Innovation in Climate Finance: World’s Largest Green Bond Fund for Emerging Markets

Climate change efforts have progressively evolved from top-down policy initiatives to bottom-up civil society participation and private sector implementation. Public and private institutional investors have both the capacity and appetite to deploy massive amounts of capital to finance the green transition, but are hindered by a lack of scalable strategies and investment vehicles which meet those objectives.

One of the first meetings to address this core challenge took place at The Rockefeller Foundation Bellagio Center in April 2011. Organized by Columbia University and the Sovereign Wealth Fund Research Initiative, a key outcome of this Bellagio meeting was the decision by Mats Andersson, the then CEO of the Swedish Pension fund AP4, to take the historic step of decarbonizing the fund’s equity portfolio. The meeting also seeded the creation of the Portfolio Decarbonization Coalition, co-founded by Amundi, to align Institutional Investment portfolios with a low carbon economy.

Last month marked another important step in driving institutional investment towards the green transition with the signing of a new partnership between the International Finance Corporation (IFC) and Amundi to create the world’s largest green-bond fund dedicated to emerging markets.  Signed by IFC CEO, Philippe Le Houérou, and Amundi Chairman, Xavier Musca, the fund combines deep expertise in both asset management and private sector development in emerging markets to help developing countries achieve long-term sustainable growth.

Fighting against climate change requires financial innovation in order to help properly channel capital flows towards the low carbon economy.

The $2 billion Green Cornerstone Bond Fund will buy green bonds issued by banks in Africa, Asia, the Middle East, Latin America, Eastern Europe, and Central Asia.  It is designed to simultaneously stimulate demand (through the fund) and supply (through targeted technical assistance to financial institutions) of green finance to “complete the circuit” and propel climate finance in emerging markets. The coordinated development of the supply and demand forces for climate investment creates an ecosystem in which markets can be nurtured and sustainably developed.  In the words of Lord Stern, IG Patel Professor of Economics and Government at LSE, the fund “promises to be a game changer with a unique product that combines attractiveness for investors and impact in emerging markets. Fighting against climate change requires financial innovation in order to help properly channel capital flows towards the low carbon economy.”

The fund will address the needs of four key stakeholders:

• For developing countries, it will facilitate the implementation of nationally determined contributions (NDCs) arising from the Paris Agreement. By channeling capital from developed to developing countries, the strategy contributes to the critical contributions of the emerging markets to global climate finance objectives, and helps investors efficiently direct capital toward climate finance. Over time, this partnership will look to add other green bond fund strategies addressing sustainable growth in the developing world to create new markets and deepen existing ones.

• For investors seeking adequate returns in the current low yield environment, the fund secures higher bond yields from a diversified range of emerging markets with the added benefit of the first-loss protection offered by IFC, while ultimately achieving climate alignment through green bond investments.

• For IFC, partnering with an asset manager enables them to leverage their core skills as a catalyst for the development of the private sector across the world, with the positive benefit of financing green assets, thereby also supporting Sustainable Development Goals (SDGs). The project also underscores IFC’s commitment to sustainable finance through its own investment in the fund and the deployment of a technical assistance.

• For Amundi, the development of this innovative emerging market green bond fund is a new green finance initiative that has set Amundi as a frontrunner in this field. Following the cutting edge development of low-carbon indices that emerged from the 2011 Bellagio meeting, Amundi created a unique joint-venture with EDF, a leading European electricity provider, to finance renewable energy and energy efficient real assets. Co-founder of the Portfolio Decarbonization Coalition, Amundi has been actively participating in green finance academic research in an ongoing effort to contribute to the public good. The new initiative expands Amundi’s climate finance investment offerings for institutional clients across the three main assets classes of equities, illiquid assets, and fixed income.

Christiana Figueres, Former Executive Secretary of UNFCCC noted that “The IFC-Amundi partnership is a prodigious example of how financial innovation can play a key role to reach this important goal.”  It is also an illustration of a transformative continuum from a first gathering of doers at The Rockefeller Foundation inspired to tackle the challenge of climate change to the development of a market changing innovation to unlock the billions we need to fuel a low carbon economy globally.