Interview with IFC's Andre Laude, Chief Investment Officer at TBLI CONFERENCE™ NORDIC 2015

Monday, 13 July 2015

Tagged under: nordic2015 impact investing climate change

Guest Blog Post written by Jonelle Maltay during TBLI CONFERENCE™ NORDIC 2015. Views and opinions are that of the writer and are not the official views of TBLI CONFERENCE™. 

Andre Laude is Chief Investment Officer in the Western Europe Department of the IFC, which caters specifically to West European investors or sponsors. They handle the relationship between corporate and large financial institutions, as well as Western European DFIs and sponsors with a Cleantech focus that want to scale investments in emerging markets.

What have been the biggest changes at the IFC since you started until now in terms of how the organization has expanded its scope and how that has defined your role?

Asserting relationship management and how we view partners in relation to business generation. It’s not just moving from one transaction to the next, it’s being the advocate of clients over a long-term perspective by choosing partners more strategically to envision a long-term framework of objectives. These partners know today, tomorrow and far along into the future there is an advocate (the IFC) who will always have their best interests in mind and share common objectives. Especially in regards to climate and social governance, which have a lot more responsiveness from sponsors nowadays as awareness of ESG factors are becoming more prevalent.

The climate agenda is one of the key focuses at the moment for many sustainability initiatives.  What suggestions do you have for equalizing the disproportionate split between mitigation and adaptation finance?

Technologies need to be developed to help society adapt to the climate challenge. We have to use a magnifying lens on our current practices whilst also looking toward the future to find the right technologies for helping societies and populations that are more vulnerable to climate risks to ride the proverbial tide, especially island nations that are facing climate disruptions the most. We need to think of climate adaptation in a different way by working with innovative business ideas, better methods of production and higher risk equations for things that have huge potential to bring benefits going forward. A lot of this is being conducted as research from our advisory services and within this spectrum there are some ideas that can evolve into investment projects, but some are more in the area of venture capital activity.

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Speaking of business risks, and considering that climate change may still be a somewhat abstract concept for some private investors who are hesitant to get involved due to the associated risks, how have you been assuring them to get onboard with climate finance?

Talking about Wind in Denmark is a good example of a business risk that has been fully tamed.

Danish institutional investors, similar to Dutch institutional investors due to the nature of the land’s topography, the proximity of the seas, and the extreme wind currents, understand that it is on the books of established players.

You have to set up the mechanisms to entice local financial institutions to invest by first starting a strong dialogue with the authorities of the state to foster an investment climate that is conducive to investing in something like the wind sector for instance.

Some of the instruments currently available to take into account the specificity of certain climate investments like renewables, take more risk than what is actually being asked from private investors. For example in regards to wind, there was an investment instrument devised which not only comprises of subordinated debt (which is more junior to commercial or senior debt mobilization) but also deferrable subordinated debt, for which the debt payment service can be deferred as per the cash flows or the time it takes the project to generate the necessary cash flows to service the second tier debt. So there are a number of instruments that can be used through working with policy makers as well as taking the higher risk tranche of a financing instrument.

The Bank itself though must still manage their balance sheet well in order to be financially sustainable and to keep their AAA rating, plus a sufficient flow of finance, as well as low cost borrowing. They can access blended finance, which are concessional funding sources from donor governments (for example the Nordic countries), which have been very active on the climate front. Those funds allow for de-risking of some of the elements of the financing within the climate investment spectrum, by which they are even more subordinated to the IFC. But it is just a risk subsidy, not a subsidy in terms of pricing but rather one which allows the creation of funding structures that are tiered, and makes it palatable for the IFC to invest as well as other lower risk prone investors.

Right now with private investors, the green bond market is expanding rapidly, but mostly through use of proceeds bonds. You previously mentioned your balance sheet and the need to be financially sustainable, but many of the bond issuances are remaining on the multilateral finance institution’s balance sheets so how can you move over to project bonds or asset backed bonds so that private investors can share more of the risk associated, since they are not as popular right now?

The next wave in project financing is likely to be Green Project Bonds and this may be the case especially for utilities or renewables that are serving the domestic public, but it is a fallacy to think that all of that can be financed in either Euros, dollars or other such currencies. There also needs to be a much greater local currency component because the receipts and revenues needed to honor the debt often comes from local currencies and you can’t have the end consumers paying the risk of either inflation or devaluation in the case where there aren’t free floating currencies. Project bonds that are mobilized in specific currencies where the projects are taking place are a huge instrument for the future. However, project bonds are less popular due to the lack of appetite from commercial banks to go for investments with longer maturities, especially given all the regulation they are subject to, so it may be better for them to undertake disintermediation.

Speaking of sharing the risks and having more currencies for Green Bond issuances you have a paper in which you wrote about the role of development finance institutions in good governance for micro finance, so what role do you believe microfinance should play in funding climate change?

If you think simply about access to finance as you think about access to energy you have populations that are excluded at the bottom of the pyramid both from a clean, safe and constant supply of energy as well as excluded from the financial system. Families can now have access to solar lanterns so their children have light to do homework at night through initiatives such as Lighting Africa, (which has reached scale with sponsors involved in the effort such as Philips), but in some instances the initial ticket size between 10 and 30 dollars can be a hurdle for a family in a developing country to pay for.  With companies like Philips, the IFC has been able to develop special programs for microfinance institutions to have access through a facility that provides use of this technology.

You also have solutions for distributed energy schemes through which there are a number of projects identified that can produce a safe means of electricity generation from renewable sources applicable at the level of small communities helping families and firms that are away from the grid. These are small scale projects that perhaps the IFC cannot do directly but can use specialized firms or funds that have that specialization. So climate investment can also be at the bottom of the pyramid: providing financial instruments to be distributed through microfinance institutions, and providing technological solutions for small scale projects for people who might not otherwise be connected to the grid for another 30 years or so.

Most Microfinance Institutions have an important role and those that are clients of the IFC can become fluent with environmental and social risks as well as climate finance. Ideally they should be players in the sectors and endowed with risk management tools to understand the technology. They also need to engage their own clients if they are involved in any polluting activities to clean up their act, and aspire to a cleaner production cycle, which in some instances may require exclusion lists; for example the prohibition of financing for recoating tires. It’s much more than an exclusion list though, it is also endowing them with the technologies to provide alternatives for cleaner production.

Overall it is good to mention microfinance because it is really the next link to reaching the consumers in developing countries who can also invest (on a smaller scale) in the environment by buying better quality and more sustainably designed tools for their homes and businesses using loans provided by microfinance institutions. 

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