21 June 2023

Cut capital charges for blended finance transition funds, EU told

The European Commission has been told it should spur sustainable investments in low- and middle-income countries (LMICs) by reducing the charges incurred by insurers for backing blended finance funds.

Investment funds that mix public and private capital to reduce investment risks have “huge potential” to catalyse EU institutional investor involvement in LMICs, but they face hurdles including their treatment in the EU prudential framework, according to a report prepared by an expert group mandated by the Commission.

Such funds currently incur “substantial prudential costs”, or capital charges, notably for insurance companies and development finance institutions, “which greatly diminishes the funds’ attractiveness,” the report says.

Preliminary Findings & Recommendations to the European Commission was prepared by the High-Level Expert Group (HLEG) on scaling up sustainable finance in low and middle-income countries. When it launched its sustainable finance strategy in July 2021, the Commission also committed to a strategy for scaling up sustainable finance in its partner countries, particularly LMICs. The HLEG was established in September 2022 to support the Commission, and includes experts from EU-based institutional investors such as Amundi, Nordea and Allianz. (See box below for members of the group).

Its preliminary report proposes the Commission “frame de-risked public-private transition and/or sustainable funds in LMICs as a new type of EU financial product, recognised in the EU financial legislation through a dedicated EU legal framework”.

Meanwhile, to support climate adaptation efforts and increase investment in climate resilient infrastructure, the group recommends the Commission promote insurance-based instruments including catastrophe, or Cat, bonds and risk pooling in LMICs.

This could be through the creation of a facility to issue Cat bonds, it suggests. A Cat bond pays the issuer when a predefined disaster risk or weather event is realised, such as by damage from a flood.

The EU should also support green bond markets in LMICs, and “explore avenues to offer coupon subsidisation for affordable debt servicing costs, where appropriate, and to cover the extra costs associated with the issuance of green bonds versus vanilla bonds”.

The report shies away from suggesting commercial ‘debt-for-nature swaps’, such as that by Barbados, to help countries with high levels of debt, as it “concluded that these are sophisticated instruments that cannot be easily replicated at scale and need to be assessed on a case-by-case basis”.

Instead, it recommends studying the potential for an initiative on sustainable securitisations and ‘sustainable asset recycling’, whereby existing public infrastructure can be sold or leased to private parties, freeing up money for the government to spend on sustainable infrastructure.

Other recommendations to the Commission include:

  • Emulate platforms such as Just Energy Transition Partnerships, to establish a ‘multi-stakeholder platform’ with partner countries, including to clarify their sustainable roadmaps and related investment plans;
  • Establish a ‘one-stop-shop’ to act as the operational and financial arm of the new partnership model to develop sustainable projects from their onset to their closure;
  • Call for multi-lateral development banks and national development finance institutions to adjust their mandate, business models and incentive structures to support private sector investment for SDGs and climate actions;
  • Engage with central banks and other authorities to accelerate reforms to deepen local financial and money markets and help create an EU-led sustainable finance local currency facility to issue local currency-denominated bonds.

The group’s final report and recommendations will be published by the fourth quarter of 2023.

Members of the group

Experts on the group include:

  • Antoni Ballabriga, global head of responsible business at BBVA;
  • Hans-Ulrich Beck, head of business transformation at Sustainalytics;
  • Laetitia Hamon, head of sustainable finance at Luxembourg Stock Exchange;
  • Elodie Laugel, chief responsible investment officer at Amundi;
  • Martin Jonasson, general counsel at Andra AP-Fonden;
  • Thede Ruest, head of emerging markets debt at Nordea Asset Management; and
  • Claus Sitckler, global co-lead at Allianz Investment Management.

Timothée Jaulin, head of ESG development and advocacy for special operations at Amundi, was an ad-hoc invited expert.

Observers to the group include the European Investment Bank, FMO, International Monetary Fund, KfW, Network for Greening the Financial System, Organisation for Economic Cooperation and Development, UN Environment Programme Finance Initiative, the World Bank and the Coalition of Finance Ministers for Climate Action.

European Commission