April 24, 2025 • 30 mins
Global investment in clean energy hit a record $2 trillion last year, according to BloombergNEF. But developing countries see only a sliver of that funding. Private investors are wary of unfamiliar markets, currency risks and perceived instability. So how do we change that? Avinash Persaud, special adviser on climate risks to the president of the Inter-American Development Bank, joins Zero to explore how we can de-risk investments, unlock private capital, and supercharge the global clean energy transition. From carbon markets to sustainability-linked bonds, where should the focus be to make the biggest impact?
Explore other episodes from the Moving Money series:
- These ‘Beautiful’ Banks Are Being Pitched to Save Climate Finance
- How the Financial System Can Work for Climate, Not Against It
Zero is a production of Bloomberg Green. Our producer is Oscar Boyd. Special thanks to: Mythili Rao, Sommer Saadi, Mohsis Andam, Blake Maples and Siobhan Wagner. Thoughts or suggestions? Email us at zeropod@bloomberg.net. For more coverage of climate change and solutions, visit https://www.bloomberg.com/green.
See omnystudio.com/listener for privacy information.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Welcome to zero I am Aksha Tarti this week. How
to unblock the private money taps. The world is pouring
money into the clean energy transition at an unprecedented rate.
(00:23):
Last year, more than two trillion dollars was invested in
low carbon technologies, according to bloombergenf Over half of that
went into renewable energy and grid infrastructure. Another third went
into electric cars. This year, those investments might slow down
in the US, but the signs remained bullish in other
parts of the world. In developed countries, the private sector
(00:45):
is leading the charge, with hundreds of billions of dollars
each year flowing to profitable clean tech opportunities and large
scale projects. Meanwhile, only a tiny trickle of private capital
goes to developing countries, with investors scared off by unfamiliar,
volatile exchange rates, and markets that at times seem too risky.
At COP twenty nine in November last year, all countries,
(01:08):
even the US, agreed to triple the money that goes
from rich countries to poor countries, reaching three hundred billion
dollars annually by twenty thirty five. But the United Nations
experts have found that the finance gap is closer to
one point three trillion dollars each year. The upcoming COP
thirty presidency is working on a roadmap that will hopefully
(01:29):
fill that void. And while we don't have the specifics yet,
we know that most of that gap will have to
be filled by the private sector. So how do we
unlock private capital for developing nations where clean energy investments
are most needed. For this episode of Moving Money, we're
welcoming back avin Ashbasod, special advisor on climate risks to
(01:49):
the President of the Inter American Development Bank. In this episode,
he shares his ideas on how to de risk investments,
attract private capital, and accelerate the clean energy transition globally. Avinash,
welcome back to the show.
Speaker 2 (02:07):
Thank you.
Speaker 1 (02:07):
Actually, when we typically talk about climate finance, we end
up talking about rich countries versus poor countries. But there
is a third group that we don't consider often, which
is private industry. One of the things that you have
suggested could be a solution for getting private investors to
invest in developing countries is to get a currency exchange guarantee,
(02:29):
because rich investors with dollars or pound don't find it
as attractive to invest in a roupe year rand, which
is fluctuating quite a lot. But if you could provide
a funding guarantee that would ensure that that exchange rate
is fixed, then that could be a much more attractive proposition.
Now that was just an idea when we talked about
(02:49):
it last time around on this podcast. You've actually put
it into action. Tell me more about how it's working.
Speaker 3 (02:56):
So yes, indeed, we launched with the Government of Brazil,
Ministry finals and the Central Bank a FX liquidity facility.
It's just started. We're looking for investors, but the platform
is established. Now let me just make one step backwards.
I think you described this very well. We have a
trillion dollar target, maybe six hundred seven hundred billion of
(03:20):
that one trillion, so sixty or seventy percent could come
from the private sector investing in things that generates a revenue,
most of which looks like mitigation. So the farmers make money,
hydroelectric power stations make money. Now they're actually the private
sector is doing this in rich countries. Eighty one percent
of mitigation is funded by the private sector in rich countries.
(03:44):
So it's not like this is something that can't be
funded commercially and you got to blend it with public money.
It's being funded, it's commercially viable stuff, but it's not
happening in developing countries because the private investors feel that
the country risk, the currency risk, not something they're experts in,
(04:06):
is large and they don't have an ability to absorb
that risk very well, and so they stay away.
Speaker 2 (04:14):
At the moment.
Speaker 3 (04:15):
What happens is there's a bit of a market structure
problem in finance. So, as your listeners will know today,
investors don't say they will find the best investments in
the world. They've all been specialized. So you go to
a global infrastructure fund or a global energy fund or
(04:35):
global renewables fund, and that fund sells to its investors
that they're experts in this sector. They don't say, oh,
we're experts in currencies, we're experts in hedging. They say
we're experts in infrastructure, and that's why they get the money.
So then they say, all these other risks we are
going to farm out to somebody else, And so they
(04:57):
go to the banks, and the banks say currency risk
in Brazil for twenty five years for your solo farm.
The problem is that's long term and the banks are
short term. The problem is Brazil is highly pro cyclical.
When in the upcycle many emojory markets are doing well,
so are the banks. But in the downcycle, all of
(05:19):
these risks collide together. The countries have a bad time,
the banks have a bad time. So the banks know this,
and they're saying, well, you know when you need money,
when I need money, so I'm going to charge you
a lot for me providing you a guarantee on the
currency side. So we've come in, we being the Inter
(05:40):
American Develoment Bank and part of the Multilateral Development Bank
system and saying, well, we've got a triple A rating
and we need to make sure we're using the benefits
of that triple A rating. And one of the benefits
of that is in the downcycle, when people are fleeing risk,
they're flying into our instruments because they're looking for safety,
(06:02):
and we represent safety. So that's a perfect time for
us to lend to renewable energy projects the dollars they
may need.
Speaker 2 (06:11):
To pay their investors.
Speaker 3 (06:13):
So our commitment to lend dollars to good projects when
they need in the down.
Speaker 2 (06:19):
Cycle means that they don't.
