What’s the Real Risk in Investing in Climate-Smart Solutions?

This article was originally featured on AVPN Blog.

Since joining Nexus for Development (Nexus) in 2018, one of my key focus areas has been to lead the fundraising activities for the Pioneer Facility – a debt facility which finances growth-stage clean energy and water enterprises across Southeast Asia. The facility was launched during a time when few players in the market were willing to take the risk of lending to smaller companies, especially those with limited track record and credit history.

Today, we still see risk appetite as one of the biggest market challenges, and the objective of the Pioneer Facility is to bridge financing gaps, which are a key inhibitor to the growth of solutions that confront climate change. Nexus has worked with development organizations and private impact investors to incubate this finance vehicle, and we view high net worth families as another key collaborating partner in supporting our mission.

The journey has produced a great number of insights and shaped my views on where we are today, in terms of the growth and progress around impact investing in Southeast Asia. Yes, we have experienced good momentum to date and the level of interest that the next generation of high net worth families have expressed is positive. But my experience has signaled that we still haven’t turned the corner and arrived at a point where we are generating deep enough impact, especially if we are truly committed to drive positive change in Asia.

The missing middle is not closing fast enough

During the AVPN Southeast Asia Summit, I had the opportunity to join a group of passionate panelists to discuss the opportunities and challenges of financing climate smart solutions. There is a consensus that a real financing need exists across financially excluded small and medium enterprises (SMEs), which limits the scale of meaningful solutions. Bridging this “missing middle” is not only critical for sustainable economic growth and job creation, but also catalytic to support positive environmental change.

The ingredients to bridge the missing middle are already in place. Our conversation at the Summit made it clear that there are many different investment products being offered to move more capital towards global climate issues. There has also been an emphasis placed on blended finance structures, where concessionary funding is leveraged as catalytic capital to crowd-in private sector money. This blended finance model is how the Pioneer Facility was designed, and I would argue that risk is well mitigated by the size of the first loss capital tranche.

Despite the wide range of existing market-based solutions, the much needed big push of capital hasn’t come. There is still a missing component.

The crux of the issue

For me, the missing component is that investors are still looking at the wrong risks; they are analyzing the risks of standalone projects, companies, or even fund managers. But the issue at hand, climate change, is much greater in breadth and depth than the performance of any one transaction or fund. The implications of deforestation, water shortages, droughts, food security – and the list could carry on – cannot be viewed with a lens that focuses on short-term risks.

A case should be made to all investors that the real risk is the risk of inaction. We should be focusing our attention and acknowledging that there are costs associated with sitting on the sidelines. Until we figure out the risk puzzle, we will remain stuck in a vicious cycle of convening to talk and discuss about the issues that our planet and humanity face, without making any real progress of mobilizing capital. To even start to tackle this issue, the market needs the support of development organizations and arguably large foundations, to step up again as concessionary capital lenders.

My call to action is that we need funders and financiers to reassess how they analyze and measure risk in order to achieve tangible momentum. From a personal perspective, there is still more focus on financial returns than on efforts expended into delving into details of the breadth and depth of impact that is targeted. But there is equal responsibility for funders and financiers to be more diligent in asking the questions as there is a responsibility from the entrepreneur, project implementer, or fund manager to lead the conversation with impact at the fore. A variety of different guides have been put together by organizations such as The J.W. McConnell Family Foundation and also by Root Capital, both of whom share different methods for interpreting the impact returns vs. financial returns.

Without a reevaluation, we are truly failing the future generations.

Jennifer Louie,
Nexus for Development Executive Director