” natural gas, i.e. they will buy differentiated gas and are offering to pay a modest premium for the relatively lower climate impact of that gas.

It is tempting to suggest that this new time savings credit has an ambition that would have been better received two years ago. Then, there was a surge of interest in carbon offset crediting that corresponded with an awakening to the understanding that the private sector needed to be forceful actors in addressing global warming and biodiversity decline. Further, there was a collective conversation about valuing things that were not typically given much weight, including the longer-term financial risks of climate inaction. It was before anti-woke legislation and before environmental advocates waged campaigns against carbon offsetting practices. Yet if we acknowledge that communities (and businesses) of all sorts must change behavior for the good of the planet, we need to create mechanisms that will adequately fund such behavior change. More transparency about the various ways it makes an impact can only help.

9/15/2023

VC’s Rotation to Emerging Verticals in 1H23

Exhibit: Venture Capital Investment by Climate Tech Vertical ($ Billions), 2021-1H23

Source: CTVC

Key Points: A 40% drop in VC investments yr./yr. in 1H23 reflects declines in more mature verticals, like Transportation and Energy, partially offset by increases in emerging, under-invested verticals Industry and Built Environment. This “rotation” is arguably sustainable and may prove productive in developing important climate mitigation opportunities.

Overall Venture Capital funding in climate tech fell 40% year-over-year in 1H23 vs. a ~50% decline for the overall market. Per market tracker Climate Tech VC (CTVC)’s mid-year report, total climate tech investment by venture capital (VC) firms totaled $13.1 Billion (B) in the first half of 2023, down 40% from a year earlier and down 35% from 2H22. Total VC market data for 1H23 appears to be unavailable, although the market was down 53% yr./yr. in the first quarter of 2023 (1Q23) and was not expected to have improved in 2Q23.

CTVC notes that seasonality in the VC market (there is generally an uptick in the 3^rd quarter of a year) makes yr./yr. comparisons more relevant.

The number of climate tech deals rose 8% yr./yr. in 1H23 to 633. The growth came in earlier-stage funding rounds — the number of “Seed” round funding deals rose 34% yr./yr. to 280, for example, while Series A rounds were essentially flat at 171. The growth in Seed deals was partially offset by ~40% declines in the numbers of Series C and Growth round deals.

In other words, average deal size fell in 1H23 as the deals shifted to earlier stages (although later stage funding deals also got smaller, in part from the lack of “mega” deals). Dollars invested in Seed rounds rose 23% yr./yr. in 1H23 to $1.1B. Dollars invested in Growth rounds fell 64% yr./yr. in 1H23 to $2.8B.

The average Seed round deal size in 1H23 was $4.9 Million, -4% yr./yr. The average Growth round deal size in 1H23 was $107 Million, -37% yr./yr. Impacting the decline in deal size were a few “mega deals” in 2022 including Northvolt ($2.7B) and Rivian ($2.5B) whereas the largest deal in 1H23 was Zeekr ($0.75B).

CTVC posits digestion and IPO challenges for the decline in later stage deals… CTVC offers as a possible explanation for the slowdown in larger/later-stage deals that VCs had made significant investments in 2021-22 and could be pausing to see how these investments evolve. Further, market challenges, like limited opportunities to IPO, could be weighing on overall VC market demand, particularly for later stage growth companies.

…But also potential “rotation” into different climate tech verticals. By climate tech vertical, investment declines (in absolute $ terms) yr./yr. in 1H23 were led by more mature verticals: Transportation (-$3.0B to $3.6B, -45%), Energy (-$2.8B to $3.1B, -47%) and Forest & Land Use (-$1.7B to $1.7B, -49%). See Exhibit. More mature verticals have a greater share of later stage funding rounds, which fell in number and in size yr./yr. in 1H23 as discussed above.