Speaker 3 (06:21):
They no longer need to go to the banks and
ask for expensive hedging. They've got this pre commitment and
we are lending, you know, only in the down cycle
when people are coming to us anyway, and we are
picking the right projects, we're picking the right countries, and
so we've limited our risks. So we've launched that with
a backing of five point two billion dollars. So this
(06:44):
isn't a five million dollar pilot. This is a serious
Some serious money is behind this, and we're working with
some new investors on potentially coming in. Some of the
investments are actually not things we expected as an interesting
biodiversity type investment. So that is looking at the waste
products of sugar cane processes. Those byproducts are currently poured
(07:08):
into the rivers and the sea, creating all kinds of pollution,
and they could be turned into something more useful than
where we're working with one investor on that, and they're
a foreign investor and they are looking at the need
to not have to hedge the foreign exchange of that investment.
Speaker 1 (07:24):
And then another idea that you are currently working on
haven't yet launched, is to figure out how foreign investors
can go into developing countries, but perhaps not directly down
to the project level, but perhaps through local banks, because
you're right, right now, most of the money that is
going in the energy transition on reducing emissions is going
(07:46):
in rich countries, whereas most of the money that we
need needs to go in developing countries, and so we
need to solve that problem. How exactly is it that
going to banks will make that happen rather than going
directly to project.
Speaker 3 (08:00):
One of the things I've enjoyed about getting older is
a realization of what matters.
Speaker 2 (08:05):
Is listening rather than speaking.
Speaker 3 (08:07):
When I was thirty years younger, I used to think,
you know, the triumph of a meeting was I spoke
all the time. And now I realize you have to
listen all the time. And so I'm listening to all
these people who say, oh, I would love to invest
in emerging markets, I'd love to invest in climate, I'd
love to invest in biodiversity. But the risks are the
(08:29):
risks of going here, and the risks of will I
get the permit, will I be able to construct, will
I get all of these things. I'm listening to this
and thinking, hmm, okay, how do we come up with
ways of the risking? And then I'm looking at some
numbers and I realized, well, the banks in Latin America
own around thirty to forty billion dollars of assets today
(08:54):
on their balance sheets, they've leant thirty to forty billion
dollars in projects that are actually producing a revenue. So
the best thing for foreign investors to do is to
buy those things that are ready there. They're ready performing,
They don't need to deal with permitting risk, construction risk.
(09:17):
These are instruments already performing. Now it seems less sexy
to be buying something that's already there. There's no origination pioneer.
But so what we say is, okay, we're going to
create a fund that will buy the performing assets in
the banks today, but at a premium, on condition that
(09:40):
the banks reinvest the money that they've got from selling
their loans into the same sector. So this allows us
to do is to double the investment very quickly. And
the way to think about this is it's a little
bit like, you know, I'm an economist that I know
no actual science, so it's always a marvel when I
discover something hid like fluid mechanics. So you know, you
(10:03):
get you get the water going uphill by creating a vacuum,
you get water going uphill in a pipe by creating
a vacuum at the top. So what we'll be doing
is creating a vacuum at the top. We're moving all
of the loans, existing loans of performing renewable energy projects,
creating this vacuum at the top, allowing the same banks
(10:23):
that originated the first loan to go out looking for another.
And the reason why this is important actually that is
the banks are saying in Latin America and in India
another place where the banks have a lot of these acids,
we've done this, it's fine, but we're now running out
of runway to do any more. We're you know, we've
got concentration limits, We've got a limited amount of savings
(10:45):
there is. And so by coming in and creating that vacuum,
we're giving them the space to do more as well
as the need to do more. And so I think
that's a way in which we can go from thirty
billion dollars invested in renewables in Latin America to sixty
billion in a couple of years, and then one hundred
and twenty billion in a couple of years time, and
(11:06):
two hundred and forty billion in a few years after that.
So I think that that is a way that we
can really accelerate. You have all of these ideas about
accelerating in brand new projects, in brand new logations that
investors have never been before, and the reality is they're
too afraid to go.
Speaker 1 (11:23):
Trying to invest in performing assets is exactly what finance does.
And so why is it that you have to come
up with this idea and why isn't finance already doing it?
Speaker 3 (11:33):
We are quite right, ninety seven percent of finance is
refinancing something that it's a sad reality, and finance loves
to refinance and refinance over and over again. So I
actually think that we when we get this fund up
and running, people are going to come to it. Now,
the reality is today someone has to do this hard
(11:55):
work because these loans, you know, they're not defined as renewable.
So some of that to go round, go into these
bank ballot sheets and say here's the thing that I'm
prepared to buy and filter them out and one fund
that needs to do us At the moment, there is
no capital market in which this is happening in these countries,
(12:16):
But I'm going to take it to a capital market
in which would want that an international capital market that
I'm not going to have a portfolio of performing loans
in a wide variety of countries in renewable energies. I
believe we'd be able to package that into an instrument
that the investors in the capital markets internationally will want.
(12:38):
And if I can then sell on the loans that
I have bought, having packaged them into nice packages that
investors are looking for with the right degree of diversification
and the right degree of spread of credit, I will
then have money that could go and reinvest by buying
some new loans. And so we do think that this
(12:58):
has scalability because I think my first point of departure
in this space a few years ago with the bridge
shown initiative, was about how do we move the needle.
There's no shortage of clever, small ideas. How do we
come up with a small number of big ideas that.
Speaker 2 (13:17):
Move the needle?
Speaker 1 (13:23):
After the break, can carbon markets become the big idea
to move the needle? Or are they forever stuck in
the doldrums. By the way, if you've been enjoying this episode,
please take a moment to rate and review the show
on Apple Podcasts and Spotify. It helps other listeners find
the show. So we've talked so far about currency exchange
(13:52):
guarantees as an idea trying to get loan portfolios in
developing countries sold to international investors and freeing up care
capital in developing countries to do more green stuff. But
there are other private sector instruments that do exist, and
they exist at pretty large scale. So green bonds are
one where basically an investor buys into the bond which
(14:15):
is targeted for use in green stuff. So it could
be building a renewable energy project, it could be building
even adaptation projects sometimes are funded by green bonds, and
that's hundreds of billions of dollars on an annual basis.
