When it comes to climate change, poor countries face a double whammy. In addition to experiencing the worst effects of global warming, risk-averse investors are struggling to access the huge amounts of capital needed to solve climate change. A new company wants to change that.
The UK-based Green Guarantee Company (GGC), launched on Friday, will significantly reduce risk for private investors seeking to finance renewable energy and other climate change projects in developing countries. We raised an initial $100 million for this purpose. The company's early investors include the governments of Nigeria, Norway, the United Kingdom and the United States, as well as the United Nations-backed Green Climate Fund, which was established to help developing countries meet their climate goals.
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“There are some very good companies in emerging markets that are just locked into sovereign ratings,” said Lasitha Perera, the firm's co-founder. Sovereign credit ratings measure a government's ability to repay its debts, but they also influence the credit ratings of companies operating within the country. GGC can step in to provide 'investment grade' guarantees to funders, allowing these companies to access more affordable long-term financing from private investors, it said. he explained.
Perera, who previously served as chief executive of GuarantCo, a local currency guarantor operating in Asian and African markets, made his case by comparing two major renewable energy companies. His U.S.-based NextEra Energy Inc. pays him 5.5% interest over 30 years, allowing him to secure bonds that are essentially loans from investors. According to Fitch, the company has an 'A-' rating. India-based Renew Energy Global, by contrast, can borrow at 4.5%, but the initial amount must be repaid in five years. The company's rating is BB-, lower than NextEra.
In principle, if GGC is able to guarantee payments on ReNew's bonds and loans, it will lead to an improvement in ReNew's credit rating, leading to an extension of the loan term and a reduction in interest rates. Perera said the company already has a “very large pipeline of deals,” but none have been completed yet as it only launched last week.
It is a well-known problem that certain climate solutions companies do not always have access to the capital they need, simply because of the country or market in which they are based. Back in 2021, BlackRock CEO Larry Fink announced that he would be effectively asking multilateral development banks, such as the World Bank and the International Monetary Fund, to act as insurers or “first loss” guarantors for these companies. We proposed a solution to make it work. This would make these companies and their climate adaptation and mitigation projects much less risky for private investors.
But so far, multilateral banks have not done this. And, as Perera points out, there is no time to wait. “So climate change is happening today. We need to start moving today,” he said. bloomberg green. “So our answer is: Let’s build this.”
The company's launch has been noted by the international development community. Speaking in Washington, D.C., last week, USAID Secretary Samantha Power praised the new company funded by her agency and pledged to invest the money with private sector partners to cover a full range of issues. He said it was a “unique company.'' loss.
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“Providing these investment-grade guarantees will significantly increase the number of investors who can support these projects, so the Green Guarantee Company will continue to invest in new investments in least developed countries to combat climate change. It is expected to facilitate $1 billion in investment,” she said.
To provide payment guarantees, GGC charges borrowers a small fee. Perera also believes that private investors often overestimate the risk that developing country companies will default on payments, or worse, default, so GGC We believe that we can earn a reasonable profit through these fees while contributing to the improvement of loan conditions. companies.
Because GGC is focused on commercial interests, it “wants to support borrowers that are rated investment grade in local capital markets but below investment grade in global capital markets,” Perera said. he said, adding that each transaction is initially evaluated according to its value. Potential climate impacts.
Mr Perera hopes to not rely solely on government funding to deliver the guarantee, if it can truly prove to be a win-win. Instead, his plan is to guarantee $5 billion worth of projects by 2035 and allow GGC to list on the London Stock Exchange.
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