Better Food, Better Brazil

REFORMING BRAZIL’S FOOD SYSTEM FOR A NEW GREEN ECONOMY

By transitioning to a food system that is people- and planet-positive, Brazil can:

1. Reduce $300 billion annual hidden costs to the economy, environment and public health

2. Generate $70 billion worth of new business opportunities per year

3. Create up to 8 million new jobs by 2030

LONDON/SÃO PAULO, 22 OCTOBER 2021: Today, the Blended Finance Taskforce, with support from SYSTEMIQ and Partnerships for Forests (a UK government funded initiative) launched the new report “Better Food, Better Brazil” at a virtual event with Brazilian stakeholders. The report is a roadmap for how Brazil can use finance to transform the country’s food system to one that is both people- and planet-positive – helping drive economic growth, create jobs and feed a growing population whilst promoting more nutritious diets, improving local livelihoods, protecting nature and delivering on climate commitments. 

Brazil is the world’s fourth-largest food producer, but its current agricultural success comes with a hidden cost of $300 billion each year. These costs are the outcome of a system where producers, investors, traders and the public sector optimize resources individually rather than collectively, causing environmental destruction, harming public health, and locking in rural poverty.

“As the financial and corporate sectors adopt more sustainable business strategies and commit to net-zero emissions, Brazil has the potential to be a global leader in nature-positive food. As a major producer, feeding 10% of the world’s population, Brazil can build a new green economy that is good for our society and protects our unique and rich biodiversity”, says Pedro Guimarães, Partner & Head of Latin America, at SYSTEMIQ.

Finance is a critical part of the transition and Brazil must mobilise $21 billion into regenerative business models. The report discusses eight nature-positive business models on the forest frontier, focusing on those that generate value from standing forests, sustainable intensification and forest restoration. The return on scaling these new businesses is more than three times the investment requirement, and could generate 8 million new jobs by 2030. The report identifies the barriers to transitioning that producers, investors and governments currently face, and highlights the solutions needed to overcome them. It sets out priority actions for key stakeholders across the Brazilian food system - outlining the systemic changes required to unlock capital and transform Brazil’s food system.  No one sector can deliver on this agenda alone: it will require coordination across multiple stakeholders.

“Brazil can shift the food finance paradigm: creating $70 billion in new investment opportunities each year while tackling major hidden costs in the system. Brazil is already at the forefront of innovation: working to scale regenerative business models and developing sustainability-linked financial products and solutions. Building on the recommendations of “Better Food, Better Brazil”, the country can accelerate this innovation, becoming the global blueprint for how to finance the transition to a nature-positive economy”, says Katherine Stodulka, Director of the Blended Finance Taskforce & Director of Sustainable Finance at SYSTEMIQ.

“We need to minimise and redirect finance away from harmful agricultural practices, and scale and accelerate it towards those that are nature-positive. Investors and others in the financial system need to shift away from short term returns and work with providers of catalytic capital to reduce risk and uncertainty around new, regenerative business models. Policymakers need to complement private sector investment by strengthening the enabling environment, ensuring environmental regulation is properly enforced and deploying public capital to help aggregate and incentivise more sustainable practices”, says Rodrigo Quintana, Manager, at SYSTEMIQ Brazil & Latin America.

“We need to transition away from our current food system. As a key actor in the global food system, Brazil can be a catalyst for such a transformation. The ‘Better Food, Better Brazil’ report – with its specific on-the-ground recommendations - is a great example of how the framework outlined in FOLU’s ‘Growing Better’ report can be tailored to the country level” says Morgan Gillespy, Director at the Food and Land Use Coalition, UN Food Systems Summit Finance Lever secretariat.

 “Partnerships for Forests (P4F) supports business opportunities and investment models in which the private sector, the public sector and local communities can achieve greater returns from either preserving or restoring forests. In Brazil, our work has special focus on agricultural value-chains, which are the main drivers of deforestation. Our experience shows that collaborative action and strong partnerships are key to catalyse investments in those models. The ‘Better Food, Better Brazil’ report showcases some of the successful arrangements that have been supported by P4F in the country, strengthening the potential of scaling and replication of those models”, says Felipe Faria, Latin America Regional Manager at Partnerships for Forests. 

João Pacifico, CEO of the Gaia Foundation, says “‘Better Food, Better Brazil’ is not only educational, but shows the specific actions required from financiers like me to overcome the existing barriers towards scaling nature-positive business models.”

Agriculture and food systems are key to global climate action. Brazil has the opportunity to be at the forefront of the global transformation to a food system that is regenerative, adaptive, and climate resilient.

Read the report at: https://www.blendedfinance.earth/better-food-better-brazil

Blended finance, the spinach of investing, will make us stronger

If governments backstop private capital, it could kickstart infrastructure building says Gillian Tett, FT

The White House faces a conundrum: President Joe Biden has bold infrastructure plans but how the heck will he pay for them? Biden has repeatedly promised to spend $2tn or so to upgrade (and green) America’s crumbling infrastructure. This is likely to be popular with voters and business leaders: last week Dow’s Jim Fitterling called on Biden to use the electricity crisis in Texas as a catalyst for overhauling the national grid. Yet the Congressional Budget Office recently warned that America’s debt will hit 102 per cent of gross domestic product this year — even before new infrastructure spending or Biden’s $1.9tn Covid relief package. And corporate lobbying groups are expressing horror at the idea of raising taxes to fund infrastructure spending.

The question for Congress is whether it can square this funding circle without a political or market firestorm. And the only honest answer is “not easily”. But here is a concept that might help: “blended finance”. The words sound as unattractive to most voters and politicians as spinach to a toddler, especially compared to catchy phrases like “Green New Deal”.

What blended finance essentially does is use a dollop of public money to provide a safety net for the private sector to credit risky projects with social value. The idea is to encourage mainstream private investors to finance projects they would otherwise shun because the risks were unmeasurable, long term or too idiosyncratic to hedge. This can be done with a credit insurance facility, or by having public money absorb the first tranche of credit losses.

Alternatively, a public, or quasi-public, agency can buy risky, idiosyncratic credits and repackage them into standardised bonds, which it backstops. This is essentially what US-backed government entities such as Fannie Mae have done for decades to support the public policy goal of widespread access to mortgages.

In recent years, the concept has sparked the most interest in emerging markets, where blended finance innovations have emerged to fund projects in line with the UN’s Sustainable Development Goals. This, sadly, has hitherto been very small scale. But influential global finance officials such as Tharman Shanmugaratnam, the Singaporean government minister, are calling for more focus on the technique to offset the economic pain that the pandemic has inflicted on poor countries.

“If the developing world does not get vastly larger net financing in the next few years, the world exposes itself to profound risk,” he points out. But there is little government finance available for investments, and private sector investors will be reluctant to step in, without protection. Hence the appeal of blended finance.

However, this principle applies well beyond the developing world. This month, Graciela Chichilnisky, an economics professor at Columbia University and a green entrepreneur, told the Warwick Economics Summit that what America really needs now is not so much trillions of taxpayer-funded spending — but a green version of Fannie Mae. Public money, she suggests, could be used to acquire loans extended to green projects, then those credits could be repackaged as standardised bonds and sold to mainstream investors. Other versions of blended finance based around equity as well as debt might also work, perhaps through a development bank.

It is a smart idea, even though it would irk some progressive Democrats by essentially socialising the risks of financing infrastructure while privatising the gains. It might also horrify free-market Republicans, who argue that government subsidies distort markets in dangerous ways. They will cite the controversial history of Fannie Mae, which needed a rescue in the 2008 financial crisis, and Barack Obama’s subsidies for solar panels, some of which went to providers that later went bankrupt.

Both sets of critics have a point: badly designed blended finance projects do go wrong. But the Biden team has no easy policy options and blended finance, if carefully done, would be a sensible step. After all, capital markets are awash with so much cash that investors are rushing into all kinds of investments. Some of this money has already moved into green-linked securities, but there is a relative shortage of assets linked to projects where investors can easily model the risks involved.

That is one of the reasons Tesla’s share price has soared. What blended finance could do now is bring together larger pools of capital to back expensive initiatives such as revamping the US electricity grid and rolling out 5G digital connectivity. It will not solve the infrastructure gap entirely; traditional fiscal spending will be needed too.

But we must stop approaching the problem in binary, partisan terms: a taxpayer-funded “Green New Deal”, or nothing. Covid-19 is already forcing a national reset; climate change challenges are visible to everyone (even in Texas), and investors are looking for new places to put cash. Embracing a green Fannie Mae would no longer be such a big leap. It is time for the Biden team to get creative — and catalytic.

Read more about blended finance for sustainable infrastructure here and read more about blended finance champions including Climate Fund Managers, the Emerging Africa Infrastructure Fund, the Tropical Landscape Finance Facility and the Global Fund for Coral Reefs in Better Finance, Better World. Link to FT where this article was originally published here.

The Paris Effect: How the Climate Agreement is Reshaping the Global Economy

The world is not yet on track to avoid dangerous, irreversible climate change.

But in the five years since the Paris Agreement, progress on low-carbon solutions and markets has been much faster than many realise. 

SYSTEMIQ’s latest report finds that low-carbon solutions could progress rapidly through the 2020s.

The Blended Finance Taskforce was proud to contribute to exciting new report, “The Paris Effect”, which finds that by 2030, low-carbon solutions could be competitive in sectors accounting for nearly three-quarters of emissions; this is up from one-quarter today (electricity) and no sectors five years ago​.

“It is clear the global long-term goal of Paris – net zero GHG emissions by mid-century – is now the reference point for governments and financial actors”, says Laurence Tubiana, CEO, European Climate Foundation. “World leaders started a journey in 2015 and now is the time to accelerate.” 

The Paris Agreement laid out a clear framework for 195 countries to steadily cut their emissions. This shared direction of travel increased the confidence of political leaders to provide consistent policy signals. In turn, these have created the conditions for companies to invest and innovate, and for the markets for zero-carbon solutions to start scaling – from electric vehicles to alternative proteins to sustainable aviation fuels. These trends have created the conditions for sectors to move towards tipping points where low-carbon solutions can out-compete legacy, high-carbon businesses.

This momentum is coming from countries, companies and investors. By moving further and faster, zero-carbon industries can be scaled in the 2020s, creating sustainable growth and more resilient economies. In sectors from renewable power, to local food economies and land restoration, the growth of net-zero economies in the 2020s can create over 35 million jobs globally. These are needed more than ever in the post-COVID recovery.

Conversely, late movers will not only miss out on the multiple gains from the transformation, but also risk slower growth, lower productivity and job creation, and a loss of competitiveness.

As the Executive Secretary of the UNFCCC, Christiana Figueres was one of the architects of the Paris Agreement. Five years on, as the global economy recovers from covid, she insists that the net zero pledges are more vital than ever: “This report shows that we can transform very quickly and that recovery from economic crisis must prioritise the delivery of these pledges. The net zero future is not a far off vision; we are ready to make the transition now.”

The report highlights that the state of the macroeconomy today further improves the conditions for a shift to a low-carbon economy. Ultra-low interest rates are well suited to clean technologies, with a higher proportion of costs up-front. The growth of digitisation also supports an expansion of resource-efficient, ‘as a service’ business models. And the economic effects of covid have overturned a lot of assumptions about how we live with implications for transport, and our consumer spending habits.

However, the transition is not assured and governments have a key role to play. Part of this will take the form of direct support: one-third of France’s covid package – around $30 billion – allocated to green measures, while South Korea’s New Deal directs $95 billion into green and digital technology; meanwhile, countries from Norway to China are using electric vehicle subsidies and building out charging infrastructure to scale the market and boost domestic manufacturing. In addition to de-risking the positives, there’s a strong push for climate transparency: the EU, Australia, Hong Kong, Japan and South Africa are among those considering TCFD-aligned disclosure mandates, helping to make risk in high-carbon assets more visible.

“We know that inadequate action translates into massive and costly climate risk”, says Professor Nicholas Stern, Chair of the Grantham Research Institute on Climate Change and the Environment at the London School of Economics. “The Paris Effect makes it clear that it also puts economies at risk of falling behind the next wave of the creation of prosperity. That wave is already gathering pace and will become a dominant force in growth and transformation over this decade. Wise policy makers and investors will aim for the opportunities, jobs, and resilience that can be delivered only through a net-zero economy.”

Read the full report.

Better Finance, Better Food

The Blended Finance Taskforce has just open-sourced some of the most promising business models and financial innovations, all aimed at transforming the world’s food and land use systems.

Taskforce Director, Katherine Stodulka, tells us why, right now, more innovation isn’t the biggest missing ingredient…

“We need to mainstream all this innovation,” Katherine Stodulka explains. “Replicating what works is the only way we get to scale.” The capital required to transform the way we produce food and use land is within reach, she insists. “The real challenge is to replicate the proven financing solutions, reduce transaction costs and create more effective partnerships at every point of the investment value chain.”