Speaker 3 (14:31):
Calling it green hmmm, doesn't make it green, And I
think that to me, the impact of that market, the
force of that market, is a function of how lower
is the infrast rate on that money. So I've called
something green, I'm going to use it for green purposes
(14:55):
and as a result, I can get money in the
marketplace at fifty basis points less one hundred basis points less,
and that's important because that means I could do more stuff,
more of this stuff. Right, The reality is the green
premium sometimes awkwardly called the gremium, is a few basis points.
(15:19):
And I look at that and I think that's really
two possible reasons why. Firstly, maybe people don't trust my
definition of green, and we need better definitions of green.
In economics, we're always saying that things are caused by
lack of information transparency, and so any economists hearing this
will say, ah, you have an information problem. No one
(15:40):
already believes that it's green. The other alternative is there
isn't a market for someone to accept a lower return
for doing something green. And I fear that that is
even more important, and that certainly seems to have been
the case in the last few years when interest rates
(16:00):
shut up.
Speaker 1 (16:01):
And at the same time, there have been two things
that happen simultaneously. There's been backlash against ESG environmental social
governance on a political level in places like the US,
but outside the US, but there isn't a political backlash.
Investors have been moving away from ESG investments because they
can make money in just normal interest linked derivatives.
Speaker 2 (16:25):
Like exactly right.
Speaker 3 (16:26):
And it suggests that this issue is cyclical rather than linear,
so that there will be a time in the future,
the interest rates come down again and we should probably
issue some more more green bonds then, because, as you say,
when interest rates were very low, remember the zero interest
rate policy zup. It seems such a long time ago,
(16:48):
but actually only a few years ago. Then people began thinking, well,
I'm not getting much cash from my bond, I might
as well to get something else as well, right, And
so there was a whole explosion of social impact investing.
Speaker 2 (17:00):
And these other instruments.
Speaker 3 (17:03):
It has, as you say, really declined, and I think
that decline is because people can now get decent rates
of return and they're not bothered about getting something extra.
I think that that we're in that environment for the
next few years. I don't think going back down to zero,
but they will go back down low at some point
in the future, and we should issue those instruments again.
(17:24):
But it's not therefore a reliable or at the moment's
scalable solution.
Speaker 1 (17:29):
Why is there a lack of demand for green bones?
Isn't it clear now with these global climate goals that
we have to be investing in these places and smart
investors try and get to the place where the trends
are where future money is to be made, and the
earlier you get in, the more money you can make.
Speaker 3 (17:46):
But remember the equation here is not someone saying I'm
going to do some smart investing. I'm thinking about the
fact that in the future this thing I'm doing is
going to be valued better, It's going to be seen
as important, and therefore I will get a higher rate
of return. This equation is different. This is like saying,
accept a lower rate of return because you're doing something good,
(18:09):
and unfortunately, for whatever reason, that market does not seem
to be there. They're not people lining up to accept
a lower rate of return for doing good, and indeed,
in some places some pension fund trustees are being taken
to court saying that their job is to maximize rates
(18:30):
of return for their members.
Speaker 1 (18:31):
The other idea that has been floated by clever financial
people is that green bonds as they had been defined,
because they are restricted for that money to be spent
on green activities, are perhaps a too restrictive instrument, and
perhaps that lower interest rate is not good enough. So
they created another instrument called a sustainability linked pond, where
(18:52):
the bond's money can be used for whatever a corporation
or a country wants it to use, except the interest
rate would be tied to the goals that the company
or the country has, and now bond investors get to
essentially drive whether the country or the company actually meets
(19:13):
those goals, because if it doesn't, then the interest rate
that the bond investors get paid rises and the company
or the country has to pay more. And that instrument
took off like a rocket over the past few years.
It's about one hundred million dollar market. We did an
investigation looking at how some of those goals were not
strong enough and that kind of halted the growth of
(19:34):
the market, but it's still a pretty robust market. All
the people I've spoken to have said fundamentally, it is
an interesting instrument, but there is an information problem that
once sorted, it will rise again. What do you think
about sustainability link ponds.
Speaker 3 (19:51):
I think that, as with green bonds, there are some
people out there who are prepared to accept a or
changed interest rate based around sustainability. Government donors can be
part of that, philanthropists can be part of that, and
I believe that we need these instruments to tap that interest.
(20:15):
Is there a mass marketplace for that, I'm not sure.
I don't think I've seen evidence to say it is.
And in my current job at the Inter American Development Bank,
we're finding lots of opportunities to tap into a particular
donors interest and create a bond around that. So, for example,
(20:36):
that the current thing we're looking at is a loan
to adapt all schools in Latin America and the Caribbean
to enable them to deal with extreme heat. There's lots
of donors concerned about that. I mean, kids are not
going to be able to learn in forty degrees integrade.
It's going to have a huge impact on their future,
(20:57):
their potential. The American government and the British government, and
the French and German and the Qataris and others are
concerned enough about that to say, oh, I will back
an instrument that funds the change of these schools. And
once you've certified, because certification is important in all these
(21:17):
processes that the school has now adapted, I will pay
some interest and therefore can reduce the cost for the country.
So I think that those things. It's great that if
I can tap into a particular demand, I can do more.
But I think that is there a massive market of
(21:38):
ordinary retail investors who want to do that, I'm not sure.
I think also going to have some issues and we're
seeing this with debt swaps. Is the more bespoke they are, interesting, sophisticated,
the less liquid they are, and so that can mean
that they're not as helpful. And what I mean that
(22:00):
is that liquidity is partly about people understanding that. Right,
So I've got a marketplace and my coupon has every
single coupon in this marketplace has got some different link
based on something else, some other metric that's hard for
investors to understand, and so that reduces the potential marketplace
who are buying and selling these instruments. And if those
(22:21):
markets are small, they're going to have less liquidity and
be more costly. Yeah, And that sort of makes sense
to me from an equity perspective, which is a much
simpler market because you're looking at a company like Apple
and you're seeing, oh, they're going to produce a new iPhone,
and that's about the information you need because people love
a new iPhone, and so you're going to bet that
Apple's going to make more money and you buy the
(22:42):
stock in the price rises and you're happy. But in
these sustainability linked instruments, You're going to have to think, oh,
this Indian electric company is going to be reducing its
emissions by two hundred and fifty million tons by twenty thirty,
and that is going to be its goal. And that's
just already that is too much information for any normal
(23:06):
person to think about and deciding with it to sell
that bond, to buy another bond. Because there's a Korean
company who's got a similar target, but for a different
years and a different it's hard for investors to really
understand how they're getting in the best deal. To use
the power of the market to drive good deals and
good investments.