In contrast, emerging verticals grew, including Industry (+$0.1B to $1.8B, +7%) and Built Environment (+$0.1B to $1.2B, +7%). (Built environment includes energy efficiency, construction, and heating & cooling.) CTVC suggests that with large industry players investing in mature markets — established automakers heavily focusing on EVs and batteries, for example — it might not surprise that VCs are looking away from transportation and to emerging opportunities.

July 13, 2023

When Governments of Developing Economies Get an Equity Stake

Exhibit: RE and Fossil Fuel Projects, Average Spread in Debt Costs by Ownership, 2011-2022

Source: UNCTAD

Key Points: A 1,700-project review in UNCTAD’s latest World Investment Report quantifies the extra financing costs for LDCs’ projects; factors include lower credit ratings, lower leverage, and longer time to close. And a host government equity stake in Developing Economies has lowered financing by ~80 basis points relative to “only” policy or loan support.

UNCTAD’s annual World Investment Report. The United Nations Conference on Trade and Development (UNCTAD) published its annual World Investment Report (WIR) this week. The report is a compendium of trends and challenges in financing the investments required for countries to achieve their Sustainable Development Goals (SDGs) by 2030. It notes that developing countries need US$1.7 Trillion in annual investment in renewable energy (RE) but received $540 Billion in clean energy foreign direct investment in 2022.

The characteristics of more expensive financing in Least Developed Countries. As part of the report, WIR 2023 includes a review of ~1,700 project with yield type information financed from 2011 through 2022. The review characterizes some of the additional sources of financing cost for Least Developed Countries (LDCs) relative to Developed and Developing countries. To illustrate:

• The average interest rate spread (to a project base rate that can be considered a risk-free rate) is 283 basis points (bps, with 100 bps=1 percentage point) for Developed countries, 290 bps for Developing countries and 386 for LDCs.
• The proportion of a project financed by debt (vs. equity) is 75% on average for Developed countries, 71% for Developing and 67% for LDCs. (The higher the debt proportion of total financing, generally the less expensive the financing.)
• The proportion of projects bucketed as “highly leveraged” (classified as having a spread >400 bps over the base rate and akin to having a very weak credit rating) was 24% in Developed countries, 23% in Developing countries and 55% in LDCs.

In addition to that data on cost spreads, other observations in WIR23 point to higher costs in LDCs as well. The report notes, for example,

• sovereign credit ratings for the vast majority of LDCs are below investment grade. Most banks have internal or regulatory limits (e.g. Basel III) on how much they can lend (on a non-recourse basis) to non-investment grade countries.
• the average number of days to close (i.e. finalize) financing on energy sector projects was 156 for Developed countries, 282 for Developing countries and 524 for LDCs; this significant delay is itself a source of costs.

A government equity stake in the project has made a meaningful impact. The project review also found ~80 bps lower borrowing costs in Developing economies when the host government had an equity stake vis-à-vis when it (or Multilateral Development Banks) had provided other, non-equity forms of support such as subsidies, (concessional) loans or loan or price guarantees. Interestingly, there is relatively little benefit, in terms of lower financing cost, between projects with this non-equity government support and those that receive no government support at all. See Exhibit.

By way of explanation, the report suggests that non-equity government support can often be crucial to a project developer’s “go/no-go” decision, by improving risk-adjusted expected financial returns. Yet, such support is less effective in changing credit risk perception among lenders. Instead, a project’s actors — sponsors, equity investors, contractors, customers/power off-takers, and country administrators — as well as the size of the project (with larger projects being harder to reverse) are more responsible for lenders’ credit risk perceptions.

WIR23 notes, however, that a government equity stake can factor into the longer negotiating time for Developing countries and LDCs and, at too high a level, allow for concerns regarding project governance.

RE vs. Fossil. The project review finds significantly (150+ bps) higher borrowing costs for fossil fuel vis-à-vis RE projects, regardless of ownership profile. See Exhibit. The report suggests that regulatory and stranded asset risks may help account for some of this gap. Additional color on the projects might be helpful, but it seems plausible that market risk (less off-taker contracting) amidst volatile hydrocarbon pricing through the 2010s played a role in the higher costs as well.

