The trick that makes climate investing in poor countries less risky

When it comes to climate change, poor countries face a double whammy: Not only do they experience some of the worst impacts of global warming, they then struggle to access the big sums of money needed for climate solutions because of risk-shy investors. A new company wants to change that.

The Green Guarantee Company (GGC), which is based in the UK and launched Friday, has raised an initial $100 million with the goal of dramatically reducing the risk for private investors seeking to fund renewable energy and other climate projects in developing countries. The company’s early investors include the national governments of Nigeria, Norway, the UK and the US, as well as the United Nations-backed Green Climate Fund, which was set up to help developing nations meet their climate goals.

“There are very, very good companies in emerging markets that are simply trapped by the sovereign ratings they are dealing with,” said company co-founder Lasitha Perera. Sovereign credit ratings measure a government’s ability to repay its debts, but they also have an impact on the credit ratings of companies that operate in the country. GGC is able to step in to provide “investment-grade” guarantees to funders, enabling these companies to access more affordable and longer-term loans from private investors, he explained.

Perera, who was previously the chief executive officer of the local currency guarantor GuarantCo working in Asian and African markets, compared two renewable giants to make his point. The US-based NextEra Energy Inc. is able to secure a bond, essentially a loan from investors, for interest payments of 5.5% payable over 30 years. The company has an A- rating, according to Fitch. In comparison, India-based ReNew Energy Global Plc is able to borrow at 4.5%, but it has to pay back the initial sum in five years. The company has a BB- rating, lower than NextEra’s.

In principle, if GGC is able to guarantee payments on ReNew’s bond or loan, then it can help improve ReNew’s rating and thus help extend the loan period or lower the interest rate. Perera said the company already has “a very large pipeline of transactions,” but because it only launched last week, it hasn’t completed any of them.

The fact that certain climate-solutions companies can’t always access the capital they need simply because of the countries or markets they are based in is a well-known problem. Back in 2021, BlackRock Inc. Chief Executive Officer Larry Fink proposed a solution — to have multilateral development banks, such as the World Bank and International Monetary Fund, act effectively as insurers or “first loss” guarantors of such companies. This would make those companies and their climate adaptation or mitigation projects much less risky to private investors.

But so far, multilateral banks haven’t done this. And, as Perera points out, there’s no time to wait. “I mean, climate change is today. We need to start moving today,” he told Bloomberg Green. “So our response is: Let’s build this.”

The company’s launch is being watched closely by the international development community. Speaking last week in Washington, DC, USAID Administrator Samantha Power gave a shout-out to the new company, which her agency helped fund, describing it as “a company unlike any other” that invests money alongside private sector partners while committing to covering any losses.

“Because providing these investment-grade guarantees vastly increases the number of investors that can support these projects, the Green Guarantee Company is projected to catalyze $1 billion dollars in new investment to the least developed countries for climate action,” she said.

For providing a payments guarantee, GGC will charge the borrower a small fee. And because Perera thinks that private investors are often overestimating the risk of developing country companies falling short on their payments — or, worse, defaulting — he believes that the GGC can make a decent profit through those fees even as it helps improves loan terms for the companies.

Because of GGC’s focus on a commercial return, it is “looking to support borrowers that would be rated investment grade in their local capital markets but below investment grade in global capital markets,” said Perera, who added that each transaction is initially assessed for its potential climate impact.

Once Perera is able to prove it really is a win-win, he hopes not to rely only on government money to enable guarantees. Instead, his plan is to be able to guarantee $5 billion worth of projects and list GGC on the London Stock Exchange by 2035.

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