Speaker 1 (23:27):
There's another private sector instrument that has got a lot
of backing at COP twenty nine. Article six rules would
agree this Article six sits under the Paris Agreement. It's
supposed to be a way for countries to trade carbon credits.
So Norway could be buying carbon credits from Indonesia and
(23:47):
reducing its own emissions from its balance sheet, while Indonesia,
which has many for USTs, even now gets to make
money and perhaps put it to an energy transition investment fund.
But companies could do it to a Microsoft that wants
to reach carbon negative by twenty thirty could be buying
the same forest credits from Indonesia. We've had, at least
(24:09):
from a corporate level, a voluntary market that has existed,
and we've covered that plenty on Bloomberg Green, but also
this podcast about how there are problems with that market.
But this new un back market was thought to be
one that will bring better rules and higher integrity and
then allow investment flows to happen, the thing that we
(24:31):
want trillions of dollars going to developing countries. How do
you feel about carbon markets?
Speaker 3 (24:36):
In thinking a lot about the issue, I've come to
believe that there are really two things we need to
think about. One is the border and the other one
is the voluntary nature.
Speaker 2 (24:49):
So within the same tax border like the.
Speaker 3 (24:55):
EU, or within the same tax jurisdictional uk U, US Canada,
you can have some very substantial carbon markets which operate
with very high prices for carbon. The European market is
worth probably about eight hundred billion dollars, the US Cap
(25:18):
and Trade Canada. Those are significant markets.
Speaker 1 (25:21):
Yeah, these are called compliance carbony, compliance carbon markets, and
I think the border is important now.
Speaker 3 (25:26):
The problem is we don't have a compliance system operates
cross border, and so we created sophisticated voluntary systems. So
the reason why we have a voluntary market is because
of the border problem.
Speaker 1 (25:40):
Well, but there are compliance markets like in Canada and
the US for example, like British Columbia with California and
with Oregon and Washington across borders, and it's a compliants.
Speaker 3 (25:52):
Very limited and subject to a specific treaty. It's not
that it's impossible, but it is that it's easy for
national tax jurisdictions to basically price carbon through their tax system.
And basically it's a political problem, it's not it's not
a technical problem. So the fundamental issues is a taxpayer
in America prepared to pay for emission reduction activity in
(26:19):
Canada or vice versa, and the fact that the taxpayer,
you know, there may be a voluntary agreement to do that,
but not a taxpayer enforced agreement.
Speaker 2 (26:30):
And that's the fundamental problem with this market.
Speaker 1 (26:33):
And it's not about the integrity or the credits and
how the carbon accounting is done and whether the promises
are met or not.
Speaker 3 (26:40):
To me, the line works this way, so people think
the line works and it's a lack of integrity.
Speaker 2 (26:44):
These these these.
Speaker 3 (26:46):
Naves are out there, these bad people doing bad things,
and as a result, there's no integrity.
Speaker 2 (26:51):
And because there's no integrity, the price is low.
Speaker 3 (26:53):
No, it's because it's voluntary and no one's required to
do it. So what is this marketplace? As someone who's saying, oh,
I wouldn't mind buying some credits to offset my activity,
and it's voluntary, I'm looking around. I don't have to
do it and not be required to do it, and
so I will buy the cheapest credit I can find.
So the price of this voluntary market is very, very low.
(27:16):
It's about two percent of the price of the compliant markets.
When the price is so low, there's no money in
there to do integrity properly. Because to do integrity properly
you need monitoring, evaluation. You need to consider also what
happens when the thing was reducing emissions stops reducing emissions,
(27:37):
So you need a bunch of staff that costs some money.
And if he has no money in this credit because
it's so it's voluntary and low priced, you're not investing
in integrity in that case. This will never work. No,
it will never work as long as it's voluntary. Now
you can make something nonvoluntary in a multiple ways. So
(27:57):
it could be there is a specific acts around the carbon,
but it could be that carbon is highly priced. Any
scheme in which has got a high price is part
of what's called an approved scheme, and approved schemes count
for something and they get some kind of tax benefit again,
(28:17):
some benefit which allows people to pay up.
Speaker 1 (28:22):
So you can think of an approved scheme, say in
the UK, where there's an industry wide approved scheme that
says you have to reduce your emissions by this much
because we have our climate targets to meet. If you
don't reduce those emissions, we will create this approved scheme
that is in Indonesia that us the UK government is
working with Indonesian government to monitor and verify that those
(28:46):
carbon emissions are being reduced. You can buy credits from
that approved scheme and they will cost just about the
same as perhaps the money you will have to put
in reducing your emissions at home, and that would be workable.
Speaker 2 (28:59):
Yes.
Speaker 3 (28:59):
So the issue is enforcement across the border. How do
you enforce it across the border? How do you enforce
your taxpayers sending money abroad for activities.
Speaker 2 (29:13):
Taxpayers don't want to do that. Governments don't want to
do that. That's the problem to solve.
Speaker 3 (29:18):
And until we solve that, those markets are going to
remain low priced and integrity is going to be always low.