Hence the BFT’s new catalogue for investors, business leaders, policymakers and project developers. It includes 60+ case studies, from around the world, which are helping attract capital for regenerative businesses and creating value from ecosystem services.

The case studies range from relatively small pilots to interventions aimed at mobilising over $1 billion for nature. Each of these financial instruments and business models is in some way unique – in design, deployment and outcomes. But they all have one thing in common: each example seeks to address at least one of the major barriers which is slowing the flow of capital out of the old food and land use economy and into more sustainable, regenerative, inclusive and nature-positive assets.

The catalogue offers something for almost all investors – showcasing opportunities around the world and across the risk / return spectrum: venture philanthropy and angel investors to development banks, private equity, insurers and pension funds. Investors at every point in the financing lifecycle can help close the $300bn annual investment gap to transform the food and land use system and accelerate a fairer, healthier, net-zero future.

Of course, the BFT doesn’t have a monopoly on spotting great opportunities: “We are launching a year-long case study campaign”, says Katherine, “collecting more stories and displaying them on our website for everyone to access. We’re aiming for another 500.”

Transforming food and land use means transforming finance

As the BFT’s “Better Finance, Better Food” report explains, we know why our global food industry need to change – it generates more than $12 trillion in hidden environmental, social and economic costs each year. We also know what needs to change, thanks to work done by the Food and Land Use Coalition (FOLU) in the “Growing Better” report, which identifies where investment is needed to drive critical transitions away from an unsustainable model of food production and land use.

But the financial sector is still largely stuck on how to drive change. Katherine reminds us that “Investing in nature is critical for people and planet. Banks and investors are making massive commitments to finance natural solutions, invest in carbon, and reach net zero. But most people don’t know how to get there.”

In part, this is because the system is broken: there are very few penalties for investments which create negative externalities; and of the $1m a minute paid by governments in agricultural subsidies, only 1% is used to benefit the environment. In most cases, there is still no premium or incentive to invest in assets which create value for people and planet, like nature conservation and rural infrastructure – even though these tend to reduce risk and create economic value as well.

Investors also face different kinds of risks when looking at the food system. Riskier geographies, small-scale projects and untraditional counterparts like smallholder farmers may be difficult for traditional lenders. Nascent business models (such as carbon or integrated landscape approaches) or solutions with unfamiliar risk profiles (e.g. regenerative agriculture or alternative proteins) can also rule out some mainstream investors.

It’s in cases like these that “blending” – using development and philanthropic capital to de-risk private investment into assets – can make a crucial difference.

Meeting the challenge

In fact, the BFT’s analysis prescribes a range of solutions: including sustainability-linked financial products with a focus on regenerative assets, nature-linked insurance to build country and community resilience and business models which create value and reduce risk through supply chain relationships, shared services and fintech solutions.

As the report makes clear, we are looking at a systemic shift, in which capital – at least $300bn a year – will need to be reallocated from the “old” food and land use economy into the new one: based around regenerative and circular business models that are driven by value rather than volume, and are more resilient, human-scale, diversified and in balance with nature. 

The potential of this new economy is vast: its additional investment represents around 6% of the annual SDG funding requirement, but it could deliver almost one third of the required carbon savings alongside huge benefits for biodiversity, human health, livelihoods and inclusion.

Size of the prize

Transforming to a more sustainable food and land use system could generate more than $4.5 trillion in new business opportunities each year. Investors are catching on quickly: the increase in venture capital for circular food innovation, recent mega-IPOs for alternative proteins companies, the booming organics market (predicted to be worth $730 billion in 2030), and significant over-subscription figures for green bonds and other debt instruments for sustainable land use.

Speaking at a “Better Finance, Better Food” event at London Climate Action Week, Hubert Keller, Managing Director of Lombard Odier, said “It is not wishful thinking. This economic transition is fully in motion, driven by the markets. A number of solutions have already been unlocked to create nature-aligned business models which are simply better: they provide better economics and superior growth opportunities; and they provide an ability to deploy capital at scale.”

Katherine adds that “investors will be left behind if they don’t shift capital out of ‘4-degree’ portfolios.” All the examples in Better Finance, Better Food show that the pipeline is growing. But, Katherine says, “to attract mainstream capital, we still need to scale what is working.”

In practice, this means standardising frameworks for financial products, disclosure of climate and nature-related risks, and aggregating small-scale projects to be investable by mainstream capital. It means optimising the way we de-risk investments, using public and philanthropic funding in a smarter way that unlocks markets. And finally, it means improving value chain partnerships, relying on skilled intermediaries and market access players to lower transaction costs, facilitate pipeline connections and channel capital to where it is most needed in the investment lifecycle.

Achieving a true systemic shift will not be easy, but as the report concludes: “Finance can be powerful enabler of the new food and land use economy, an accelerator rather than an anchor.” 

Green Horizon Summit: why investors should drive the clean energy transition

Looking back on the Green Horizon Summit, Katherine Stodulka, Director of the Blended Finance Taskforce, considers some of the messages that hit home.  

The UK cemented its leadership at the Green Horizon Summit, convening some of the biggest names in sustainable finance and hammering home the message: we need to accelerate the transition to a net-zero, nature-positive and inclusive economy. And we need to do it fast. We heard inspiring calls to action from well-known climate champions like Christiana Figueres, Kristalina Georgieva, Christine Lagarde, H.R.H. Prince Charles and the Green Finance Institute’s CEO, Rhian-Mari Thomas.

“Mobilising finance for climate will be the defining issue of our generation” said NinetyOne’s John Greene. Macquarie’s CEO, Shemara Wikramanayake, urged more investors to work with emerging market governments to develop green projects.

Mark Carney called for a “whole of economy” transition to net zero. His Task Force on Scaling Voluntary Carbon Markets – chaired by Standard Chartered – published its first set of 17 recommendations, which is open for consultation until 10 December 2020.

For a comprehensive wrap up of the three-day conference – including Adair Turner on Making Mission Possible and Nick Stern on the importance of blended finance, head to the Green Finance Institute’s summary here.

But if you only watch one session, check out Nigel Topping – the UK’s High Level Climate Action Champion for COP26 – who imagines himself chairing the Audit and Risk Committee for Planet Earth… “it’s a complete risk management failure.”

In five minutes, Nigel explains:

• Why investors must act now: the future is approaching faster than we think. In 2016, forecasters at the IEA said we’d still be building internal combustion engines in the 2070s. Four years later, that looks more like a phase-out by the 2030s if not before. “The future has come forward by decades.”
  

• Why this is not a moral choice: the perceived trade-off between climate action and financial performance has seen many investors lose money. They have been too slow to see the value destruction in O&G balance sheets, too slow to get out of coal, too slow to see the electrification of vehicles and utilities.  “Those who are asleep at the wheel miss out”
  

• Why the finance sector needs to drive innovation: we need to align business models to the inevitable exponential transition to net zero. Investors can accelerate this transition by ensuring the wise deployment of capital. There is a vast opportunity if we get this right. But those who join the race too late may never catch up. “It’s very hard to chase an exponential curve”.

Blended Finance in Action: key lessons to get to scale

Convergence shines a spotlight on critical lessons for executing blended finance transactions in an interview with Taskforce member, Nadia Nikolova, from Allianz Global Investors (AllianzGI), a part of Allianz Group.

AllianzGI is an active asset manager with over 25 offices around the world and more than EUR 546 billion in assets under management. AllianzGI is one of the few large-scale asset managers with a dedicated Development Finance team that has raised more than USD 2 billion in commitments towards development finance strategies since 2016. The Development Finance team is part of a wide private markets platform including the Infrastructure Debt team, which has over 20 years of collective experience in infrastructure investing, globally.

When it comes to blended finance, AllianzGI works closely with development banks to create investment solutions that support the UN Sustainable Development Goals (SDGs) and promote greater private capital mobilization into emerging and frontier markets. AllianzGI is committed to structuring deals that multiply the impact of every dollar for both the donor and the investor, while also scaling societal impact where it is needed most.

With plans to expand their sector focus, Convergence connected with Nadia Nikolova, Lead Portfolio Manager of AllianzGI Development Finance, to learn more about AllianzGI’s approach to blended finance, the structuring of investment-grade solutions, and her perspective on how to attract other institutional investors to emerging markets through these blended finance products.

How did AllianzGI’s journey in blended finance begin?

Back in 2015, International Finance Corporation (IFC) was capital constrained and approached AllianzGI to explore ways to mobilize private capital into their respective local markets. At the same time, institutional investors that were clients of ours were seeking to diversify their portfolios into these markets through investment-grade transactions. So, we asked what to us was an obvious question: Why not use structured finance techniques like those utilized by the European Investment Bank’s Project Bond Credit Enhancement product rather than have IFC de-risk on a per project basis? De-risking on a portfolio level is much more capital efficient. It all started over tea and biscuits in our offices. Once we started the partnership with IFC, a process which we really enjoyed, we continued to look for other investments in emerging markets with a blended de-risked profile.

As one of the two asset management entities of Allianz SE, what is unique to your investment mandate, and why is blended finance a viable structuring approach to invest in emerging markets?

AllianzGI is specialized in alternative investments, particularly in private markets. AllianzGI was one of the first infrastructure debt investors to do direct origination, and we have kept that innovation and first mover approach to many of the new strategies we launch, including Development Finance. As a team, we really have our heart in development finance and creating scalable, lasting sustainable impact. From the start, blended finance was a viable approach because it helped satisfy the requirements of all stakeholders, be it an institutional investor looking for investment-grade transactions, a capital constrained development bank requiring on-demand capital, or an asset manager like us.

The structures we create offer an appropriate return for all parties. I think this is paramount for the “future-proofing” of any investment strategy. If you view our approach from an SDG lens, what we really specialize in is partnering for the Goals (SDG 17). Our partnerships with development banks are fundamental to our strategy. We source investments from them, lean on their expertise, co-invest with them, rely on their preferred creditor status and halo effect, and trust their track record. Take this pandemic as an example; it is almost impossible to do deals now without having a local presence. Our team does not have 700 people scattered across the world that have local connections and can carry out due diligence in the field, so in the current situation we are facing, our partnership strategy helps us keep pace in mobilizing capital. Now, for portfolios where we do not have partnerships with development banks, being locally present is very important. For that reason, when we built our Asia Private Credit team, which is making direct investments in mid-cap entities all over Asia; we set up a local team, which now sits in India and Singapore. When you are not investing through partnerships, local presence, particularly in emerging markets, is key.

Allianz has partnered with IFC to invest in a portfolio of loans IFC issued to infrastructure projects through the Managed Co-Lending Portfolio Program (MCPP). The transaction was blended: it received a SIDA guarantee to cover first loss in a portion of the portfolio. Can you share some key learnings or reflections from structuring this blended transaction?

We started structuring the IFC vehicle in 2016-17. The market has changed dramatically since. Three years ago, Environmental, Social, and Corporate Governance (ESG) was a new concept. Now, if you do not have an ESG strategy, you are not in the market. There are plenty of lessons learned from the MCPP, including:

1. It is better to go big. It takes such a long a time to launch a fund that it is best to build funds that are large scale. If we were to redo the IFC vehicle, we would double the size. There is so much up-front effort put in these structures that it makes sense to leverage on that work.
   

2. The power of data is essential for private capital mobilization. We were able to participate in the transaction with IFC because they opened their books for us and provided full visibility on their track record for us to do comprehensive due diligence. As a result, we were able to estimate how much first loss we needed for the senior investors to access an investment grade product. If we want this type of structure to be replicated to further mobilize true private capital into emerging markets, the investment performance data and track record of development banks needs to become public. This is why the discussion around the Global Emerging Markets (GEMs) Risk Database is very important.
   

3. Language comprehension is vital. Development banks are often not driven by the same issues and concerns as institutional investors. Often, their perspective is driven by a policy requirement which could be obscure to a private investor. The opposite is also true. So, the lessons for me have been two: (i) make no assumptions, ask questions, and (ii) always explain why a certain point is so vital. Once we speak each other’s language, progress is much faster.

In 2019, Allianz became the first large commercial lender to commit long-term funding to a blended Africa-focused infrastructure fund, committing USD110 million in the Emerging Africa Infrastructure Fund. What led Allianz to make this commitment, and how has it helped influence future investment decisions?

Having done the MCPP with IFC, AllianzGI was looking for similar types of investments. What does our vehicle with IFC look like? It is a diversified portfolio of infrastructure loans – infrastructure being core to our DNA. So, we were looking for investment-grade infrastructure-focused opportunities in emerging markets, and unfortunately, these are limited. One of the reasons we decided on investing in the Emerging Africa Infrastructure Fund–where we are a lender and not an equity investor –is because it presented very similar characteristics to the MCPP; it already had an established portfolio of infrastructure loans with a track record over 10 years, it was a well-managed vehicle, and there was a clear alignment of interest and a substantial amount of first loss - that diversification attracted us.