July 6, 2023

Continued Growth in Companies Using Internal Carbon Pricing in 2022

Exhibit: Companies Using or Planning to Implement an Internal Carbon Price, 2015-2022

Source: CDP and World Bank Group

Key Points: The number of companies using Internal Carbon Pricing (ICP) rose again in 2022 (to 1,200 of 8,400 surveyed). Most ICPs are too low to reflect accepted views of the societal cost of carbon, but having the mechanism is an important step — it drives developing the ability to assess carbon footprints and it can drive significant behavioral change.

An incremental 12% of companies surveyed using an internal carbon price in 2022. The World Bank Group, in its latest annual State and Trends of Carbon Pricing report, released in late May, includes information about companies’ Internal Carbon Pricing (ICP) policies and intentions in 2022. The World Bank gets this ICP information from an annual survey conducted by CDP (formerly the Carbon Disclosure Project). (The CDP’s last report on its survey was published in 2021 and assessed its 2020 survey results.) Of the 8,402 companies responding to CDP’s latest survey, 1,203 have ICP, up 12% from the year ago survey and up 40% from 2020. Further, another ~1,500 companies responded that they intend to implement ICP within the next two years. See Exhibit. Based on CDP’s earlier surveys, ~1/2 of the world’s 500 largest companies (by market capitalization) are putting a price on carbon.

Companies seeking to use ICP to change behavior and drive low carbon investment. The survey respondents indicated that the primary reason for having ICP is to spur low carbon investment and energy efficiency measures. A smaller number of respondents indicated that it was to help them navigate regulations at a business-unit level; approximately ½ of the companies with ICP are already subject to either a carbon tax or ETS and another 15% expect to be so within the next three years. In its earlier report, CDP cites that its data finds correlation between a company having ICP and “taking other strategic actions to integrate climate change issues into their business strategy.”

The ICP companies are using tends to be low, however. Although average or median ICP were not provided with this year’s results, in prior years’ reports, CDP has indicated the median ICP reported was $25-30/ton of CO2-equivalent. With that said, the reported ICP range is wide, with ~16% of reporting companies using an ICP below $10/ton (and some ICPs are pennies/ton) and ~10% reporting over $100/ton. As the World Bank report notes in its State and Trends report, it has been recommended that a carbon price of at least $40/ton be used to encourage behavior more consistent with limiting global warming to below 2º Celsius. This allows for the concern that the pricing isn’t motivating adequate behavioral change, although having an IPC at all brings an important awareness to companies’ investment and operating decisions.

The financial services sector leads in the number of companies with ICP; power and fossil fuel companies lead in the proportion of their sector having ICP. The World Bank report notes that the services industry leads sector groups with ICP in place, with >1/4 of total companies (i.e., >300 services companies surveyed have ICP), followed by the manufacturing sector and then materials. Within the services industry, the report notes the financial services is particularly well represented. This is consistent with anecdotal information, for example, of asset managers using carbon pricing as part of assessing risk of various portfolios.

As a proportion of the number of survey respondents within a given sector that have an ICP, the power and fossil fuel sectors have historically led. In the CDP’s last published results from its 2020 survey, for example, 71% of companies in the power sector had ICP, followed by 67% of companies in the fossil fuel sector and 52% of respondents in the financial services sector.

June 8, 2023

CDR Portfolio Option Introduced​

Exhibit: The NextGen CDR “Ecosystem”

Source: Mitsui O.S.K. Lines

Key Points: NextGen CDR hopes to progress CO₂ removals at scale by offering (1) vetting, oversight and portfolio construction services to buyers and (2) advanced market purchases, i.e., revenue visibility, to sellers. NextGen launched in late April with five buyers committing to ~200K tons; it is targeting selling 1MM tons by 2030 at an average price of $200/ton.