Speaker 1 (29:25):
Thank you having nush, Thank you, Thank you for listening
to Zero. If you've not done it already, please check
out the other episodes in the Moving Money series. If
you have, we hope you've enjoyed the series. Please write
to us with any feedback at zero port at bloomberg
dot net. Let us know if you have any more
questions about climate finance that you'd like us to answer
(29:47):
in a future episode of Moving Money. And now for
the sound of the week, that's not the sound of
a gun, but the sound of a cash counting machine
used in banks. If you like this episode, please take
a moment to rate and review the show on Apple
(30:07):
Podcasts or Spotify. Share this episode with a friend or
with someone who still believes in carbon credits. This episode
was produced by Oscar Boyd. Noomberg's head of podcast is
Sage Bowman and head of Talk is Brendan newnham. Our
theme music is composed by Wonderly Special. Thanks to might
Lee Rao Soamersadi Mosses, Andem, Blake Maples, and Shawan Wagner.
(30:30):
I'm Akshadrati back soon.
Welcome to zero I am Aksha Tarti this week. How
to unblock the private money taps. The world is pouring
money into the clean energy transition at an unprecedented rate.
(00:23):
Last year, more than two trillion dollars was invested in
low carbon technologies, according to bloombergenf Over half of that
went into renewable energy and grid infrastructure. Another third went
into electric cars. This year, those investments might slow down
in the US, but the signs remained bullish in other
parts of the world. In developed countries, the private sector
(00:45):
is leading the charge, with hundreds of billions of dollars
each year flowing to profitable clean tech opportunities and large
scale projects. Meanwhile, only a tiny trickle of private capital
goes to developing countries, with investors scared off by unfamiliar,
volatile exchange rates, and markets that at times seem too risky.
At COP twenty nine in November last year, all countries,
(01:08):
even the US, agreed to triple the money that goes
from rich countries to poor countries, reaching three hundred billion
dollars annually by twenty thirty five. But the United Nations
experts have found that the finance gap is closer to
one point three trillion dollars each year. The upcoming COP
thirty presidency is working on a roadmap that will hopefully
(01:29):
fill that void. And while we don't have the specifics yet,
we know that most of that gap will have to
be filled by the private sector. So how do we
unlock private capital for developing nations where clean energy investments
are most needed. For this episode of Moving Money, we're
welcoming back avin Ashbasod, special advisor on climate risks to
(01:49):
the President of the Inter American Development Bank. In this episode,
he shares his ideas on how to de risk investments,
attract private capital, and accelerate the clean energy transition globally. Avinash,
welcome back to the show.
Speaker 2 (02:07):
Thank you.
Speaker 1 (02:07):
Actually, when we typically talk about climate finance, we end
up talking about rich countries versus poor countries. But there
is a third group that we don't consider often, which
is private industry. One of the things that you have
suggested could be a solution for getting private investors to
invest in developing countries is to get a currency exchange guarantee,
(02:29):
because rich investors with dollars or pound don't find it
as attractive to invest in a roupe year rand, which
is fluctuating quite a lot. But if you could provide
a funding guarantee that would ensure that that exchange rate
is fixed, then that could be a much more attractive proposition.
Now that was just an idea when we talked about
(02:49):
it last time around on this podcast. You've actually put
it into action. Tell me more about how it's working.
Speaker 3 (02:56):
So yes, indeed, we launched with the Government of Brazil,
Ministry finals and the Central Bank a FX liquidity facility.
It's just started. We're looking for investors, but the platform
is established. Now let me just make one step backwards.
I think you described this very well. We have a
trillion dollar target, maybe six hundred seven hundred billion of
(03:20):
that one trillion, so sixty or seventy percent could come
from the private sector investing in things that generates a revenue,
most of which looks like mitigation. So the farmers make money,
hydroelectric power stations make money. Now they're actually the private
sector is doing this in rich countries. Eighty one percent
of mitigation is funded by the private sector in rich countries.
(03:44):
So it's not like this is something that can't be
funded commercially and you got to blend it with public money.
It's being funded, it's commercially viable stuff, but it's not
happening in developing countries because the private investors feel that
the country risk, the currency risk, not something they're experts in,
(04:06):
is large and they don't have an ability to absorb
that risk very well, and so they stay away.
Speaker 2 (04:14):
At the moment.
Speaker 3 (04:15):
What happens is there's a bit of a market structure
problem in finance. So, as your listeners will know today,
investors don't say they will find the best investments in
the world. They've all been specialized. So you go to
a global infrastructure fund or a global energy fund or
(04:35):
global renewables fund, and that fund sells to its investors
that they're experts in this sector. They don't say, oh,
we're experts in currencies, we're experts in hedging. They say
we're experts in infrastructure, and that's why they get the money.
So then they say, all these other risks we are
going to farm out to somebody else, And so they
(04:57):
go to the banks, and the banks say currency risk
in Brazil for twenty five years for your solo farm.
The problem is that's long term and the banks are
short term. The problem is Brazil is highly pro cyclical.
When in the upcycle many emojory markets are doing well,
so are the banks. But in the downcycle, all of
(05:19):
these risks collide together. The countries have a bad time,
the banks have a bad time. So the banks know this,
and they're saying, well, you know when you need money,
when I need money, so I'm going to charge you
a lot for me providing you a guarantee on the
currency side. So we've come in, we being the Inter
(05:40):
American Develoment Bank and part of the Multilateral Development Bank
system and saying, well, we've got a triple A rating
and we need to make sure we're using the benefits
of that triple A rating. And one of the benefits
of that is in the downcycle, when people are fleeing risk,
they're flying into our instruments because they're looking for safety,
(06:02):
and we represent safety. So that's a perfect time for
us to lend to renewable energy projects the dollars they
may need.
Speaker 2 (06:11):
To pay their investors.
Speaker 3 (06:13):
So our commitment to lend dollars to good projects when
they need in the down.
Speaker 2 (06:19):
Cycle means that they don't.
Speaker 3 (06:21):
They no longer need to go to the banks and
ask for expensive hedging. They've got this pre commitment and
we are lending, you know, only in the down cycle
when people are coming to us anyway, and we are
picking the right projects, we're picking the right countries, and
so we've limited our risks. So we've launched that with
a backing of five point two billion dollars. So this
(06:44):
isn't a five million dollar pilot. This is a serious
Some serious money is behind this, and we're working with
some new investors on potentially coming in. Some of the
investments are actually not things we expected as an interesting
biodiversity type investment. So that is looking at the waste
products of sugar cane processes. Those byproducts are currently poured
(07:08):
into the rivers and the sea, creating all kinds of pollution,
and they could be turned into something more useful than
where we're working with one investor on that, and they're
a foreign investor and they are looking at the need
to not have to hedge the foreign exchange of that investment.