IFC played a significant role in getting us to think about how we want to invest in emerging markets. Our basic investment thesis is that our investors are looking for large-scale attractive investment opportunities with investment-grade type characteristics. In investment-grade countries in Latin America, we do direct origination of single large transactions. As we move up the risk scale, we seek to invest in diversified uncorrelated portfolios, both from a sector and geography perspectives. The more frontier the markets we enter, the more de-risking and first loss our investors require.

Before our partnership with IFC, we were focused on large-scale, individual investment-grade transactions in emerging markets. What we have done with IFC and the Emerging Africa Infrastructure Fund is tap into the significantly larger pool of non-investment grade opportunities, and through structured finance, have converted them into scalable investment grade portfolios for our clients.

In some ways, COVID-19 has turbocharged the need for coordinated efforts among diverse investor groups. Has there been any activity or dialogue in the last 6-8 months that has been particularly encouraging for AllianzGI?

There has been a greater sense of urgency, which we have welcomed. One response to the COVID-19 pandemic that has stood out to us came from MIGA, part of the World Bank Group. Around March-April, they saw emerging market sovereigns and sub-sovereigns were starved for funding and experiencing significant capital outflows. This made it ever more challenging for them to acquire the necessary medical equipment, support their healthcare sector, inject liquidity in the system, and so on. To address this, MIGA decided to leverage its existing sovereign guarantee product but repositioned it and put it on a fast-track to provide urgent liquidity to these countries. Using one of our blended strategies, AllianzGI together with Allianz, created a program that allowed us to invest in MIGA guaranteed facilities alongside commercial banks and support COVID-19 relief. That sense of urgency and ability to take off the shelf products and expedite processes, has been very helpful.

Hopefully, this sense of urgency will systemically filter into the system in a more meaningful way to increase investment in investible SDG-related projects across developing countries.

AllianzGI is now moving away from ad-hoc investment opportunities to being more strategic. When it comes to blended finance, what is changing?

We respond to the market when it is needed, but we also have a long-term vision of where we need to go, whether that is cultivating partnerships with development banks, or operating vehicles that open us up to an entire syndication market. I would say our strategy is two-fold: (i) Through our blended funds and partnerships, investing in vehicles that target riskier markets, and expanding our sector focus to include both infrastructure but also projects focused on addressing gender inequality and social inequalities, and (ii) remaining opportunistic to respond to crises like COVID-19; achieving the SDGs is now a crisis, so we need to respond accordingly as a responsible investor.

The key issues we face when trying to solve some of these development challenges and increase institutional investment in emerging markets is sourcing the necessary first loss and originating individual transactions. For the new strategies we have in mind, we have a much larger investment scope that might range from existing SDGs¬ aligned investing to participating in gender-related bonds or partnering with commercial banks for sustainable investing in a certain developing region.

Do you think institutional investors like AllianzGI want to get more involved in blended finance and, if so, what is needed to get institutional investors more active in blended finance in regions where there may be higher risk, real or perceived?

We need a couple of things:

1. The GEMs Database to be published, so that we have investment performance data and a historic track in these jurisdictions.

2. A visible and tangible pipeline of projects, so that we can build substantially diversified scalable portfolios–no investor is going to commit capital if they do not believe it will be deployed.

3. MDBs and DFIs to actively include institutional investors in their deal syndication rather than follow well trotted paths of other DFI and banks syndications

4. More first-loss; most of our funds have a 4-8x mobilization effect, meaning every dollar of public capital, we mobilize $4-8 of private investment. It therefore makes sense to put donor capital in a portfolio of uncorrelated risk to maximize the impact of every donor dollar.

What else would you like to communicate to the market?

To start, blending on an individual transaction level is capital inefficient for the donor. Under this scheme, attracting large pools of institutional capital to emerging markets would require such high degree of blending that it becomes unfathomable. For this reason, a portfolio approach is one that should be considered. Secondly, partnerships are very important to us, and it is something we stand for. We are always open to discuss new opportunities with players in the market

To end, blended finance does not have to be concessionary for anyone. Everyone can receive an appropriate return for the risk they are taking and satisfy their investment strategy, which is very different for a donor than it is for an institutional investor who must comply with credential regulations. For blended finance to be a sustainable strategy, we must prove that there is enough return even for donors so that their capital can over time be substituted by private capital as well.

Global Investors for Sustainable Development call for need to scale blended finance

The FT’s Moral Money reflects on the power of the UN’s new group of Global Investors for Sustainable Development Group.

As anyone in the environmental, social and governance (ESG) investment world can attest, the UN is capable of assembling task forces that aim to find ways to funnel more money into the sustainable development goals (SDGs).

But making sure those groups’ recommendations do not end up gathering dust on a shelf has proven difficult.

Last year António Guterres, UN secretary-general, sought to tackle this head on when he called together 30 chief executives from the world’s largest companies, banks and pension funds to form the Global Investors for Sustainable Development (GISD) group.

They have now released their first set of recommendations. Among them is a call for the G20 countries to push the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) to establish global ESG disclosure standards and a laundry list of guidance for the European Commission.

The group certainly has a lot of firepower. Participants include members of the Blended Finance Taskforce like Citigroup and Allianz — and Jay Collins, vice-chairman of Citigroup and chair of the GISD report committee, is optimistic the GISD will create real change.

Simply bringing the GISD members together has already laid the groundwork for new sustainable financing projects, he told Moral Money. “When we started talking about the need to scale blended finance and why the model isn’t working . . . we realised that the group of us around the table have the ability to do something, and to create something.”

The pandemic has only served to “supercharge” the need to achieve the SDGs, he said. “I haven’t seen since World War II this urgent need to align government policies with private sector actors and investors.”

Building the New Nature Economy

The Blended Finance Taskforce contributed to the World Economic Forum paper on the Future of Nature and Business Policy Companion: Recommendations for Policy-makers to Reset towards a New Nature Economy.

The paper sets out how finance ministers can kick-start a nature-positive economy programme that creates jobs and builds resilience by reducing risks to food security, public health, and climate.

This paper contributes to an important and growing body of work around a nature-positive economy, which aims to influence stimulus recovery packages.

Using the "Covid-Moment" Wisely

In this post, Blended Finance Taskforce Chair, Jeremy Oppenheim, reflects on using the covid-19 moment wisely …

In the words of Mark Twain, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure but ain’t so”. Today, many of our solid certainties feel much more liquid. So, it is with humility that I write about the emerging learnings from the COVID moment. The purpose of this series is to invite each other to share and make sense of what we are learning, with a strong bias to action and “what to do.”  

The response to save lives has been immediate, vital and inspiring. As the world looks to minimise the social and economic damage of COVID-19, it’s imperative that we focus on the systemic actions that come next, and which increase our chances of rebuilding our society on more equitable, resilient principles. Our historic responsibility – to all those who suffer personal losses through the pandemic – is to learn, not repeat the same mistakes and to use this moment wisely and courageously.

Observing the Past Few Months

We did not use them well. There was a deep assumption in the West, that COVID-19 was like SARS or Ebola: someone else’s problem.  Even when the virus arrived, many political leaders failed to act with conviction and seriousness.

Why? In part, because no-one likes to tell hard truths. But also because, despite the Global Financial Crisis, we are not psychologically open to rigorous risk analysis, and prefer to operate with growing degrees of cognitive dissonance. It leads us to dismiss or downplay more extreme, unthinkable scenarios.

However, COVID-19 was not a ‘black swan’ event – it was entirely predictable. In this, it is no different from the threats associated with growing social inequality, climate change or biodiversity loss.

We structurally under-estimate the probability and exponential costs of these systemic risks. And as a result, we fail to take preventive action. COVID-19 has shown us that our social, public health and economic systems are incredibly inter-dependent and only as strong as their weakest link. Public health systems (at least in the more individualistic West) are still geared to cure rather than prevention, even where the cure is typically the high-cost approach. It should come as no surprise that we have been short on testing equipment – or that we largely ignore the poor air quality which, through its impact on respiratory and cardiac conditions, causes around 9 million deaths a year.

Climate change, with its invisible CO2 molecules, falls into the same category. For too many with power, it is a distant, depersonalised threat. If COVID teaches us anything, it is to invest in more resilient systems which, by design, drive up social inclusion, improve public health, tackle climate change and regenerate nature.

Experiencing the Present

The threat to our public health systems has become the most effective rallying cry to action and solidarity. Our public health workers have been recognised as superheroes. We have learned about the need to flatten the curve and have taken on board how our health system needs to work in a predictable environment, where we can manage for known peaks in demand. At the same time, the sharpest critiques have been reserved for political failure to provide for front-line health workers.

Yet it’s early days in a deep social disruption that is likely to last in some shape or form for at least 18 months. It’s far too early to assess the real personal and economic costs of the COVID crisis. Many of the true costs will be hidden: the explosion of mental health problems and the devastating economic impact on poorer, more vulnerable people, along with smaller businesses. Many people who have just joined the middle-class will be thrown back into poverty; and those who remain trapped in poverty could experience another lost decade of development.

Public finances will be drastically weakened, threatening current commitments to international development and humanitarian assistance – and rendering more fragile our collective capacity to respond to the next challenge. There is a high risk that, despite the emergency pro-solidarity response, the medium-term result will be increased social division and polarisation. It will take courageous political leadership to mobilise the broad-based support needed to reset our social contract – in ways that put our most vulnerable citizens first and give sufficient voice to the next generation.

Anticipating the Future

The crisis appears more likely to provoke a nationalist than an internationalist response. In short, the nation state is back. National borders were initially perceived as the primary way to prevent the spread of the virus. Governments are concerned about international supply chains for medical equipment, basic pharmaceutical products and for food – and we are already seeing evidence of export bans and trade disruption. Businesses are concerned about their global supply chains, and the most advanced are considering how to combine the benefits of global diversification with more localised, circular models.

Meanwhile, the stability of the EU is potentially at risk. Even if formal arrangements survive, it will take strong political leadership and a bold, “better than before” recovery programme to rebuild trust – not another decade of austerity.

Yet given all that’s at stake, we need to find new forms of collective international action to address predictable crises. The new nationalism does not augur well for our joint responses to climate change, biodiversity loss or the next pandemic. We have seen that what we do (or fail to do) in one corner of the world has ripples everywhere.

We are consistently failing to serve the most vulnerable people and communities in our globally inter-dependent world. Maybe now is the time for a new, much more networked Bretton Woods model of global governance: one designed for 21st century challenges and capable of mobilising the best talent, capital and know-how from across public and private sectors.

We have been here before. And we did not meet the test. During the Global Financial Crisis, governments pumped in trillions, mainly through quantitative easing in the money markets, and pursued fiscal austerity.

The banking system and the wider economy did not fail, but nor did we see a ‘great reset.’ Social divisions grew; the economy became more leveraged and the banking system more concentrated. We failed to make our societies more resilient in terms of the environment, social equality or public health. It was mainly poor families and communities who bore the costs; those with capital had, until last month, benefited from an enormous, liquidity-fuelled boom in asset values.

So, what’s going to be different? Technology will help – especially around renewable energy, digital connectivity, medical equipment and vaccine discovery (both amazing), and other clean technologies. With oil prices low, maybe this is when the smart money really moves into the new economy: more resilient, circular and low carbon. Finally, the exogenous nature of this shock should help. There are not the same ‘moral hazard’ issues which got in the way of cross-border cooperation last time round.

Even so, it will take an exceptionally heavy lift to use the COVID moment wisely. But precisely because it requires all of us, as citizens, to step up, thetrulybigquestionsarebackonthetable.

It is now the time to start planning for a deep, fundamental reset. In practice, everyone has a role to play:

1. Political leaders will be judged on their honesty, courage and competence. They will need a positive, practical vision which makes the sacrifices of the crisis worthwhile and helps to rebuild institutional trust.

2. Public sector leaders will need to combine deep, accelerated, mission-directed innovation inside the public sector with much greater openness to the forms of public-private partnership that can strengthen system resilience

3. Enlightened business leaders must keep faith with their “winning with purpose” strategies. They can accelerate their implementation through faster capital and talent redeployment, through new models of value chain collaboration, and by making the case for a properly resourced public sector with the necessary regulatory powers and expertise.

4. Financial investors, especially the fiduciary owners of society’s long-term capital, must get on with developing and implementing the right metrics for allocating capital at scale: metrics that take proper account of externalities and systemic risks this time

5. Philanthropy can be central to this global movement – but only by coming together in a radically different Its leading figures must support powerful coalitions to tackle our great challenges at both local and global levels.

6. We all have the task of helping our neighbours in our local and global That means engaging more seriously with politics, spending and investing wisely, and voting with our conscience.

We have a responsibility to contribute to building a fairer and more sustainable world. And we already know what it looks like, because we collectively signed up to a vision, with concrete targets, in Sustainable Development Goals and the Paris Agreement on Climate Change in 2015.

For many of us, it may be our last chance to make a real difference.

Investing in the Blue Economy

Ocean risk or opportunity - is the Blue Economy investible?

