Opening remarks to the Net-Zero Asset Owner Alliance-hosted roundtable discussion at the Munich Security Conference by Günther Thallinger, Chair of the NZAOA and board member, Allianz SE

Power Move: Accelerating the Just Energy Transition

“The imperative to significantly reduce emissions of harmful greenhouse gases to ensure our planet is habitable has now been given additional impetus by geopolitical developments.

Any much-needed change must be guided by the principles of a just transition: a strategic approach that requires all actions to serve the needs of and includes, the most vulnerable groups in society.

The question remains: how do we unlock private capital to finance the transition to renewable energy?

The Alliance has worked on this and we see the importance and urgency of collaborative action by all stakeholders to bring about systemic change.

Blended finance structures that leverage public and philanthropic capital to mobilize private-sector funding play a critical role in scaling investments into Emerging and Developing Economies (EMDEs) – but not only there.  It is also the wealthy nations that must accelerate innovation and the transition to renewable energy for the sake of energy security and the avoidance of rising greenhouse gases By scaling blended finance structures that leverage public capital together with the private sector we can accelerate the green transition and counter energy security and geopolitical risk.

The most prominent commercial investors in the blended finance space have historically been commercial banks, primarily through project finance, albeit with a declining share. An increase in investment activity into blended finance in the climate area has recently been observed from institutional investors (increasing their share of investments from 18% of private investments between 2016-2018 to 25% between 2019-2021).

Given the preferences of institutional investors such as pension funds and insurance companies for larger ticket sizes to reduce relative transaction costs, they commonly invest through funds. To mobilize the available long-term institutional capital for the net-zero transition globally scaling standardized portfolio approaches is therefore key.  

Historically, the geographical focus of blended finance transactions has been in the context of EMDEs. However, it can also be seen as an effective measure to mobilize required capital within any developed market where a risk-return mismatch of investments hinders the flow of capital to finance the transition.

Through the NZAOA’s Call to Action to Asset Managers for climate-focused blended finance vehicles (first launched in February 2021), the Alliance collaborated with asset managers to drive the design of scalable blended finance vehicles that meet the needs and requirements of institutional investors. To date, 26 vehicles have been submitted by a diverse set of asset managers. With a focus on developing and emerging economies, the proposed private debt and private equity vehicles and platforms cover a broad range of sectors, reflecting the immense universe of investment opportunities in the net-zero transition.

The Alliance has worked on five proposals:

  1. To close the gap between high investment risk in EMDEs and investors’ obligations to earn risk-adjusted returns, governments and philanthropists must create sizeable and flexible pools of concessional capital to de-risk investments to bring them within investors’ risk limits. We suggest scaling and aggregating pools of concessional capital that create fiduciary investment assets.
  1. Shareholders of the multilateral development banks and development finance institutions should modernize the governance and business models of those institutions to align with the Sustainable Development Goals (SDGs) and Paris Agreement. They could be incentivized to maximize total investment, most importantly through mobilizing private capital, while at the same time effectively deploying their own balance sheets. We suggest those institutions should further be steered to focus their efforts on promoting an enabling environment for private capital flows, enhancing grant-funded measures for capacity and project pipeline building together with domestic governments.
  1. A systemic lack of reliable information about key issues such as project risks, yields/returns, and historic defaults/losses pushes private sector investors to price the perceived risks at disproportionately high levels. The Alliance calls for governments to support accurate risk pricing by providing access to core credit risk data.
  1. Most donor funding currently requires investments to fit specific sectoral or geographic guidelines. Such restrictions reduce the potential pool of investible projects as well as the scale of respective blended finance vehicles, thereby disabling the scale and diversification institutional investors are demanding. Therefore, we suggest prioritizing thematic parameters in official development assistance.
  1. Increasing the use of guarantees would assist in making the economic risk-return profiles for climate solutions and clean technology investments more attractive to private investors. Guarantees require less budget provisioning, and increased use of this blended finance instrument could offer the potential of a significant multiplier effect. Governments could make a big difference by making guarantees eligible for official development assistance.

The financial models exist. All of us political decision-makers and investors must now up our game. Currently, there is a will, but also gaps in knowledge and capacity. These must be overcome.”

About the UN-convened Net-Zero Asset Owner Alliance

The Net-Zero Asset Owner Alliance is a member-led initiative of 84 institutional investors, with over US$11 trillion in assets under management, committed to transitioning their investment portfolios to net-zero GHG emissions by 2050. The Alliance members were the first in the financial industry to set intermediate targets (aligned with the Paris Agreement schedule) and they report on their progress annually. The Alliance is convened by UNEP FI and PRI and is supported by WWF and Global Optimism.