Speaker 1 (07:24):
And then another idea that you are currently working on
haven't yet launched, is to figure out how foreign investors
can go into developing countries, but perhaps not directly down
to the project level, but perhaps through local banks, because
you're right, right now, most of the money that is
going in the energy transition on reducing emissions is going
(07:46):
in rich countries, whereas most of the money that we
need needs to go in developing countries, and so we
need to solve that problem. How exactly is it that
going to banks will make that happen rather than going
directly to project.
Speaker 3 (08:00):
One of the things I've enjoyed about getting older is
a realization of what matters.
Speaker 2 (08:05):
Is listening rather than speaking.
Speaker 3 (08:07):
When I was thirty years younger, I used to think,
you know, the triumph of a meeting was I spoke
all the time. And now I realize you have to
listen all the time. And so I'm listening to all
these people who say, oh, I would love to invest
in emerging markets, I'd love to invest in climate, I'd
love to invest in biodiversity. But the risks are the
(08:29):
risks of going here, and the risks of will I
get the permit, will I be able to construct, will
I get all of these things. I'm listening to this
and thinking, hmm, okay, how do we come up with
ways of the risking? And then I'm looking at some
numbers and I realized, well, the banks in Latin America
own around thirty to forty billion dollars of assets today
(08:54):
on their balance sheets, they've leant thirty to forty billion
dollars in projects that are actually producing a revenue. So
the best thing for foreign investors to do is to
buy those things that are ready there. They're ready performing,
They don't need to deal with permitting risk, construction risk.
(09:17):
These are instruments already performing. Now it seems less sexy
to be buying something that's already there. There's no origination pioneer.
But so what we say is, okay, we're going to
create a fund that will buy the performing assets in
the banks today, but at a premium, on condition that
(09:40):
the banks reinvest the money that they've got from selling
their loans into the same sector. So this allows us
to do is to double the investment very quickly. And
the way to think about this is it's a little
bit like, you know, I'm an economist that I know
no actual science, so it's always a marvel when I
discover something hid like fluid mechanics. So you know, you
(10:03):
get you get the water going uphill by creating a vacuum,
you get water going uphill in a pipe by creating
a vacuum at the top. So what we'll be doing
is creating a vacuum at the top. We're moving all
of the loans, existing loans of performing renewable energy projects,
creating this vacuum at the top, allowing the same banks
(10:23):
that originated the first loan to go out looking for another.
And the reason why this is important actually that is
the banks are saying in Latin America and in India
another place where the banks have a lot of these acids,
we've done this, it's fine, but we're now running out
of runway to do any more. We're you know, we've
got concentration limits, We've got a limited amount of savings
(10:45):
there is. And so by coming in and creating that vacuum,
we're giving them the space to do more as well
as the need to do more. And so I think
that's a way in which we can go from thirty
billion dollars invested in renewables in Latin America to sixty
billion in a couple of years, and then one hundred
and twenty billion in a couple of years time, and
(11:06):
two hundred and forty billion in a few years after that.
So I think that that is a way that we
can really accelerate. You have all of these ideas about
accelerating in brand new projects, in brand new logations that
investors have never been before, and the reality is they're
too afraid to go.
Speaker 1 (11:23):
Trying to invest in performing assets is exactly what finance does.
And so why is it that you have to come
up with this idea and why isn't finance already doing it?
Speaker 3 (11:33):
We are quite right, ninety seven percent of finance is
refinancing something that it's a sad reality, and finance loves
to refinance and refinance over and over again. So I
actually think that we when we get this fund up
and running, people are going to come to it. Now,
the reality is today someone has to do this hard
(11:55):
work because these loans, you know, they're not defined as renewable.
So some of that to go round, go into these
bank ballot sheets and say here's the thing that I'm
prepared to buy and filter them out and one fund
that needs to do us At the moment, there is
no capital market in which this is happening in these countries,
(12:16):
But I'm going to take it to a capital market
in which would want that an international capital market that
I'm not going to have a portfolio of performing loans
in a wide variety of countries in renewable energies. I
believe we'd be able to package that into an instrument
that the investors in the capital markets internationally will want.
(12:38):
And if I can then sell on the loans that
I have bought, having packaged them into nice packages that
investors are looking for with the right degree of diversification
and the right degree of spread of credit, I will
then have money that could go and reinvest by buying
some new loans. And so we do think that this
(12:58):
has scalability because I think my first point of departure
in this space a few years ago with the bridge
shown initiative, was about how do we move the needle.
There's no shortage of clever, small ideas. How do we
come up with a small number of big ideas that.
Speaker 2 (13:17):
Move the needle?
Speaker 1 (13:23):
After the break, can carbon markets become the big idea
to move the needle? Or are they forever stuck in
the doldrums. By the way, if you've been enjoying this episode,
please take a moment to rate and review the show
on Apple Podcasts and Spotify. It helps other listeners find
the show. So we've talked so far about currency exchange
(13:52):
guarantees as an idea trying to get loan portfolios in
developing countries sold to international investors and freeing up care
capital in developing countries to do more green stuff. But
there are other private sector instruments that do exist, and
they exist at pretty large scale. So green bonds are
one where basically an investor buys into the bond which
(14:15):
is targeted for use in green stuff. So it could
be building a renewable energy project, it could be building
even adaptation projects sometimes are funded by green bonds, and
that's hundreds of billions of dollars on an annual basis.
Speaker 3 (14:31):
Calling it green hmmm, doesn't make it green, And I
think that to me, the impact of that market, the
force of that market, is a function of how lower
is the infrast rate on that money. So I've called
something green, I'm going to use it for green purposes
(14:55):
and as a result, I can get money in the
marketplace at fifty basis points less one hundred basis points less,
and that's important because that means I could do more stuff,
more of this stuff. Right, The reality is the green
premium sometimes awkwardly called the gremium, is a few basis points.