Responsible Investor’s latest research report “Investors & The Blue Economy” in partnership with Taskforce member Credit Suisse and supported by UNEP FI, the European Commission & WWF investigated whether conditions exist for private capital to flow towards a sustainable use of the ocean. And if not, what needs to change.

This report gives a first assessment of the perceived investment risks and challenges in the fast-moving Blue Economy field, alongside an overview of investible opportunities already providing solutions to ocean challenges.

More information on sustainable oceans and the blue economy can also be found here.

Sustainable finance: the highs and lows of 2019

2019 was a year of highs and lows for sustainable finance. In this post, the Blended Finance Taskforce shares some recent highlights and reflects on a few of the major trends we think will influence 2020 (read: nature-based solutions, net-zero portfolios, greener capital markets and transition finance).

There were moments of strong progress on climate …

1. Business ramped up their commitments, especially in consumer facing industries like food, fashion, travel & tourism, plastics and a growing emphasis on decarbonising hard to abate sectors like shipping, cement and steel.  At the UN Climate Action Summit in September, almost 90 businesses committed to implement a 1.5°C target throughout their operations.  Read more about the highs and lows of the Summit here.  

2. “Net zero” was the catch cry of 2019. A group of the world’s largest pension funds and insurers launched the Net Zero Asset Owners Alliance and the EU committed to becoming the first climate-neutral continent by 2050 with the European Green Deal.

… and there were new developments with carbon finance

1. Pledges of net zero put carbon markets back in the spotlight. COP25 did not produce any deal on a global carbon market under Article 6 of the Paris Agreement, but the voluntary market for carbon credits continues to grow.  New trading platforms like EMERGENT have also been launched to incentivise the exchange of carbon credits for projects which avoid deforestation. For insights on the outcomes of COP25 from Taskforce champion, Lord Nicholas Stern, see here.

2. Forests were central to carbon offset discussions. Preventing tropical deforestation represents the cheapest, highest-impact offsets, meaning that countries like Indonesia – which is home to the world’s 3rd largest rainforest – have a major opportunity to combine forest protection while attracting international investment. Indonesia is set to pilot a carbon market in 2020.  For a useful summary on carbon markets and the history of carbon trading, see here.

We saw real leadership on financing the SDGs …

1. Commercial banks saw value in sustainability.  Credit Suisse launched its Responsible Consumer Fund with Lombard Odier and Rabobank focused on tackling food waste and investing in regenerative farming while Standard Chartered pulled out of three coal projects in South East Asia this week.

2. Development banks also delivered bold action on climate and the SDGs. The EIB committed to end fossil fuel lending after 2021 and the IFC is mobilising $4 from its own account and another $5 from co-investors for every dollar of donor funds in a blended finance transaction. See more about development bank mobilisation ratios in the Taskforce’s flagship report, “Better Finance, Better World”.

3. The blended finance market has started to scale, supported by initiatives like the OECD’s Tri Hita Karana Roadmap for Blended Finance. Taskforce champions like Climate Fund Managers, Dolma Impact Fund, Circulate Capital and ILX also made significant progress mobilising capital for the circular economy, clean energy and sustainable infrastructure. 

… and nature was top of mind for investors

1. Investing in nature-based solutions became a priority. Protecting forests and oceans and scaling up sustainable agriculture is one of the most cost-effective solutions to tackle emissions, protect vital ecosystems and improve livelihoods and food security.  In the “Growing Better” report of the Food and Land Use Coalition, the Taskforce found that shifting to more sustainable food and land use systems could unlock $4.5 trillion in new business opportunities each year.   

2. Development banks, climate funds and foundations are looking to scale natural solutions activities in 2020. We look forward to working with many of you on this. We are also proud to work with a number of blended finance vehicles that actively mobilise capital for sustainable food and land use systems including the Tropical Landscape Finance Facility, the &Green Fund, Clarmondial’s Food Securities Fund, Partnerships 4 Forests, RARE, GAIN, the Natural Capital Lab and many more. Please get in touch if this is part of your 2020 agenda or reach out to Convergence if you could use design grant funding to support a blended solution for natural capital in Asia. 

The financial sector focused on climate risk and resilience …

1. Investors all over the world are waking up to their exposure to physical climate risk. The Taskforce joined a group of financial institutions with over $5 trillion under management to launch the Coalition for Climate Resilient Investment, which will help integrate climate risks into decision-making across the infrastructure investment value chain. We also welcome the UK’s leadership ahead of COP 26 in Glasgow on this topic as the Bank of England introduces stress testing for the largest UK banks and insurers on climate.

2. Funding for adaptation and resilience is growing. At 5%, adaptation still only receives a fraction of total climate finance, but multilateral development banks (MDBs) are taking action. In 2018, MDBs increased the proportion of climate finance for adaptation from 23% to 30% and earlier this year, the EBRD issued the world’s first resilience bond for $700 million. The Global Commission for Adaptation and the UK government also championed the resilience agenda in 2019, while AXA and Ocean Unite launched the Ocean Risk and Resilience Alliance to build coastal resilience, mobilise investment for natural capital and tackle ocean risk through innovative financial and insurance solutions.

… but we are still a long way off a Paris-aligned financial system

1. There are multiple levers which are working to green the financial system.  We commend the launch of the Principles for Responsible Banking, the work of the Task Force on Climate-related Financial Disclosures (including those exploring a TCFD for Nature), the Coalition of Finance Ministers for Climate Action, the Network for Greening the Financial System and the growing focus among central banks, regulators and treasurers to integrate climate risk into decision making.   

2. Despite being a record year for green bonds and sustainability-linked loans, we are still falling short. Greenhouse gas emissions continue to rise along with levels of coal finance.  Although 2017 and 2018 both saw over half a trillion dollars of climate finance, this is still a drop in the ocean compared to the size of the $80 trillion global economy.  In response, we have developed a set of priority actions for greener capital markets and key recommendations for products, practices and partnerships which could help scale sustainable finance in 2020.

Fortunately, the number of climate “champions” continues to grow …  

1. Philanthropy was a true pioneer of financial innovation in 2019.  The MacArthur Foundation launched the $150 million Catalytic Capital Consortium in collaboration with the Rockefeller Foundation and Omidyar Network to unlock billions of dollars for impact investment.  New players like hedge fund Quadrature Capital also came onto the scene, pledging largescale funding to fight climate change.

2. New SDG champions also inspired us this year. We were pleased to support IMAGINE (courageous business leaders for climate and equality), the Make My Money Matter campaign (Paris-aligned pension funds), and the Tri Hita Karana Forum for Sustainable Development (watch this space for the launch of a new “Blended Finance and Innovation Institute” in Indonesia in 2020).   

… and now, more than ever, we need to focus on action

All in all, we have seen huge progress in financing the SDGs this year and grown the Taskforce family significantly.  But we know that we are still not doing enough, or moving quickly enough, to tackle the climate emergency.

As we head into the “Decade of Delivery”, we will try to live up to the recent challenge posed by Taskforce Chair, Jeremy Oppenheim:

“It comes down to what kind of economy we want to build and how does finance play a role? …  I challenge you to a simple ‘litmus test’: are the interventions that we are proposing actually having any impact on the real economy?”

We look forward to working with many of you in 2020 to do just that – focusing on using finance to drive real economy shifts and scaling solutions which work.  

***

About the Blended Finance Taskforce

The Blended Finance Taskforce is a coalition which brings together actors from across the development finance and investment community to accelerate investment for the SDGs.  Our flagship report Better Finance, Better World set out key recommendations to unlock private capital by using development finance more catalytically. 

We deliver our mission through thought leadership, convening and providing an informal marketplace to channel development capital to high impact projects and geographies. The Taskforce has produced leading research and supported the development and scaling of numerous blended finance vehicles and country platforms.

We have spent the past 12 months implementing an 8-initiative Action Programme focused on scaling investment in priority sectors and regions.

Our work

• Scaling blended and sustainable finance (see: Better Finance, Better World; Scaling Sustainable Finance: Products, Practices and Partnerships)

• Reimagining infrastructure in emerging markets (see: Infra 3.0: Better Finance, Better Infrastructure)

• Accelerating the clean energy transition (see: Blended Finance for Clean Energy)

• Transforming global food and land use systems (see: Growing Better: 10 critical transitions to transform food and land use and Financing Sustainable Land Use)

• Investing in the blue economy (see: Mobilising Capital for the Oceans)

• Supporting national low-carbon development initiatives and helping design blended finance vehicles (see: Tri Hita Karana Forum for Sustainable Development)

• Scaling catalytic development instruments (see: Scaling up Development Guarantees)

Definitions 

"Blended finance" is the use of development capital (from donor governments, development banks or philanthropy) to mitigate investor risks and therefore mobilise commercial capital for the SDGs. Examples of blended finance include subordinate capital in a fund structure, development guarantees, political risk insurance, FX hedging, technical assistance for project preparation and outcome-based payments.  See more here: www.blendedfinance.earth

"SDGs" are the UN Sustainable Development Goals – a universal roadmap for people and planet.  The Business & Sustainable Development Commission found that the SDGs could create at least $12 trillion a year in economic value by 2030.  See more: https://sustainabledevelopment.un.org/

LOW-CARBON ASSETS: overcoming barriers to investment

It’s been a record year for green bonds. Mainstream investors are shifting to sustainable assets. So how can good news on green finance be bad news for the planet? Because we’re still not seeing the capital flows required for the transition to a low-carbon, resilient and inclusive economy.

Here, the Blended Finance Taskforce explains the changes that investors need to see in 2020 to accelerate and scale investments in low-carbon assets.

Earlier this year, an alliance of the world’s largest pension funds and insurers, managing $2.4 trillion in investments, committed to achieving carbon-neutral investment portfolios by 2050. It’s just one example of an increased ambition to shift portfolios towards low-carbon, sustainable assets.

The shift goes beyond commitments and targets. 2019 was yet another record year for green bonds, and acquisitions of climate risk analytics and impact investment boutiques from mainstream investors - such as 427, bought by Moody’s, and Schroders acquiring a majority stake in BlueOrchard - signalled a definite rise in sustainable finance practices.

Policymakers and regulators have also been driving the increased investor action through disclosure initiatives like the “Task Force on Climate-related Financial Disclosure” (TCFD), and regulatory frameworks on green standards and taxonomies including the European Commission’s “Action Plan on Financing Sustainable Growth” and China’s early “Guidelines for establishing the green financial system”. We have also seen a recent push by central banks, recognising climate-related risks as material to financial stability and collaborating through “Network for Greening the Financial System” (NGFS).

But it’s not enough. We are still not seeing capital flow at the speed or scale that is required to equip companies and countries to combat the effects of climate change. The green bond market is only 0.2% of the overall debt market. Meanwhile fossil fuel bank financing has been rising since 2015 and carbon emissions climbed by 2% in 2018 (the fastest year since 2011) because of high energy demand delivered by fossil fuels.

Bad macro- and sectoral policies are the main factors leading to capital misallocation: the lack of a carbon price, fossil fuel and distorting agricultural subsidies, and regulatory and planning failures. However, there are important impediments in the capital markets. They relate to their structure and conduct driven by financial system regulation, information asymmetries, investor inertia and product supply. Some of these barriers restrict domestic investment, while others restrict cross-border investment.

How can we address the structural barriers that act as a brake, rather than an accelerator of the transition we need? And how are regulators and market participants already addressing these barriers?

REGULATORS AND CENTRAL BANKS ARE NOT FULLY USING THEIR TOOL-BOX TO INCENTIVISE CLIMATE-ALIGNED INVESTMENT

Many of the regulatory requirements on liquidity, reserves and capital provisioning were introduced or tightened after the global financial crisis to safeguard the stability of the financial system. However, these measures tend to restrict the flexibility of banks (Basel III) and insurers (Solvency II in Europe) to invest in the low carbon economy, as they create hurdles to invest in infrastructure and/or emerging markets.

Basel III has contributed to a decline in cross-border lending after the 2007-08 financial crisis (alongside deleveraging processes and tougher standards for anti-money laundering). It is often cited as a disincentive to investing in emerging markets and infrastructure, owing to biases that favour corporate bond issuance (which helps the oil and gas companies that are major issuers of these bonds) over infrastructure finance.

Differentiated capital weighting could help: by assigning higher or lower risk weights depending on sustainability criteria and carbon-intensity in anticipation of future negative and sudden price developments.

The French and Italian Banking Associations have called for a “green supporting factor” in response to the European Commission’s Action Plan on Sustainable Finance. And while the People’s Bank of China has announced it will integrate “green finance” into its macro-prudential assessment framework, the European Commission and the NGFS have committed to carrying out more research to assess risk differentials between green and brown assets.

One key area of work will be on risk assessment frameworks. These are currently backward-looking and therefore do not adequately capture climate-related risks, which require more sophisticated forward-looking analysis and longer time horizons.

Quantitative easing by central banks, in the US and Europe, has also been charged with being unsupportive of investments in the low-carbon economy. The asset-purchasing programme entailed buying high-quality, liquid assets in the form of government and corporate bonds that reflect the overall market; this inevitably means issuers are more often in high-carbon industries than low-carbon ones.