NextGen CDR Facility introduced. Sponsors South Pole and Mitsubishi have launched the NextGen CDR Facility. The facility is designed to pool multiple large-scale sources of technology-based Carbon Dioxide removal (CDR). NextGen is facilitating the purchase and sale of CDR credits, ensuring compliance with industry best practice for credit issuance and CDR performance. Its ambitions are to contract for 1 Million (MM) tons worth of offsets at an average price of $200/ton by 2030.

Three initial sources of credits. See Exhibit. Although other technologies are expected to be added to the available portfolio, the initial sellers of CDR credits into the facility are:

• 1PointFive’s Direct Air Capture facility under construction in Texas. The facility targets removing 500 thousand (K) tons per year and is expected to be operational in 2025.
• Summit Carbon Solutions’ biomass carbon removal and storage project in the U.S. upper Midwest. The project envisions partnering with 30 ethanol plants across five midwestern states to capture CO2 emitted during the fermentation process and send it to a sequestration site in North Dakota via pipeline. The project targets 9MM tons per year. Sales to NextGen from this project may reach $30 Million.
• Carbo Culture’s biochar project in Finland. The company targets storing 2.5MM tons by 2030. Carbo Culture had previously signed advanced market purchase agreements with Zendesk and Rothschild & Co. Construction of its first commercial facility is underway; the company envisions several operating facilities by 2026.

Five founding buyers committed to buy 193K tons starting in 2025. Mitsui O.S.K. Lines, BCG, LGT, Swiss Re and UBS have committed to buy CDR credits as the sources scale up operations.

Creating a technology portfolio for buyers. NextGen is seeking to provide large CDR buyers an option to buy a portfolio, enabling them to invest in several technologies with less effort than having to source, perform due diligence, and contract each on their own. Buyers may be attracted to the portfolio as a way to help sponsor several technologies or to hedge against the risk that a particular technology does not pan out as envisioned. Buyers also get the benefit of yet another source of vetting for project integrity — NextGen is sourcing its credits that have been vouched for by the International Carbon Reduction and Offset Alliance (ICROA, an integrity body) but will also continue to provide independent monitoring services.

NextGen is funding technologies just as they are scaling up; April also saw earlier stage CDR funding support. NextGen is slotting into the development lifecycle as technologies are scaling/commercializing. This stands in contrast to, for example, Frontier Climate, which is supporting a wide(r) array of CDR technologies earlier in their development, although also through advanced market commitments (Frontier has accordingly assumed thought leadership responsibilities regarding valuing technology uncertainty). Also in April, Frontier received commitments for $100MM from another four buyers, bringing its total advanced market commitments to over $1 Billion.

May 3, 2023

Insight Into the Higher Cost of Capital in Emerging Economies

Exhibit: WACCs in Select East Asian Countries, Onshore Wind and Utility Scale Solar

Source: Imperial College and IEA, Payne Institute

Key Points: A recent IEA/Imperial College report compares financing costs of renewable energy (RE) across the ASEAN. The differences stem from perceived country/currency risk, electric power policy, (contractual) relationship with the utility/buyer and “depth” of financing options. The report is part of a broader initiative to lower obstacles to RE development.

A strikingly large range in cost of capital (i.e., cost of financing) across countries. The authors derived Weighted Average Cost of Capital (WACC, see below for more detail) ranges for each country by renewable energy (RE) technology. The WACCs range from approximately 6.5-8% for utility-scale solar projects in Malaysia to approximately 10-13.5% for utility-scale solar in Vietnam. See Exhibit. The high WACCs create a significant, although not the only, obstacle to RE deployment at scale in those countries.

The WACCs for all the countries studied include some risk premium vis-à-vis developed economies. This is reflected, for example, in currency exchange risk vs. the US Dollar; the report suggests this adds ~1-3 percentage points, with Malaysia at the low end and Vietnam and Indonesia at the high end.

