By Virginia Furness, Karin Strohecker and Simon Jessop
BAKU (Reuters) - As officials from around the world strive this week to reach a deal on funding for poorer countries to tackle climate change, investment manager Rob Drijkoningen is the sort of person they're hoping will help get them there.
Drijkoningen is head of emerging market debt at U.S. asset manager Neuberger Berman, which holds $27 billion in sovereign and corporate debt from developing countries. He should be a natural partner for multilateral development banks (MDBs) looking to find private sector investors for projects to slow climate change or cope with its effects.
Boosting private sector investment is, for rich nations, a crucial part of clinching a deal at the COP29 climate talks in Azerbaijan this week on a global commitment for annual funding to fight climate change - dubbed the New Collective Quantified Goal.
Development banks committed to increase their lending to poorer countries to $120 billion a year by 2030. They also pledged to bring in an additional $65 billion annually in private sector cash to those nations.
But Drijkoningen, after speaking with the European Investment Bank (EIB) and European Bank for Reconstruction and Development (EBRD) about potential deals this year, decided there were too many hurdles to investment.
Development banks, he said, are not willing to open their books and share enough information about investments' risks. Nor do they allow private investors to pick and choose the projects that interest them. For asset managers already facing limited appetite from clients for long-term infrastructure assets in developing nations, those obstacles make investment unappealing.
"We would need to get a true sense of a level playing field: of getting equal access to information so that we can appropriately assess the merits," Drijkoningen said. "That's a cultural issue that I doubt we have come close to changing."
Cash-strapped Western governments are pinning their hopes on a massive increase in private sector investment to reach the $2 trillion-plus needed annually to help poorer countries move to greener energy and protect against the impacts of extreme weather.
After a resounding win by climate denier Donald Trump in this month's U.S. presidential election, worries are rising that the financing gap will steadily widen if Washington - and its dollars - pulls out of the global climate fight.
An ongoing, two-year reform of multilateral institutions like the World Bank - aimed at overhauling the way they lend to make more use of their money - helped drive a 41% increase in the mobilisation of private sector funds to low income countries in 2022 across 27 development banks, a report this year showed.
The head of the EBRD, Odile Renaud-Basso, told Reuters the bank was working hard to provide more information to the private sector, but there were some limits to what could be made public.
But a Reuters analysis of lending data and interviews with two dozen development banks, climate negotiators, private sector investors and non-profits showed that change at multilateral lenders needs to accelerate significantly if the private sector is to fulfil its hoped-for role.
The analysis of total aggregate lending last year provided by 14 of the world's top development banks showed that for each dollar invested across all markets just 88 cents of private money was sucked in.
And that fell to just 0.44 cents of private money to poorer countries. Here, the banks made climate finance commitments of $75 billion and mobilised $33 billion of private investment.
A report by a group of independent experts for the G20 group of industrialised nations last year on how to strengthen multilateral development banks said the target that needed to be hit was $1.5 to $2 for every $1 of lending.
SLOW PROGRESS
Governments - which bankroll development banks - are pushing them to go reform faster. That should result in a more ambitious funding target in Baku - and help countries to skirt a politically contentious discussion on increasing the banks' capital.
The EBRD now delivers $3.58 of private money for every $1 it invests across its portfolio, up from $2 dollars three years ago. IDB Invest - the private sector arm of the Inter-American Development Bank (IDB) - has also embarked on an overhaul of its business, helping to increase IDB Group's mobilised private capital fivefold from 2019 to 2023 to $4.4 billion.
There are various ways for multilateral lenders to pull in private sector cash. The most established one is parceling up parts of their own loans and selling them to private investors, freeing up money to lend again. These so-called B-loans have been around for more than six decades.
But Nazmeera Moola, chief sustainability officer at asset management firm Ninety One, said that a raft of issues - including long lead times and returns that were sometimes unattractive - had diminished the appeal of these assets.
Meanwhile, many large institutional investors, such as pension funds or insurance companies, think of direct investing through corporate or project finance lending in emerging markets as "scary stuff", she added.
Harmen van Wijnen, chair of the board of Dutch pension fund ABP, which has invested 1 billion euros in B-loan funds managed by blended finance specialist ILX, said that taking the leap into unfamiliar risks - like project finance in emerging markets - would need to be mitigated by guarantees from multilateral lenders.
Some MDBs are already providing guarantees or structures that help reduce the risks, for example by hedging the risk of a collapse in the local currency.
At COP29, some banks have flagged new initiatives including a move by the United States to guarantee $1 billion of existing loans to governments by the Asian Development Bank so it can lend a further $4.5 billion to climate-friendly projects.
The EBRD's Renaud-Basso told Reuters it was also looking to guarantee sovereign lending to free up more money, without providing further details.
Guarantees aside, the reluctance of some development banks to play the junior partner in project lending, amid pressure to land big deals and maximise their own returns, was leaving them in competition with private sector investors, according to half a dozen sources in the industry.
Gianpiero Nacci, EBRD Director for Sustainable Business and Infrastructure, said that while MDBs were starting to change their culture and structures to make them more focused on attracting private sector investment, it was a "work in progress".
"We're increasingly incentivising our banking teams to focus on mobilization," he said, noting the EBRD is introducing internal targets beyond its own direct investment.
Given the scale of the climate challenge, some development experts are choosing to go it alone, among them Hubert Danso, chief executive of Africa Investor, a platform that connects private investors with green infrastructure projects on the continent.
"We have an MDB market failure which is incapable of crowding in the private capital required," he said.
CULTURAL HURDLES
In an August document, the Organisation for Economic Cooperation and Development (OECD), which tracks the climate finance efforts of multilateral institutions, found lack of data was a "major obstacle" to raising private investment to the required levels.
The previously unpublished report, reviewed by Reuters, said a shortfall in transparent data was leading to private investors mispricing investment risk.
"For efficiency of markets, data is critical," said Haje Schutte, a deputy director at the OECD. "There is an ethical and fairness dimension to that: these public sector institutions have a role to beyond their institutional self-interests."
Some development banks are worried about sharing their proprietary information and require the OECD to sign non-disclosure agreements, Schutte said.
Alert to the criticism and following an investor consultation, MDBs have increased the credit risk data shared in a database called GEMs, originally designed to be used for information exchange between the banks themselves.
Since March, some data on recovery rates for public as well as private lending has been made available and, in October, more historic data was offered. But some investors are demanding more granular risk information.
Erich Cripton, a director at Canadian pension fund CDPQ Global, which has over $300 billion in assets under management, said investors have been pushing for MDBS to publish more data in the GEMS database.
He said the released data reflected the MDBs preferred creditor status meaning that for a private investor, the risk was higher.
For Nadia Nikolova, lead portfolio manager at Allianz (ETR:ALVG) Global Investor, who has raised over $3.5 billion in development finance and impact credit strategies, the lack of information hampers her ability to raise and invest capital in developing economies.
"Institutional investors have a fiduciary duty to invest money responsibly," she said. "If I don't have that information, I can't price the risk."
Abdullahi Khalif, Somalia's chief climate negotiator, acknowledged on the sidelines of the COP29 talks that investing there was riskier than in industrialized economies, but added those who did so had opportunities for good returns in areas including renewable energy and irrigation.
"The only private sector that can come is a private sector that is really looking forward to taking the risk."