Some have argued that these programmes have indirectly favoured the growth of high-carbon incumbent industries by providing them with cheaper financing – thereby negating the “market-neutral” approach warranted by central banks. This has led to calls for a review of the impact of monetary policy on real assets.

Others are also calling for central banks to manage their own assets according to responsible investment standards, or at least manage their pension funds according to sustainable metrics.

LACK OF CLARITY ON FIDUCIARY DUTY AND OUTDATED INTERPRETATIONS OF LEGAL OBLIGATIONS

Institutional investors often justify inaction on climate by citing their fiduciary duty to maximise returns. Their ability to factor in non-financial metrics - in relation to climate, for example - and to take longer-term views remains unclear or secondary.

This affects how asset managers execute their investment mandates. They are rewarded on the wrong metrics in an increasingly competitive, low-fee, passive investing environment, typically leading to short-term performance bias. The lack of clarity around the scope of fiduciary duty and existing loopholes can further reinforce the old mindset: that taking non-financial metrics into account when assessing portfolio opportunities reduces the investable universe and risks limiting returns.

SHORT-TERMISM AND MISMATCH OF TIME HORIZONS

For most asset managers and owners, climate issues are still not considered material and do not feature in short-term investment decisions.

Capital markets are supposed to look to future cash-flows, but the combination of discounting methodologies, short-term incentives and the unfamiliar, non-linear nature of climate-related risks makes it almost inevitable that - without strong regulation - market actors respond only when it is too late. The ability of cash-rich, carbon-intensive incumbents to reward financial intermediaries with rich fees only compounds the problem.

Beyond the role of high-frequency trading, financial institutions such as hedge funds with short time horizons, and the structure of performance-based financial reward in the financial industry, regulations can also encourage short-term investment behaviours. For example, mark-to-market accounting rules for assets held in long-term portfolios, pro-cyclical prudential regulation and quarterly financial performance reporting can drive short-term biases.

This has also meant favouring investment in financial assets over productive assets from companies: between 1980 and 2006, Fortune 500 companies spent around 2.5x in share repurchases compared to R&D investments.

Many high-profile investors and corporate leaders are joining forces to stop pressure from quarterly earnings to drive more long-term decision making. For example, JP Morgan CEO Jamie Dimon, and Warren Buffett have teamed up for this cause, arguing that companies will pursue activities that are counter to the long-term interests of the business as long as executives and investors are focused on the short term. However, it is less clear that these pronouncements from Buffett and Dimon change the investment conduct of their institutions.

THE CHALLENGING INVESTMENT CHARACTERISTICS OF LOW-CARBON ASSETS

It is challenging for investors to invest in newer, asset-light climate and technology-driven solutions due to high perceived risks driven by geography, high upfront costs, or untested business models and lack of historical performance data.

This is especially true in emerging markets where capital is needed most. Clean-tech innovation plays are even more challenging. They are more capital-intensive than, for example, the next social media app. As a result, they suffer from deep “valley of death” financing barriers as they move beyond the demonstration phase.

One way to address the challenges of investing in the low-carbon economy is to generate investable products for institutional investors, through aggregation and other de-risking measures: policy support, innovative public-private partnerships or blended finance platforms. Examples include the Property Assessed Clean Energy (PACE) Program for energy-efficiency projects; Fannie Mae’s $50 billion green mortgage-backed securities programme; and the former UK Green Investment Bank’s first offshore wind fund, exceeding its investment target of £1 billion (US$1.3 billion), opening the sector to long-term investors such as pension funds. For other innovative infrastructure delivery models, see our work on Infra 3.0.

LACK OF SUPPORTING “SUSTAINABLE” MARKET INFRASTRUCTURE

With growing volumes of “ESG”, “sustainable”, “impact”, “green” and “ethical” products on the market, it’s not easy for investors to navigate the shades of green versus brown.

Asset managers have been able to label funds and define their investment processes as they see fit, making it challenging to compare products. In a low-fee and increasingly passive strategy environment, asset managers and investment consultants have incentives to stick with the creation of more conventional products and indices with an established track-record instead of pushing the boundaries for more positive underlying impact of its products.

The industry has relied on voluntary commitments, without a true standardisation of practices. The EU’s efforts to implement a taxonomy and regulation for low-carbon benchmarks will be a huge step forward in this respect, which hopefully will be harmonised across more geographies.

In June 2019, the Technical Expert Group on Sustainable Finance’s Taxonomy report effectively listed activities that are considered sustainable for mitigation and adaptation, which eventually will be transformed into policy by the EU, accompanied by a green bond standard, eco fund labels and low-carbon benchmarks. The investment association (IA) is consulting on creating standard definitions for terms and will also develop a label for funds that have adopted ethical, responsible and sustainable investment strategies, so investors can identify them more easily.

Other more “traditional” products are also limited in emerging markets, preventing capital from flowing across borders, such as long-dated foreign exchange hedging instruments or sufficiently developed bond markets that enable price discovery (e.g. green bond issuance in local currency).

A FINAL, BUT CRITICAL, GAP IS THE AVAILABILITY OF HIGH-QUALITY DATA AROUND PHYSICAL CLIMATE RISK.

Investors are slowly getting sensitized to these risks – for example, through rising insurance claims in the context of more intense hurricane seasons and, perhaps more powerfully, through the recent PG&E bankruptcy.

The PG&E case, in which a state utility is being held responsible for major property losses as a result of the wildfires in California, could be a game-changer in terms of investor awareness and a willingness to price physical climate risk.

This could affect multiple economic sectors, from real estate through agriculture, to the energy system, to global supply chains which have bottlenecks in climate-exposed geographies. Sovereign risk ratings are also likely to be affected, affecting bond prices in many markets. Financial information providers such as Moody’s/S&P are ramping up efforts in this area, alongside some new specialised players such as Jupiter, with deep data analytics skills bridging climate science and asset valuations.

LIMITED FISCAL INCENTIVES

Regulations, tax systems and climate policies need to reflect and incentivise investors to be able to make the right decisions in uncharted territory.

The rulebook must favour innovation, and incentives need to be aligned for generated profits to be re-invested in climate-positive and real value-add projects.

These changes will require political courage, which is increasingly getting backing through “greener” election results and public outcry through demonstrations.

Fiscal policy at the real asset level would have more impact and affect the pricing of related financial investments, including introducing a meaningful carbon pricing and phasing out fossil fuels. Other incentives could include tariffs and exemptions for water supply, tax breaks for geographical diversification of farming, and exemptions from land use fees for road and rail infrastructure.

PRIORITY ACTIONS FOR CAPITAL MARKETS REFORM

Capital markets have a major role to play in facilitating an orderly low-carbon transition and ensuring investment flows at the speed and scale required. This can be achieved by focusing on capital market reforms and initiatives that:

1. Measure and manage climate-related and other other nature-related financial risks through disclosure efforts and risk assessment methodologies that incorporate forward-looking, non-linear risks and longer-term horizons.

2. Clarify fiduciary duty with a clear mandate around long-term profitability of investments and relevant climate/sustainability risks to empower investment advisers to provide longer-term sustainable investment advice

3. Develop blended capital market vehicles to de-risk investments into: (i) large-scale clean energy infrastructure, especially cross-border investments into emerging markets; (ii) clean-tech to get over the “valley of death”; and (iii) more efficient buildings.

With a background in sustainable debt finance, Diletta Giuliani is part of the Blended Finance Taskforce, working to shift the financial system to more sustainable practices and accelerate investment in priority economic systems, with a focus on natural solutions.

COP25 highlights

COP25 highlights

COP25 saw two weeks packed with finance stories - here’s a quick overview of the key ones from The Chronicle:

• France’s financial regulator ACPR said it will stress-test banks and insurers on climate risks [Reuters];

• Mark Carney has been appointed as UN envoy on climate, as Michael Bloomberg stepped down to focus on the US presidential campaign [Guardian];

• Spanish oil giant Repsol announced its intention to reach net zero emissions by 2050 and absorb a €4.8 billion hit to the value of its oil and gas assets in the process. Repsol’s approach was hailed as the most ambitious commitment of the industry, as it covers 95% of the products it sells, including Scope 3 emissions [Reuters]. Carbon Tracker also has a good in-depth technical analysis;

• A new report identified the top global financiers of new coal development, which included Citigroup, BNP Paribas and key Japanese banks. Over the past three years, financial institutions have channeled $745 billion to companies planning new coal power plants [DeSmog];

• A record 613 investors with $37tn in assets sent the largest ever joint call for climate action, addressed to world leaders gathered at COP [FT]

Taskforce champion, Professor Lord Nicholas Stern, said:

“The Spanish government deserves great credit for hosting the summit with the government of Chile at such short notice and so effectively. It is encouraging that governments reached agreement on most of the remaining parts of the so-called rulebook about the implementation of the Paris Agreement. But it is disappointing that no consensus was reached about Article 6 of the Paris Agreement on the trade of emissions permits and credits, which means this issue will still need to be resolved over the next 12 months. Although the COP process often seems frustratingly slow, it is important to remember that it proceeds through consensus among all 197 Parties to the 1992 United Nations Framework Convention on Climate Change.”

“The governments of Italy and the U.K. now face a major challenge over the next 12 months in working to persuade all countries to bring forward more ambitious commitments to cut emissions of greenhouse gases, consistent with the Paris Agreement’s goal of holding global warming to well below 2 Celsius degrees. This work could be reinforced by the growing recognition of the great attractions of a transition to sustainable economic development and growth, with rising living standards, better health, greater social inclusion, a less polluted environment, and stronger ecosystems. The announcement of the European Green Deal is an important step in this new direction.

“Although the United States is in the process of withdrawing from the Paris Agreement, all other countries have shown their determination to implement it. The rise in global mean surface temperature will only be halted when total emissions of greenhouse gases from human activities are cut to effectively zero.

“A highlight in Madrid has been the first gathering of the Coalition of Finance Ministers for Climate Action at a United Nations climate change summit. The leadership of finance ministers will be critical to the economic transformation that we need. The leadership of International Monetary Fund under its new Managing Director, Kristalina Georgieva, will add valuable support and momentum.

“I hope political leaders will now listen to the many voices, particularly of young people of the world, who are calling for urgent action on climate change to make the world safer, healthier, fairer and more prosperous. The commitment of young people to tackle climate change is our hope for the future and we have a duty to respond to their call for strong and urgent action.”

Blended Finance Taskforce interesting for treasurers to help take action on climate change

HRH The Prince of Wales has urged treasurers to take action over climate change. Matt Packer explains why Prince Charles is fired up about green finance

On 13 November, His Royal Highness The Prince of Wales gave a video address to the Annual Dinner of The Association of Corporate Treasurers (ACT), highlighting the vital part that treasury teams must play in the fight against climate change.

“As good finance professionals,” he said, “you are aware of the positive impact on performance that can be achieved by incorporating environmental, social and governance [ESG] considerations into lending and investment processes.

“However, as leaders in financial markets, you need to do much more if we are to have any hope of addressing catastrophic climate change and its many inherent risks.”

Prince Charles stressed: “All of you in the room this evening, ladies and gentlemen, are in a position to take action by considering the relevance of environmental and social risks and opportunities in every financing decision you take.”

He added: “If we are to achieve a sustainable economy in the long run – responding to issues such as climate change within the time frames that are required – then sustainable finance must become the norm… and quickly.”

During his speech, Prince Charles cited a handful of authoritative sources on the development of climate change, and the levels of finance that will be required to fight it. Those sources have helped to fuel his interest in – and enthusiasm for – green bonds and other forms of sustainable finance.

Prince Charles is now focusing on raising awareness of different green finance options through his Accounting for Sustainability Project (A4S) and his recently established Sustainable Markets Council (SMC): an advisory board of public-private-philanthropic leaders, convened with the support of the World Economic Forum (WEF).

Here are some recent findings from those sources, plus some updates from Prince Charles’s own projects:

1. United Nations Intergovernmental Panel on Climate Change (IPCC)

In October last year, the IPCC published its landmark Special Report on Global Warming of 1.5°C. Compiled by 91 authors and editors in 40 countries and citing more than 6,000 scientific references, the report examined the potential impacts of allowing global warming to creep past a threshold of 1.5°C above pre-industrial levels.

IPCC Working Group I co-chair Panmao Zhai explained: “One of the key messages that comes out very strongly from this report is that we are already seeing the consequences of 1°C of global warming through more extreme weather, rising sea levels and diminishing Arctic sea ice, among other changes.”

With that in mind, the report noted: “Limiting warming to 1.5°C above pre-industrial levels would require transformative, systemic change, integrated with sustainable development.” Such change, it said, would require the “upscaling and acceleration” of efforts to implement far-reaching, multilevel and cross-sectoral mitigation measures.