Challenges in Vietnam and Indonesia. The higher WACC in Vietnam and Indonesia reflects, per the interviewees, greater perceived business and financing risks from:

• integration challenges (of tying in newly constructed electricity generation into the grid)
• power curtailment risk (by the state-owned utility that is to buy the power)
• contractual risk (with the state-owned utility)
• underdeveloped banking systems (tends to result in higher interest rates; this may be due in part to a more limited track record, at least in Indonesia)

Report Background. The International Energy Agency (IEA) and the Imperial College London recently published a joint report on the financing costs and challenges of developing new RE sources in the ASEAN region (the Association of Southeastern Asian member states). It offers interviewees’ assessments of the WACC and issues/challenges for different RE projects. The report gathered cost of capital data from representatives in these countries via interviews with private and public investors and industry sources.

The report is part of a larger effort to increase transparency of the components of the cost of capital for RE in emerging economies; that effort is a World Economic Forum/IEA initiative called the Cost of Capital Observatory, of which the Payne Institute’s Sustainable Finance Lab is a working group member. It is hoped that greater transparency can help spur development of concessional support and policy changes to lower perceived risks and thus lower the cost of financing.

The Cost of Capital Observatory’s efforts have included a survey of (different) professionals conducted in the Summer of 2022. A follow up survey is to be released in May. Some of the original survey data was integrated into the IEA/Imperial report’s cost of capital estimates (our thoughts on the original survey results are here).

 WACC defined. The WACC of a project is determined by its cost of debt and its cost of equity (otherwise known as the expected return on an equity investment), weighted based on how much each (debt and equity) comprises of the total financing. To illustrate, if a project is financed with 70% debt that has a 7% interest rate and 30% equity with a 12% expected return, the WACC would be (.7*.07)+(.3*.12) = 8.5%. The cost of equity is estimated by adding a risk-based estimate of the returns to that of a risk-free rate of return. The WACC is lowered by having lower costs of debt and equity — and these are lowered when investors perceive lower risks in the project — and/or, generally, with more of the financing coming from debt vs. equity.

4/26/2023

Credit Suisse Demise Opens Another Hole in Climate Financing

Exhibit: Blue Bonds Principles

Source: The Nature Conservancy

Key Points: Climate finance is more vulnerable than other sectors to a banking crisis because fewer banks engage with emerging companies/newer financial products. We discussed SVB in a separate article; here we note Bloomberg reporting of a Credit Suisse niche in “nature” bonds — blended finance vehicles that lower debt costs in exchange for nature action.

SVB’s bankruptcy looks set to slow startups’ development. Silicon Valley Bank’s (SVB) outsized role in providing banking services (including specifically venture-related loans) to startups included a dominant presence in some segments of “climate tech,” new technologies directed at producing carbon-free energy or in some form of decarbonization. The bank’s demise thus threatens to slow climate tech companies’ commercialization and growth, which, in turn, suggests a slower pace of energy transition (although calibrating how much of a delay or impact might be impossible). A silver lining, as we discussed in in an opinion piece in The Hill, it is that one would hope for a diffusion (of people in the climate venture capital ecosystem and of knowledge of emerging technologies) to many banks that can lead to much more financial support over time.

Credit Suisse’s fall may slow novel environmental bond issuance. In what admittedly is a smaller example than SVB, the investment bank played a key role as a facilitator in issuing some novel nature-protection related bonds. The largest category of these is “Blue bonds” (see description below). Per Bloomberg, Credit Suisse was the sole arranger of the largest blue bond issued to date, $364 Million (MM) to Belize in 2021, and of a $150MM issuance to Barbados last year. Blue bonds appeared poised to grow, with Bloomberg reporting that Gabon ($700MM), Ecuador ($800MM) and Sri Lanka ($1 Billion) all working towards issuance.

Credit Suisse was also the sole structurer and joint book runner on the World Bank’s $150MM “Rhino bond,” designed to fund the protection of black rhinos in South Africa.