(15:19):
And I look at that and I think that's really
two possible reasons why. Firstly, maybe people don't trust my
definition of green, and we need better definitions of green.
In economics, we're always saying that things are caused by
lack of information transparency, and so any economists hearing this
will say, ah, you have an information problem. No one
(15:40):
already believes that it's green. The other alternative is there
isn't a market for someone to accept a lower return
for doing something green. And I fear that that is
even more important, and that certainly seems to have been
the case in the last few years when interest rates
(16:00):
shut up.
Speaker 1 (16:01):
And at the same time, there have been two things
that happen simultaneously. There's been backlash against ESG environmental social
governance on a political level in places like the US,
but outside the US, but there isn't a political backlash.
Investors have been moving away from ESG investments because they
can make money in just normal interest linked derivatives.
Speaker 2 (16:25):
Like exactly right.
Speaker 3 (16:26):
And it suggests that this issue is cyclical rather than linear,
so that there will be a time in the future,
the interest rates come down again and we should probably
issue some more more green bonds then, because, as you say,
when interest rates were very low, remember the zero interest
rate policy zup. It seems such a long time ago,
(16:48):
but actually only a few years ago. Then people began thinking, well,
I'm not getting much cash from my bond, I might
as well to get something else as well, right, And
so there was a whole explosion of social impact investing.
Speaker 2 (17:00):
And these other instruments.
Speaker 3 (17:03):
It has, as you say, really declined, and I think
that decline is because people can now get decent rates
of return and they're not bothered about getting something extra.
I think that that we're in that environment for the
next few years. I don't think going back down to zero,
but they will go back down low at some point
in the future, and we should issue those instruments again.
(17:24):
But it's not therefore a reliable or at the moment's
scalable solution.
Speaker 1 (17:29):
Why is there a lack of demand for green bones?
Isn't it clear now with these global climate goals that
we have to be investing in these places and smart
investors try and get to the place where the trends
are where future money is to be made, and the
earlier you get in, the more money you can make.
Speaker 3 (17:46):
But remember the equation here is not someone saying I'm
going to do some smart investing. I'm thinking about the
fact that in the future this thing I'm doing is
going to be valued better, It's going to be seen
as important, and therefore I will get a higher rate
of return. This equation is different. This is like saying,
accept a lower rate of return because you're doing something good,
(18:09):
and unfortunately, for whatever reason, that market does not seem
to be there. They're not people lining up to accept
a lower rate of return for doing good, and indeed,
in some places some pension fund trustees are being taken
to court saying that their job is to maximize rates
(18:30):
of return for their members.
Speaker 1 (18:31):
The other idea that has been floated by clever financial
people is that green bonds as they had been defined,
because they are restricted for that money to be spent
on green activities, are perhaps a too restrictive instrument, and
perhaps that lower interest rate is not good enough. So
they created another instrument called a sustainability linked pond, where
(18:52):
the bond's money can be used for whatever a corporation
or a country wants it to use, except the interest
rate would be tied to the goals that the company
or the country has, and now bond investors get to
essentially drive whether the country or the company actually meets
(19:13):
those goals, because if it doesn't, then the interest rate
that the bond investors get paid rises and the company
or the country has to pay more. And that instrument
took off like a rocket over the past few years.
It's about one hundred million dollar market. We did an
investigation looking at how some of those goals were not
strong enough and that kind of halted the growth of
(19:34):
the market, but it's still a pretty robust market. All
the people I've spoken to have said fundamentally, it is
an interesting instrument, but there is an information problem that
once sorted, it will rise again. What do you think
about sustainability link ponds.
Speaker 3 (19:51):
I think that, as with green bonds, there are some
people out there who are prepared to accept a or
changed interest rate based around sustainability. Government donors can be
part of that, philanthropists can be part of that, and
I believe that we need these instruments to tap that interest.
(20:15):
Is there a mass marketplace for that, I'm not sure.
I don't think I've seen evidence to say it is.
And in my current job at the Inter American Development Bank,
we're finding lots of opportunities to tap into a particular
donors interest and create a bond around that. So, for example,
(20:36):
that the current thing we're looking at is a loan
to adapt all schools in Latin America and the Caribbean
to enable them to deal with extreme heat. There's lots
of donors concerned about that. I mean, kids are not
going to be able to learn in forty degrees integrade.
It's going to have a huge impact on their future,
(20:57):
their potential. The American government and the British government, and
the French and German and the Qataris and others are
concerned enough about that to say, oh, I will back
an instrument that funds the change of these schools. And
once you've certified, because certification is important in all these
(21:17):
processes that the school has now adapted, I will pay
some interest and therefore can reduce the cost for the country.
So I think that those things. It's great that if
I can tap into a particular demand, I can do more.
But I think that is there a massive market of
(21:38):
ordinary retail investors who want to do that, I'm not sure.
I think also going to have some issues and we're
seeing this with debt swaps. Is the more bespoke they are, interesting, sophisticated,
the less liquid they are, and so that can mean
that they're not as helpful. And what I mean that
(22:00):
is that liquidity is partly about people understanding that. Right,
So I've got a marketplace and my coupon has every
single coupon in this marketplace has got some different link
based on something else, some other metric that's hard for
investors to understand, and so that reduces the potential marketplace
who are buying and selling these instruments. And if those
(22:21):
markets are small, they're going to have less liquidity and
be more costly. Yeah, And that sort of makes sense
to me from an equity perspective, which is a much
simpler market because you're looking at a company like Apple
and you're seeing, oh, they're going to produce a new iPhone,
and that's about the information you need because people love
a new iPhone, and so you're going to bet that
Apple's going to make more money and you buy the
(22:42):
stock in the price rises and you're happy. But in
these sustainability linked instruments, You're going to have to think, oh,
this Indian electric company is going to be reducing its
emissions by two hundred and fifty million tons by twenty thirty,
and that is going to be its goal. And that's
just already that is too much information for any normal
(23:06):
person to think about and deciding with it to sell
that bond, to buy another bond. Because there's a Korean
company who's got a similar target, but for a different
years and a different it's hard for investors to really
understand how they're getting in the best deal. To use
the power of the market to drive good deals and
good investments.