It added: “While transitions in energy efficiency, carbon intensity of fuels, electrification and land-use change are under way in various countries, limiting warming to 1.5°C will require a greater scale and pace of change to transform energy, land, urban and industrial systems globally.”

More recently, the IPCC released its Special Report on the Ocean and Cryosphere in a Changing Climate, looking at the impacts of global warming on the planet’s frozen zones.

In a statement, the organisation pointed out: “Marine heatwaves have doubled in frequency since 1982 and are increasing in intensity. They are projected to further increase in frequency, duration, extent and intensity.

“Their frequency will be 20 times higher at 2°C warming, compared to pre-industrial levels. They would occur 50 times more often if emissions continue to increase strongly.”

It stressed: “As mountain glaciers retreat, they are also altering water availability and quality downstream, with implications for many sectors such as agriculture and hydropower.”

IPCC chair Hoesung Lee said: “The open sea, the Arctic, the Antarctic and the high mountains may seem far away to many people. But we depend on them and are influenced by them directly and indirectly in many ways – for weather and climate, for food and water, for energy, trade, transport, recreation and tourism.”

2. Business & Sustainable Development Commission

In its 2017 flagship report Better Business, Better World – backed by 35 top CEOs and civil society leaders – the Commission noted that putting the UN’s Sustainable Development Goals (SDGs) at the heart of the world’s economic strategy could open economic opportunities worth $12 trillion by 2030, and raise employment by up to 380 million jobs.

Following its research, the Commission acknowledged that, while the previous few decades had lifted hundreds of millions out of poverty, they had also been marred by unequal growth, rising job insecurity, swelling debt and environmental risks.

“This mix,” it said, “has fuelled an anti-globalisation reaction in many countries, with business and financial interests seen as central to the problem, and is undermining the long-term economic growth that the world needs.”

Commission chair Mark Malloch-Brown said: “This report is a call to action to business leaders. We are on the edge and business as usual will drive more political opposition and land us with an economy that simply doesn’t work for enough people. We have to switch tracks to a business model that works for a new kind of inclusive growth.”

Designed to run for just two years, the Commission was closed in January 2018 – but its work continues through a number of spin-off ventures, of which the Blended Finance Taskforce holds the greatest interest for treasurers.

At an October event hosted by social enterprise Devex, Taskforce chair Jeremy Oppenheim warned that the global finance community is not on track to achieve the SDGs.

He said: “We need to rethink some of the ways in which we price risk, price assets, think about returns, decide what to invest in and what not to invest in… and if we continue to wait for policymakers to do it, then we’re part of the problem.”

Oppenheim added: “If we keep on just providing the money neutrally across the system, [we’re] going to keep on investing in the easy stuff, because that’s what we do, that’s how everything is geared up. We will have to find a way to shift the use of monetary instruments into much more aggressive SDG and climate-related investing.” See the Taskforce coverage here.

3. Climate Bonds Initiative (CBI)

Taskforce member and leading advocacy group for the green bonds industry has called for annual issuance in the field to rise to $1 trillion by 2021/22.

In October, the CBI announced that global green bonds issuance this year had passed the $200bn milestone – a new record – with energy dominating overall use of proceeds (33%), followed by low-carbon buildings (29%), low-carbon transport (20%) and water initiatives (9%).

CBI CEO Sean Kidney said: “Based on these figures, 2019 will be another record year for green finance… [however,] $200bn or $400bn a year is not enough to address the climate emergency and provide the capital at the scale urgently required for large-scale transition, adaptation and resilience.”

He stressed: “From here on, every year in the 2020s must be a record year for green finance. The climate challenge for global finance – regulators, banks, insurers and institutional investors – remains. Generating that first $1 trillion in annual green investment by 2021/22 is now critical. It’s the benchmark from which to measure year-on-year growth in climate-based investment towards 2030.”

That said, Prince Charles noted in his ACT video address, that $1 trillion of green bonds issuance per year is “just a drop in the ocean” compared to the size of the debt market that treasurers deal with every day.

4. A4S

Founded in 2004 as a means of urging the finance community to tackle the economic and social challenges that stem from climate change, A4S has since assembled an impressive Chief Financial Officer Leadership Network, comprised of CFOs determined to take a lead on sustainable decision-making.

Network members include Andrew Bonfield of Caterpillar, Harmit Singh of Levi Strauss & Co and Robin Washington of Gilead Sciences.

In September, A4S held a prestigious gathering for the launch of the Network’s US East Coast chapter, welcoming to the fold Claus Aagaard of Mars, Ewout Steenbergen of S&P Global and Mark Kaye of Moody’s Corporation.

Kaye said: “One of the defining challenges we face as business leaders is to embed social and environmental sustainability into our core business strategies and operational processes. I joined the A4S CFO Leadership Network because it provides an outstanding forum for sharing ideas and best practices, giving us all an opportunity for shared success in this important area.”

Download the A4S Essential Guide to Debt Finance here.

5. SMC

The Prince of Wales hosted the SMC’s inaugural meeting on 7 November.

According to a statement, he and the participants “reiterated their collective commitment to urgently drive sustainable markets, and discussed concrete action points for the coming months to help tackle decarbonisation and create sustainable markets”.

In addition, SMC members discussed ways to match investors with scalable sustainable investment opportunities, and explored how best to support ongoing efforts to create a series of globally recognised metrics for assessing the progress of sustainable finance.

The participants will convene again in January, during the WEF’s Annual Meeting in Davos.

About the author

Matt Packer is a freelance business, finance and leadership journalist

Scaling Sustainable Finance: Products, Practices and Partnerships

A broken system

We are living through one of the hottest decades ever recorded, with climate-related natural disasters increasing in frequency and intensity. And yet we continue to invest in high-carbon industries, with greenhouse gas emissions at record highs in 2018 and coal finance on the rise. We are also losing biodiversity at unprecedented rates, with over a million species on the verge of extinction. Recent images of the forest fires in the Amazon remind us that tropical deforestation (largely caused by agricultural and infrastructure expansion and livestock ranching) accounts for around 15% of global greenhouse emissions which is a major driver of global heating and environmental degradation.

System change not climate change

We know that limiting global warming, mitigating the effects of climate change and delivering the UN Sustainable Development Goals (SDGs) will require a rapid and far-reaching transformation across the real economy: we need to green the energy system, decarbonise heavy industries including hard to abate sectors like cement and steel, integrate resilience into the design of our buildings, transport systems and cities, and revolutionise the way we produce food and use land. But to achieve net zero emissions by 2050, the financial system also needs to move.

Products, Practices and Partnerships

A massive reallocation of capital away from emissions-intensive investments and into low-carbon solutions across all geographies and all asset classes will require the right products to incentivise clean technology and more sustainable practices. We will also need better institutional practices which build the capabilities and capacity to generate green pipeline. Finally, this won’t happen without innovative partnerships across the development finance, philanthropic and commercial investment communities, including through the use of blended finance vehicles and instruments to mobilise private capital for the SDGs.

By sharing learnings, coordinating action and testing new pilots, the Blended Finance Taskforce aims to showcase actionable solutions and tackle some of the critical barriers which currently prevent the financial system from being an enabler of the low carbon economy. This paper will look at the following key questions:

Products

1. How can we ensure that sustainable finance products are ambitious enough (e.g. actually aligned with Paris and the SDGs and able to shift portfolios)?

2. What are barriers and solutions to piloting and then scaling new sustainable and blended finance products?

Practices

1. What lessons can be shared across development and commercial finance institutions to help build capacity to scale up sustainable investments (e.g. standards, internal tracking mechanisms, pipeline generation etc)

2. What can the development finance community learn from commercial market and vice-versa to create the right incentives and culture to invest in long-term, low-carbon solutions?

Partnerships

1. What are the types of partners that could be brought in to successfully scale the sustainable and blended finance “market” (e.g. in financial structuring, pipeline development or project execution)? Who is missing from the conversation?

2. How can we improve the process of assigning concessional capital to projects and vehicles? (e.g. “matchmaking” platforms or regular tenders to accelerate effectiveness, transparency and lower transaction costs)?

Investing in Paris for a better world

According to the scientific community, limiting global warming and mitigating the effects of climate change will require a rapid and far-reaching transformation across the real economy where we generate net zero emissions by 2050. To do so, we need to green our energy system, decarbonise heavy industries including hard to abate sectors like cement and steel, integrate resilience into the design of our buildings, transport systems and cities and revolutionise the way we produce food and use land.

Achieving these goals will require strong and coordinated political leadership, a recalibration of consumption patterns and pioneering businesses who drive new operating models where value is created through sustainability.

But none of this will happen – or happen fast enough – unless it is combined with a rapid and widespread transition across the financial sector. To have any hope of decarbonising the global economy and delivering ambitious climate targets under the Paris Agreement, we need a massive reallocation of capital away from emissions intensive investments and into low carbon solutions across all geographies and all asset classes.

There is growing momentum and countless new initiatives which are committed to “greening” the financial system. But this is not happening at the necessary scale, speed or with the level of coordination required. The financial system is only responding at the margin.

This means that unprecedented efforts to install renewable power capacity still only translate into 2% of global energy demand and spending on wind and solar has now fallen 8% in 2018 to $332 billion. By comparison, the largest global banks have poured nearly $2 trillion into fossil fuel financing since the Paris Agreement was adopted, with financing on the rise each year.

Coal finance has continued to expand despite more banks and financial institutions taking steps to eliminate their involvement. Carve-outs and loopholes still exist; banks who commit not to finance greenfield coal projects have not necessarily have taken steps to limit their coal-related advisory, insurance and corporate finance work. All of this has corresponded with the highest ever greenhouse gas emissions recorded in the year of 2018.

Investing more and smarter in the new climate economy

To achieve net zero emissions by 2050, a lot more capital will need to shift into the new climate economy which is low carbon, captures and pays for the negative externalities of high-emissions industries like coal or livestock, and which creates value from more circular and sustainable activities.

First, we will need to multiply the annual average investment in low-carbon technologies and energy efficiency by roughly a factor of six compared to 2015 levels. This will mean renewing our energy-related infrastructure to the tune of $200 trillion and decarbonising at least $50 trillion of existing infrastructure over the next 30 years.

Second, we will need to mobilise another $1 trillion each year to make infrastructure more resilient to the inevitable physical impact of climate change. The lion’s share of this needs to go to emerging markets, who are typically on the front-line of climate change and much less equipped to handle the effects.

Finally, we must commit an additional $300-350 billion a year to transform global food and land use systems – which represent at least a third of the most cost-effective climate mitigation solutions, and are also essential to strengthening food security and biodiversity.

Reimagining the way we invest

Investing in the low-carbon economy has traditionally been more capital-intensive than continuing as usual (for example building a wind farm typically has higher up-front costs than building a thermal coal power plant) and this financing requirement has often been a barrier to scaling investment in renewables or energy storage. However, with significant reductions in the cost of clean-tech inputs (especially for solar and wind) and the advent of innovative financial products like green mortgages to incentivise energy efficiency in buildings, it should be easier to repurpose outstanding capital towards low-carbon, resilient assets and increase upfront capitalisation of the system.

It is not only cheaper technology that can accelerate the low carbon transition, but also about new “smarter” delivery models. Solutions which are more distributed, digitised and service-based, and which capture the benefits of new technologies, economic clusters and natural solutions to increase resilience and connectivity (so called “Infra 3.0”) can increase the productivity of assets and reduce costs by offering infra-light alternatives. By taking a lifecycle-approach we can also better understand the costs and benefits of an asset over time, including the impact on maintenance and the cost of negative externalities on human health and the environment.

Increasing infrastructure productivity and cutting investment needs could deliver huge savings, but it will require a wave of financial innovation from sophisticated financial players – shifting investment structures and developing new business models, new partnerships and tech platforms to make it work. Blended finance solutions which use development capital to mitigate investor risks can play a crucial role for this transition.

Development finance institutions can for example help to aggregate projects so that largescale capital can still access smaller scale investments and philanthropic funds can be particularly catalytic to seed entrepreneurs and scale technology innovation, especially in more difficult geographies or high-impact sectors.

The Paris opportunity

The good news is that redirecting our capital flows into low-carbon technologies and regenerative, circular models of production and consumption can both reduce risk and drive higher-quality economic growth and investment returns. Bold climate action is expected to generate $26 trillion in global economic benefits through 2030, creating 65 million new low-carbon jobs while preventing 700,000 premature deaths each year from air pollution. The food and land use sector alone represents a $4.5 trillion annual business opportunity across ten critical transition areas including forests, regenerative agriculture, nutritious diets, healthy oceans, alternative proteins and more efficient supply chains.

Critically, investing “in line with Paris” does not mean jeopardising returns or mandates. On the contrary; it is becoming increasingly evident (and slowly clarified by regulators) that incorporating environmental and social considerations is key to mitigating financial risk and in-line with institutional investors fiduciary duty (e.g. responsibility when acting on behalf of others). Particularly for assets and industries exposed to climate-related physical and transition risks – as well as generating better performance.

