Last Friday marked a significant development in the blended finance ecosystem to mobilize investment for the Sustainable Development Goals and Paris Agreement. Contributing to the global ambition to mobilize private investment to impact in developing countries, the Green Guarantee Company (GGC) launched with funding from the United Kingdom’s Foreign Commonwealth & Development Office (FCDO) through its MOBILIST programme, the Green Climate Fund, the Nigeria Sovereign Investment Authority (NSIA), the United States Agency for International Development (USAID) with Prosper Africa, and Norfund.
GGC will issue guarantees to credit enhance debt to climate mitigation and climate adaptation borrowers/projects undertaken in developing countries. GGC has obtained a BBB Investment Grade rating from Fitch Rating Services, which allows it to leverage its initial $100 million capital 10x to write and hold up to $1 billion of guarantees. These guarantees will allow borrowers/projects with high climate-impact to obtain funding from debt providers (e.g. banks) that they would otherwise not be able to obtain since the underlying risk profile is beyond the risk mandate of the debt investor (e.g. credit-enhancing a project with an implied risk rating of B+ to BBB). GGC’s business plan forecasts issuing at least $5 billion of guarantees to support climate projects by 2035.
Why this is important
Applying conventions by the Big Three rating agencies and the investors’ “sovereign ceiling,” most debt investment opportunities in the 150 low- and middle-income countries on the OECD Development Assistance Committee List have implied B and CCC risk ratings. Most debt investors cannot invest at that level of risk, or can deploy only small amounts usually in developed countries. GGC’s guarantees will make the Paris Agreement and SDGs investible in developing countries for a large number of prospective investors, mobilizing investors to climate impact investment. The Climate Policy Initiative estimates climate investment needs in developing countries close to $1.5 trillion per annum with actual investment at only around 15% of the level required.
The development and private investment communities agree that the blended finance sector needs to identify, standardize, and scale:
- Project-level private investment mobilization solutions that increase the universe of viable and investible projects that attract project sponsors, debt providers, and equity investors; and
- Portfolio-level private investment mobilization solutions (e.g. tiered blended finance funds) that create fiduciary and regulatory-compliant investments that mobilize institutional investors, with proceeds invested into viable and investible projects.
GGC is a major contribution to the set of project-level private investment mobilization solutions that can be standardized and scaled, joining similar organizations such as GuarantCo and African Guarantee Fund. GGC helps narrow the gap between investors’ perceptions of high risk in developing countries and actual risk that has been shown to be lower than expected in datasets like the Global Emerging Markets (GEMs) database.
What’s next?
Convergence, Green Guarantee Company and others will organize an information session on the role guarantees play in mobilizing private investment in March. Subscribe to our newsletter to receive more information about this and other Convergence events.
For more information on Green Guarantee Company, visit www.greenguarantee.co
For more information on blended finance and private investment mobilization, contact [email protected]
To find out more about the information session and other events, later in February please visit www.convergence.finance/news-and-events