Speaker 1 (23:27):
There's another private sector instrument that has got a lot
of backing at COP twenty nine. Article six rules would
agree this Article six sits under the Paris Agreement. It's
supposed to be a way for countries to trade carbon credits.
So Norway could be buying carbon credits from Indonesia and
(23:47):
reducing its own emissions from its balance sheet, while Indonesia,
which has many for USTs, even now gets to make
money and perhaps put it to an energy transition investment fund.
But companies could do it to a Microsoft that wants
to reach carbon negative by twenty thirty could be buying
the same forest credits from Indonesia. We've had, at least
(24:09):
from a corporate level, a voluntary market that has existed,
and we've covered that plenty on Bloomberg Green, but also
this podcast about how there are problems with that market.
But this new un back market was thought to be
one that will bring better rules and higher integrity and
then allow investment flows to happen, the thing that we
(24:31):
want trillions of dollars going to developing countries. How do
you feel about carbon markets?
Speaker 3 (24:36):
In thinking a lot about the issue, I've come to
believe that there are really two things we need to
think about. One is the border and the other one
is the voluntary nature.
Speaker 2 (24:49):
So within the same tax border like the.
Speaker 3 (24:55):
EU, or within the same tax jurisdictional uk U, US Canada,
you can have some very substantial carbon markets which operate
with very high prices for carbon. The European market is
worth probably about eight hundred billion dollars, the US Cap
(25:18):
and Trade Canada. Those are significant markets.
Speaker 1 (25:21):
Yeah, these are called compliance carbony, compliance carbon markets, and
I think the border is important now.
Speaker 3 (25:26):
The problem is we don't have a compliance system operates
cross border, and so we created sophisticated voluntary systems. So
the reason why we have a voluntary market is because
of the border problem.
Speaker 1 (25:40):
Well, but there are compliance markets like in Canada and
the US for example, like British Columbia with California and
with Oregon and Washington across borders, and it's a compliants.
Speaker 3 (25:52):
Very limited and subject to a specific treaty. It's not
that it's impossible, but it is that it's easy for
national tax jurisdictions to basically price carbon through their tax system.
And basically it's a political problem, it's not it's not
a technical problem. So the fundamental issues is a taxpayer
in America prepared to pay for emission reduction activity in
(26:19):
Canada or vice versa, and the fact that the taxpayer,
you know, there may be a voluntary agreement to do that,
but not a taxpayer enforced agreement.
Speaker 2 (26:30):
And that's the fundamental problem with this market.
Speaker 1 (26:33):
And it's not about the integrity or the credits and
how the carbon accounting is done and whether the promises
are met or not.
Speaker 3 (26:40):
To me, the line works this way, so people think
the line works and it's a lack of integrity.
Speaker 2 (26:44):
These these these.
Speaker 3 (26:46):
Naves are out there, these bad people doing bad things,
and as a result, there's no integrity.
Speaker 2 (26:51):
And because there's no integrity, the price is low.
Speaker 3 (26:53):
No, it's because it's voluntary and no one's required to
do it. So what is this marketplace? As someone who's saying, oh,
I wouldn't mind buying some credits to offset my activity,
and it's voluntary, I'm looking around. I don't have to
do it and not be required to do it, and
so I will buy the cheapest credit I can find.
So the price of this voluntary market is very, very low.
(27:16):
It's about two percent of the price of the compliant markets.
When the price is so low, there's no money in
there to do integrity properly. Because to do integrity properly
you need monitoring, evaluation. You need to consider also what
happens when the thing was reducing emissions stops reducing emissions,
(27:37):
So you need a bunch of staff that costs some money.
And if he has no money in this credit because
it's so it's voluntary and low priced, you're not investing
in integrity in that case. This will never work. No,
it will never work as long as it's voluntary. Now
you can make something nonvoluntary in a multiple ways. So
(27:57):
it could be there is a specific acts around the carbon,
but it could be that carbon is highly priced. Any
scheme in which has got a high price is part
of what's called an approved scheme, and approved schemes count
for something and they get some kind of tax benefit again,
(28:17):
some benefit which allows people to pay up.
Speaker 1 (28:22):
So you can think of an approved scheme, say in
the UK, where there's an industry wide approved scheme that
says you have to reduce your emissions by this much
because we have our climate targets to meet. If you
don't reduce those emissions, we will create this approved scheme
that is in Indonesia that us the UK government is
working with Indonesian government to monitor and verify that those
(28:46):
carbon emissions are being reduced. You can buy credits from
that approved scheme and they will cost just about the
same as perhaps the money you will have to put
in reducing your emissions at home, and that would be workable.
Speaker 2 (28:59):
Yes.
Speaker 3 (28:59):
So the issue is enforcement across the border. How do
you enforce it across the border? How do you enforce
your taxpayers sending money abroad for activities.
Speaker 2 (29:13):
Taxpayers don't want to do that. Governments don't want to
do that. That's the problem to solve.
Speaker 3 (29:18):
And until we solve that, those markets are going to
remain low priced and integrity is going to be always low.
Speaker 1 (29:25):
Thank you having nush, Thank you, Thank you for listening
to Zero. If you've not done it already, please check
out the other episodes in the Moving Money series. If
you have, we hope you've enjoyed the series. Please write
to us with any feedback at zero port at bloomberg
dot net. Let us know if you have any more
questions about climate finance that you'd like us to answer
(29:47):
in a future episode of Moving Money. And now for
the sound of the week, that's not the sound of
a gun, but the sound of a cash counting machine
used in banks. If you like this episode, please take
a moment to rate and review the show on Apple
(30:07):
Podcasts or Spotify. Share this episode with a friend or
with someone who still believes in carbon credits. This episode
was produced by Oscar Boyd. Noomberg's head of podcast is
Sage Bowman and head of Talk is Brendan newnham. Our
theme music is composed by Wonderly Special. Thanks to might
Lee Rao Soamersadi Mosses, Andem, Blake Maples, and Shawan Wagner.
(30:30):
I'm Akshadrati back soon.
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