This means that shifting the financial system to become more sustainable should be in line with long-term asset owner fiduciary duties as well as the objectives of savers in the broader society. It should really be no surprise that a recent survey suggests that close to 70% of UK pension plan holders want their investments to consider the impact on people and planet alongside financial performance.

Temperature check on sustainable finance

With such a strong business case, is anything happening today? Newspaper headlines suggest that the finance industry is getting on with it – streamlining products, practices and partnerships to transition to the new climate economy and capture the value from this systemic shift. We know that a number of leading investors are grappling to understand their exposure to physical and transition risk. Others are actively pursuing the financial opportunities related to a low-carbon economy – in some geographies this is heavily driven by pro-climate regulatory pressures (e.g. in France, the Netherlands and the UK). In others, it is driven by the need to “future-proof” portfolios for imminent shifts across demography, consumer preferences, technology and climate-related risks.

The media continues to report ambitious climate finance targets from development banks (e.g. committing to Paris-alignment), to profile investment banks as they expand their sustainable finance practices (e.g. JP Morgan and Goldman Sachs), to highlight new climate and resilience initiatives (e.g. newly launched UN Principles of Responsible Banking, ClimateAction100+) and to catalogue acquisitions of climate risk analytics boutiques by mainstream financial advisory and ratings firms (e.g. 427 bought by Moody’s).

Following on from the rise of green bonds, pioneered over a decade ago by the development banks, we have seen new trends emerging for green and sustainable labelled products such as exchange traded funds (ETFs, catering for the passive market), transition bonds (to support brown going green), sustainability-linked loans (tied to environmental performance), parametric insurance offerings (triggered by climate-related disasters) and resilience bonds (as just issued by the EBRD).

Across the industry, there has undoubtedly been a significant uptake in green and sustainable finance activity. The large multilateral banks hit record high $43 billion in 2018, up 22% from the previous year. The macro numbers for global sustainable finance assets under management came in at $31 trillion for 2018, up over 30% from the previous year. These assets reportedly account for a third of total tracked assets; in some regions they account for more than half. This year especially, investors can't seem to get enough of booming sustainability-themed ETFs which exploded in the first half of 2019 having already attracted more than they did in all of 2018.

But is it enough?

Many of the market’s largest players are sitting on the side-lines. Huge variation remains between investors across geographies, and the numbers and sustainability headlines may be somewhat misleading. Only a fraction of these activities could be said to be driving “deep green” climate action. No matter what the numbers, the latest report from global ratings agency S&P, states that banks and other investors are dramatically underestimating climate-related risks.

Very few have a Paris-aligned strategy or “net-zero” ambition. The most common sustainable investment strategy globally continues to be negative or exclusionary screening on the basis of environmental, social and governance (ESG) factors – especially in Europe where this accounts for more than 60% of the total “sustainable finance” universe. Arguably, this kind of negative screening strategy does little to directly support the expansion of low-carbon projects. ESG-integration is becoming more popular, with assets of roughly $17.5 trillion (up 70% past two years). The more active strategies, often coined “impact” or “thematic” investing count for only a tiny fraction of the reported total (current size of the impact investing market roughly at $500 billion).

The product range available to help “green” mainstream capital is still very small and not expanding rapidly enough, despite new products being launched almost weekly and lots of attention given to green bonds in recent years. Specialised labels for sustainable finance funds have been granted to just over 400 financial products in Europe over the last decade, but when compared to over 60,000 funds available on the European market this number gets less impressive. The cumulative total of green bonds issued as of 2019 is still minuscular at $650 billion compared to the total bond market which exceeds $100 trillion.

Perceived trade offs

Relatively few investors have climate change seriously on their core investment agenda. For the large majority, climate issues are still not considered material and do not feature in short-term investment decisions. Some asset owners go beyond the bare minimum, but that’s too few. Why? They are not convinced that pursuing green will deliver and that there is no trade-off between investment performance and sustainable investing. Certainly not in the short-run which drives their own private incentives.

Among hedge fund managers, an overwhelming 60% still do not consider ESG factors when selecting equities for their portfolios. Despite the urgency of the climate situation, the prevailing belief in international finance is that portfolios will have time to gradually evolve. This leaves all mainstream portfolios exposed to the risk of a sudden shift in sentiment – a Minsky moment – by the financial community once climate risk comes to the fore due to some unpredicted event.

As is often the case, finance is characterised by binary risk exposure: a problem can be neglected until it is too late. Even though capital markets are supposed to look to future cash-flows, the combination of discounting methodologies, short-term incentives and the unfamiliar, non-linear nature of climate-related risks makes it almost inevitable that, absent strong regulation, market actors will only respond when it is too late. The ability of cash-rich, carbon-intensive incumbents to reward financial intermediaries with rich fees only compounds the problem.

What needs to change?

Multiple market factors, information failures and policy distortions within the capital markets create a bias towards the status quo – in this case, an economy addicted to fossil fuels and a financial sector which has largely only responded in an ad hoc way to the climate crisis. Given that the low-carbon transition is one that is relatively capital intensive, this becomes a huge problem as money won’t flow at the speed and scale required. As a result, the finance system is itself a brake rather than an accelerator of the required transition.

We could drive real change by tackling the following barriers and accelerating systemic solutions: 1) Creating the right regulatory incentives (amend existing regulations and capital weighting measures to support investing in infra in emerging markets) 2) Clarifying fiduciary duty and changing mindsets (more clarity on what falls within fiduciary duties which can further challenge old mindsets that considering ESG risks limiting returns) 3) Reviewing asset allocations towards infrastructure (increase investors ability to pursue infra in emerging markets and new infra/tech service solutions) 4) Improving taxonomy and quality of green products (differentiate brown from green, challenge asset managers and consultants to not only stay with conventional and proven products) 5) Expanding data tools and transparency (improve ability to assess climate exposure, build out internal climate expertise and expand external information to hold players accountable) 6) Narrowing information gaps and reducing perceived risk (create blended finance structures to overcome barriers for investors to participate in challenging geographies and asset classes)

Encouraging examples of leadership

There are a number of sustainable finance pioneers across the development and commercial finance communities who are trying to tackle these capital-market specific constraints to accelerate Paris-aligned investment. When Greta Thunberg, the 16-year-old climate activist, addressed the 2019 UN General Assembly, she said that global leaders can’t possibly have understood the magnitude of the climate emergency or else they could not keep failing to act.

Of course, we know there are numerous systemic barriers which compound to prevent the capital shifts we need to see in order to accelerate the transition to a low carbon economy. And while it is possible to get disheartened by the size of the task at hand, it is a widespread expectation that pressure for action will only increase – giving courage for political leaders for bold policy, giving mandate for regulators to change rules, pressuring leaders to transform their business models, driving more innovation for technology solutions and incentivising investors to re-allocate capital flows towards a low-carbon pathway.

The areas of change and innovation highlighted in this paper are a good start, but we need to go faster and mainstream this agenda. The good news is that there is already significant momentum happening (e.g. with the arrival of physical risk analytics).

Critical areas to deepen and accelerate change further include to:

1. Challenge asset owners, asset managers and investment consultants on the heavy focus on quarterly earnings, past track-records and data instead of forward looking and longer-term climate and tech-risk adjusted projections

2. Work with finance ministers across all geographies to incorporate climate resilience in macro-fiscal and financial frameworks (including working with the insurance industry for new solutions and IMF incorporating climate in its consultations)

3. Increase public awareness of the power of their personal finances to push for climate (e.g. to unleash the “Greta generation” to demand for sustainable pensions, insurance or bank accounts).

We have to remind ourselves that finance markets can only go so far without the right regulatory and policy context. Furthermore, there is still a deep problem in capital markets related to the short-termism of many of the individual agents and only the asset owners can really change this – and that would take a revolution in the mandates that they, whether as institutions or as individuals, provide to their asset managers and pension providers.

Fortunately, we now have finance ministers, central banks, regulators, credit rating agencies – and importantly, investors and business – all elevating and accelerating efforts on climate. This is exciting and could lead to new norms in capital markets where the herd instinct is very strong.

We also need stronger acts of bold individual leadership combined with support for regulatory action that drives both transparency and capital allocation towards a low-carbon economy. Ultimately, the financial system can and must be an accelerator of this transition; and those who move early will benefit the most. We know what to do, we just have to get going.

Blended Finance for Nutrition

Taskforce members, GAIN, have released a new paper on how to unleash private investment for nutritious food value chains in frontier markets. This paper fills an important gap as the first of its kind to highlight the role of blended finance mechanisms to mobilise capital for nutritious foods projects while addressing the challenges and limitations of this approach.

Key messages:

1. With greater access to financing and technical support, SMEs (which produce the bulk of food consumed in low and middle income countries) can play a larger role in increasing the availability and affordability of safe, nutritious foods
   

2. However, there is currently a large funding gap to support SMEs in nutritious food value chains
   

3. The growing field of blended finance represents a significant opportunity to leverage public and private financing to incentivise and support these companies to provide more nutritious foods.
   

4. Attracting investors to blended finance mechanisms requires: making the case that nutritious food is a compelling theme for investment; identifying viable investment opportunities with SMEs in nutritious food value chains; and developing metrics that allow investors to select the right SMEs and track the social impact of their investments

See more about the new food and land use economy in the “Growing Better” report published by the Taskforce and the Food and Land Use Coalition.

BLENDED FINANCE AT WORK: CONNECTING TO REAL-WORLD PROJECTS

We continue to look for ambitious commitments from governments and businesses as they try to tackle the climate crisis. But the gap between aspiration and delivery is often seen as a financial one. Away from the media spotlight, the Blended Finance Taskforce has been helping develop investment models and partnerships that connect financial and policy leadership to real-life projects.

As we draw closer to 2020, the so-called “Decade of Delivery”, most people continue to focus on the SDG funding gap – the multi-trillion-dollar shortfall between delivering the UN Sustainable Development Goals, and the money being mobilised to do so. New approaches to blended finance, backed by SYSTEMIQ, are inviting the development finance and investor community to think differently. They suggest not only how to narrow the gap, but also where that funding could be best directed to capture significant economic opportunity as well as the most value for people and planet.

BETTER FINANCE, BETTER WORLD

It’s over two years since SYSTEMIQ launched the Blended Finance Taskforce. It focuses on scaling up private investment for high-impact sectors and geographies by bringing in new financial intermediaries, developing innovative instruments and building confidence around better data. The Taskforce works with a range of public and private sector champions to accelerate its mission, including pension funds, sovereign wealth funds, family offices, insurers, credit rating agencies, asset managers, project developers, development agencies, multilateral development banks (MDBs), foundations and NGOs.

The Taskforce starts from the need to use development capital more catalytically to mobilise additional commercial finance for SDG-related investments. This is something which many development funders have historically struggled to do – overall, MDBs still mobilise less than $1 of private capital for every dollar of their own funding.

INFRASTRUCTURE – THE BIG SDG DRIVER

Some of the most advantageous projects, in SDG terms, face the most significant financing gaps.  Sustainable, low-carbon infrastructure can accelerate huge improvements in people’s lives while generating risk-adjusted returns. However, infrastructure has typically been an underinvested asset class for investors, especially in developing countries.

The blended finance approach looks to make such assets in emerging markets more ‘investable’ by large-scale, mainstream capital. Of course, regulatory and policy changes, as well as mainstreaming the right financial instruments, are all part of the answer.

The Blended Finance Taskforce works with investors to scale up direct allocations to low-carbon, resilient infrastructure. As its “Infra 3.0” paper showed, this implies a rethink of the infrastructure itself – starting from the service need and envisaging a more efficient, “infra-light” means of delivery which utilises more distributed, digitised, shared-services models, while taking advantage of natural solutions and economic clustering to improve productivity. 

NATURE-BASED SOLUTIONS – THE CLIMATE HERO  

Despite being one of the most cost-effective counter-actions to the climate crisis, nature-based solutions like mangroves, coral reefs and even green spaces in cities – which moderate extreme temperatures, increase resilience to natural disasters and protect vital biodiversity – are also significantly under-invested. 

“Blended finance can mitigate certain investor risks, creating the right incentives for capital to flow to impactful projects on the ground and ensure we pay for nature”, says Katherine Stodulka, SYSTEMIQ’s sustainable finance expert. This is particularly true of the team’s work to mobilise capital for forests and the blue economy – a key focus of UN Climate Week, where a new report confirmed that oceans could deliver 20% of the emissions cuts needed to keep global warming to 1.5C.

Stodulka points to two projects in Indonesia to demonstrate the real-world impact of blended finance. One is an ongoing initiative with the Indonesian government on the restoration of tropical peatland. The other focuses on the combination of sustainable fishing concessions, ecotourism and conservation in a marine protected area. “Indonesia has been a champion for SDG investment”, she explains. “These projects show that the expertise and leadership isn’t just North-to-South.”  

The team also contributed much of the thinking behind “Growing Better”. The Food and Land Use Coalition’s recent report identified 10 critical transitions to transform global food and land use systems, which could open up an estimated $4.5 trillion a year in new business opportunities by 2030.  