Blue bonds offer a chance for a country to lower its debt burden in exchange for protecting ocean areas. A relatively new product, blue bonds are loans with two purposes: 1) to refinance a country’s outstanding debt and therefore offer some relief and 2) to allocate some of the newly borrowed funds to a program to preserve and protect ocean areas (see Exhibit). Blue bonds are thus an extension of debt-for-nature swaps first conceived in the 1980s.

Blue bonds have been orchestrated and managed by The Nature Conservancy (TNC). Grant funding (sourced in part from TNC as one of the recipients of The Audacious Project) helps initiate projects. Loan insurance provided by the U.S. International Development Finance Corporation (i.e. public support) helps private investors accept lower returns and so the new loan carries a lower interest rate. Also, for at least the Belize debt, the proceeds were used in part to buy back existing bonds that were trading a steep discount, thereby lowering the country’s outstanding loan balance.

3/22/2023

The Recent Reshaping of Renewable Energy Investment

Exhibit: % of Renewable Energy by Finance Source, 2013-2020

Source: CPI

Key Points: Renewable energy (RE) investment shifted to commercial lending/securities from project finance in the 2010s, reflecting growing comfort with solar/wind technologies as well as a China industrial policy tool. The shift likely helped RE growth in 2021-22 in the OECD. “Direct” institutional investment is seen as a key enabler in developing economies.

A detailed study of renewable energy finance trends. In late February, the Climate Policy Initiative (CPI) and International Renewable Energy Agency (IRENA) published their third biannual report of investments in Renewable Energy, segmenting by region, technology, source of financing and grid/off-grid. The data and analysis concentrate on 2013-2020, although there is some data available through 2022.

No significant growth in RE investment in 2014-2020… The value of investment in RE from 2014 through 2020 was relatively unchanged, fluctuating between $260 Billion (B) and $350B (see figures at the top of the Exhibit for annual detail). A step-up in RE investment began in 2021 and reached $500B in 2022 (please see this recent Payne blog for discussion).

…But there was a change in where the money came from to make the investments. The composition of the financing sources, however, shifted considerably, to a mix of 56% debt/44% equity in 2020 vs. 23% debt/77% equity in 2013. The shift occurred largely as project-level (project financed) equity was replaced by balance sheet (i.e. corporate) debt. Project-level equity fell to 10% of total sources by 2017 from 30-40% in 2013-2016; balance sheet financing, in which a company borrows from commercial lenders or securities markets, grew to 30% of total sources by 2020 from 0% in 2014 (see Exhibit).

The maturation of solar and wind technologies allowed for the shift.  The growth in commercial lending and marketable securities, which are less expensive and much more broadly available than project financing, reflects increased comfort with solar and onshore wind technology. The growth in lending was, however, not all driven by market forces. It also reflected policy decisions — the most important example being in China, which established a Feed-in Tariff to encourage wind development and directed Chinese state-owned financial institutions to lend to wind projects.

Institutional investor direct project investment is well below 1% of total financing. The study notes the very limited role institutional investors, including pension funds, insurance companies, sovereign wealth funds and endowments and foundations, play in directly funding RE investment. These entities combined to invest in a range of $300 Million to $1.3B per annum over 2013-2020.

These institutions do provide capital support, investing through established capital markets (i.e., they buy listed stocks and bonds). But with their collective tens of $Trillions of assets under management, their direct participation in projects is seen as a powerful tool in fostering significantly more RE development in developing economies. It is perceived that direct investment is required for developing economies given relatively immature capital markets and lending institutions in these countries.

The argument that this group might be interested in making these direct investments is based on the idea that they have:

1. longer investment time horizons,
2. stated goals to decarbonize their investment portfolios, and
3. (arguably) some willingness to earn more modest rates of return (as long as the risk profile is commensurately lower).

Spurring more direct investment from these entities, however, involves overcoming a number of hurdles, including providing local knowledge and country- and project-specific risk amelioration; it likely also requires them making specific changes in their investment mandate to include more tolerance for longer term, less liquid holdings (i.e. to be willing to hold onto their investments for a long time).

3/6/2023