The report also identifies the risks of inaction: investors in the agro-food industry may be heavily exposed to emission-intensive industries such as traditional meat and dairy. It is not only investors in the energy sector who are likely sitting on 4-degree portfolios.    

But translating today’s hidden costs into tomorrow’s new markets will require new business models that emphasise value over volume-based economics.  Again, there’s a familiar paradigm at work: innovative partnerships are needed to help accelerate major shifts in the way we finance our food and land use systems, to “de-risk” new asset classes – and to achieve this at scale. 

Across such a vast change agenda, some areas are easier to target than others. Along with healthier diets, diversified protein supply and food waste, the report signals digital solutions and new demographic and gender-equality approaches as having lower barriers to financial intervention.

By contrast, the largest investment will be required in forests, rural infrastructure and training farmers in regenerative agriculture practices. In these areas and others, as Stodulka explains, “increasingly, we’ll be looking to blended finance to help drive the difficult transitions for the global economy – not as a permanent solution, but as a way to shift the investment paradigm and capture new opportunities inherent within a more sustainable, low-carbon model of production and consumption.”

Unlocking private-sector financing in emerging-markets infrastructure

A new McKinsey article describes three levers to help governments and development finance institutions increase private-sector financing for infrastructure to narrow the SDG funding gap:

1. Liquidity: increase availability of funds from both domestic and international investors including through favourable tax treatment and other regulation

2. Scale: bundle individual projects and provide a portfolio of different products for large investors to increase scale

3. Enabling environment: address the governance and capability gaps that often hinder private-sector investment

The Blended Finance Taskforce paper “Infra 3.0: Better Finance, Better Infrastructure” goes even further, finding that we could reduce the overall funding gap by $1 trillion a year by improving infrastructure productivity.

Infra 3.0 provides a framework to drive efficiencies, generate cost savings and create new ways of delivering traditional, sustainable and innovative models of infrastructure – ensuring we invest “smarter” not just more.

This will be possible by delivering infrastructure in a way which is highly distributed, digitised and “service” based, and which captures the benefits of new technologies and economic clustering. Perhaps most importantly, Infra 3.0 includes natural solutions to increase asset resilience and connectivity. See more on investing in natural infrastructure in the Food and Land Use Coalition’s “Growing Better” report.

In addition to new investment, Infra 3.0 also shows how important it is to focus on O&M which can reduce the total cost of core infrastructure by more than 50%.

Taskforce Chair delivers keynote at Devex’s “Future of Development Finance” conference with real economy litmus test

This week, the Blended Finance Taskforce joined Devex for a day-long event on the future of development finance in London which gathered over 150 experts and practitioners from the business, finance, development and philanthropic community for a thought-provoking discussion on how we can close the SDG funding gap.

The event included a keynote address from Jeremy Oppenheim, Chair of the Blended Finance Taskforce and co-founder of SYSTEMIQ. It also showcased many friends and members of the Taskforce as they looked at the future of development finance – what’s holding it back and how we can create long-term solutions to mobilise capital in years to come.

Speakers shared realistic and sobering messages about the progress we’ve made so far: the bottom line is that we are not on track to achieve the SDGs. Going from billions of dollars of public capital to trillions of private dollars invested in the SDGs must involve a massive reallocation of capital away from destructive activities into those that generate positive outcomes for people and planet.

“It comes down to – what kind of economy do we want to build and how does finance play a role in building that economy?”

To do this, the financial system needs to undergo a deep transformational shift in order to build a truly sustainable global economy. How do we do this? Oppenheim says, “We need to rethink some of the ways in which we price risk, price assets, think about returns, decide what to invest in and what not to invest in … and if we continue to wait for policymakers to do it, then we’re part of the problem.”

 He went on: “If we keep on just providing the money neutrally across the system, it’s going to keep on investing in the easy stuff, because that’s what we do, that’s how everything is geared up. We will have to find a way to shift the use of monetary instruments into much more aggressive SDG and climate related investing.”

Oppenheim challenged the audience to a simple “litmus test”: are the development interventions that we are proposing actually having any impact on the real economy? One example is the food and land use system on which we utterly depend: it is generating not just static externalities but dynamic risks that are completely unpriced in the finance sector.  Because of that, all the financing overwhelmingly is going into players that have balance sheets that are creating the products at the heart of this problem. 

It also means that investment doesn’t get to the smallholder farmer who not only needs to be implementing more regenerative practices to improve soil health and resilience to drought and flood, but also needs to increase her yield per hectare fourfold to avoid rapid deforestation and agricultural land expansion.

According to the Food and Land Use Coalition’s latest “Growing Better” report, we must decrease land used for agriculture by around 1.5 billion hectares and return it to nature as a central pillar of the climate solution through reduced emissions and more resilient carbon sinks. He said, “What would it take to get successful in supporting those smallholder farmers going from 2 to 8 tonnes per hectare on their crops – if we can’t do that, then the rainforest is toast – then everything will unravel”.

Nick O’Donohoe, CEO of CDC Group reminded us of the opportunity. He said, “this is an extraordinarily exciting time to be in development finance. If you look at the big picture, there’s never been a time when what we do – investing in private companies to stimulate economic growth and create jobs – has been so central in the development agenda. And that’s a function of the SDGs, of the Addis financing conference, the climate emergency, and it’s all focused attention on the critical role that the private sector plays, and the critical need to get capital to the private sector in some of the most difficult, poorest countries in the world.”

With consensus on the scale, urgency and gravity of this challenge as well as the size of the prize for business, people and planet if we shift to a low carbon, resilient and inclusive economy, a refreshingly frank discussion followed about the barriers that exist and the range of solutions to address them.

More key takeaways from the day are set out below.  

SYSTEMIC BARRIERS LIMIT THE FLOW OF CAPITAL TO THE SDGS

Many of the same barriers highlighted in the Taskforce’s flagship report, Better Finance, Better World, were discussed throughout the Devex conference, highlighting the difficulty and complexity involved with tackling them. Three major barriers which got significant airtime were:

1. Policy and regulation: regulatory reform and policy action are critical to get capital flowing to low carbon and sustainable assets.  This is true in developed economies, where financial regulation like Basel III can be a disincentive to investing in infrastructure or emerging markets but could have outsized positive effects (e.g. through TCFD) It is also particularly important in emerging markets, where predictable and transparent policy can play a critical role to improve the enabling investment environment. Globally, subsidy regimes (especially for fossil fuels or in the food and land use sector) must be repurposed if we are going to shift capital away from high carbon and unsustainable portfolios. Overcoming Political will is challenging in many parts of the world and we don’t have the luxury of waiting for widespread and coordinated political reform.
   

2. Perception of risk: The challenge of managing risk in emerging markets and across high-impact “SDG-related” projects, was seen as one of the main factors restricting the flow of capital to where it is needed most. This underlines a fundamental need to tackle the way we price and perceive risk, either at the source (through better governance or increased data and transparency) or through the use of mechanisms and instruments which use development capital (public or philanthropic) to crowd in private investment by mitigating certain risks.
   

3. Lack of local solutions: The heavy focus on cross-border finance and lack of local solutions was a recurring theme – emphasising the need for solutions which can scale domestic and local finance and increase the capacity of financial institutions in emerging. Mahmoud Mohieldin, Senior Vice President at the World Bank, highlighted this point, saying “it will be virtually impossible to achieve the SDGs on the current trajectory. Catalysing finance will be critical at all levels – international, domestic and local.”
   

THERE ARE PRACTICAL SOLUTIONS WHICH CAN BE ACTIONED TODAY

Overcoming barriers like a high perception of risk, limited local solutions and weak policy will require the development of better products, practices and partnerships . While not all straightforward, there are actionable steps we can take now toward these solutions.

1.  PRODUCTS. We need to pilot innovative, fit-for-purpose vehicles and work to replicate and scale those investment models that prove successful. These vehicles should also be suitable for large-scale capital and serve a broad base of investors. One-off, small-scale vehicles that attract capital from the usual suspects won’t get us there. IDB’s “sovereign digital bond” proposed at the conference is a great example of the type of innovation we want to encourage.

2. PRACTICES. Better institutional practices amongst data providers, NGOs, and development and commercial finance actors are critical in order to (1) promote transparency, (2) improve data accuracy and availability, and (3) increase the capacity of investors to deploy capital to high-impact, sustainable solutions. This not only helps investors better understand and manage risks but also measure the impact of their investments.
   

3. PARTNERSHIPS. Innovative partnerships that involve investors across the spectrum of development finance, philanthropy and the private sector, including through blended finance vehicles, can accelerate efforts to mobilise capital for the SDGs. In doing so, these partnerships can help to mitigate investor risk, support project pipeline development, and test and bring to market new technologies and business models that might otherwise go unfunded.

Rethinking the future of food and agriculture

We are on the cusp of the fastest, deepest, most consequential disruption of agriculture in history.

A new report by RethinkX called “Rethinking Food and Agriculture” shows how the modern food disruption, made possible by rapid advances in precision biology and an entirely new model of production called “Food-as-Software”, will have profound implications not just for the industrial agriculture industry, but for the wider economy, society, and the environment. This is a useful companion to “Growing Better: Ten Critical Transitions to Transform Food and Land Use” from the Food and Land Use Coalition and the Blended Finance Taskforce.

KEY FINDINGS

• By 2030, demand for cow products will have fallen by 70%. Before we reach this point, the U.S. cattle industry will be effectively bankrupt. By 2035, demand for cow products will have shrunk by 80% to 90%. Other livestock markets such as chicken, pig, and fish will follow a similar trajectory.

• Production volumes of the U.S. beef and dairy industries and their suppliers will decline by more than 50% by 2030, and by nearly 90% by 2035. In our central case, by 2030 the market by volume for ground beef will have shrunk by 70%, the steak market by 30%, and the dairy market by almost 90%.

• The current industrialized, animal-agriculture system will be replaced with a Food-as-Software model, where foods are engineered by scientists at a molecular level and uploaded to databases that can be accessed by food designers anywhere in the world. This will result in a far more distributed, localized, stable, and resilient food-production system.

• By 2035, about 60% of the land currently being used for livestock and feed production will be freed for other uses. This represents one-quarter of the continental U.S. – almost as much land as was acquired during the Louisiana Purchase of 1803. The opportunity to reimagine the American landscape by repurposing this land is wholly unprecedented.

• Modern foods will be cheaper and superior to animal-derived foods. The cost of modern food products will be half that of animal products and they will be superior in every functional attribute – more nutritious, tastier, and more convenient with much greater variety. Nutritional benefits could have a profound impact on health, both in a reduction in foodborne illness and in conditions such as heart disease, obesity, cancer, and diabetes that are estimated to cost the U.S. $1.7 trillion every year.

• Wider economic benefits will accrue from the reduction in the cost of food in the form of increased disposable incomes and from the wealth, jobs, and taxes that come from leading the way in modern food technologies.

• Environmental benefits will be profound, with net greenhouse gas emissions from the sector falling by 45% by 2030. Other issues such as international deforestation, species extinction, water scarcity, and aquatic pollution will be ameliorated as well. By 2035, lands previously used to produce animal foods in the U.S. could become a major carbon sink.

IMPLICATIONS

Economic

• The cost of modern foods and other precision fermentation products will be at least 50% and as much as 80% lower than the animal products they replace.

• At current prices, revenues of the U.S. beef and dairy industry and their suppliers will decline by at least 50% by 2030, and by nearly 90% by 2035. All other livestock and commercial fisheries will follow a similar trajectory.

• Farmland values will collapse by 40%-80%.

• Major producers of animal products are at risk of a serious economic shock.

• The average U.S. family will save more than $1,200 a year in food costs. This will keep an additional $100bn a year in Americans’ pockets by 2030.

• By 2030, at least half of the demand for oil from the U.S. agriculture industry – currently about 150 million barrels of oil equivalent a year – will disappear.

Environmental

• By 2035, 60% of the land currently used for livestock and feed production will be freed for other uses. These 485 million acres equate to 13 times the size of Iowa.

• If all this freed land were dedicated to reforestation, all current sources of U.S. greenhouse gas emissions could be fully offset by 2035.

• U.S. greenhouse gas emissions from cattle will drop by 60% by 2030, on course to nearly 80% by 2035. Even when the modern food production is included, net emissions from the sector as a whole will decline by 45% by 2030, on course to 65% by 2035.

Social

• Higher quality, more nutritious food will become cheaper and more accessible for everyone.

• Half of the 1.2 million jobs in U.S. beef and dairy production and their associated industries will be lost by 2030, climbing towards 90% by 2035.

• The emerging U.S. precision fermentation industry will create at least 700,000 jobs by 2030 and up to one million jobs by 2035.

Geopolitical

• Trade relations will shift as decentralized food production becomes less constrained by geographic and climatic conditions than traditional livestock farming and agriculture. Major exporters of animal products will lose geopolitical leverage over countries that are currently dependent upon imports of these products.