Developing countries hold a special place in my heart. I’ve lived and worked in them and travelled and made friends in them. So it worries me on a deeply personal level that less COVID vaccines are finding their way to these countries compared to developed nations. It only serves to highlight the widening inequality gap and reminds me that so many people in the world are increasingly being excluded from access to basic needs. When I lived in Cambodia I started working in finance, I learned that money has the ability to lower the barriers that block the pathway to individual and national development. It can increase access to food, water, education, and information and help combat poverty and inequality. It’s the main reason why I’ve continued to work in the sector one way or another my entire career.
Money needs to be used in the right way, supporting the right industries in the right places. I believe we urgently need to increase access to renewable energy in emerging markets.
In 2020, the worldwide urgent need to respond to COVID-19 cast the need to address other global challenges into the shadows. Although response to the pandemic still demands our attention, we should also now urgently turn the spotlight back on the mid- and longer-term, and ramp up our efforts to put finance to work on finding solutions to global threats, such as climate change and increasing inequality. It is widely known that the energy transition helps combat climate change, but the risk of not accelerating it fast enough also threatens quality of life, especially in developing countries. Almost all poor nations are within 30 degrees of the equator so they are not only more vulnerable to the physical effects of climate change, but if we don’t mitigate climate risks, the access to basic needs is likely to become even more difficult.
In terms of creating access to energy, we are at a crucial point in time where some of the world’s least developed countries have an opportunity to leapfrog most of the developed ones because they are immediately able to implement renewable energy solutions, and they can produce where they consume. There is no need to build coal-based power stations nor rely on grid infrastructure, although some form of grid is likely to be needed to produce sufficient electricity for larger scale economic activity.
There is no denying the enormity of the challenge, in fact I would say it’s a triple challenge. Firstly, we must implement within the barriers of our CO2 budget as a global population. Secondly, we must achieve better levels of development, and thirdly, most developing countries lack the financial power to immediately jumpstart the energy transition themselves but they do have policies to attract foreign direct investment, which means renewable energy investments in emerging markets can tick all three boxes.
The good news is that climate action and climate investments have gained a lot of attention in recent years. Phenix Capital Group, authors of the 2021 Impact Fund Universe Report, state that renewable energy and climate action represent roughly one third of all impact investments, and 40% of new commitments in 2020. But just looking at these numbers hides the fact that most investors still shy away from emerging markets. During a crisis there is often a flight to safety out of emerging markets and into the dollar, and that is what happened with COVID-19. Unfortunately, this behaviour tends to be driven by investor perception of high-level risks in those countries. But it is just that, a perception. Like any investment there are risks involved, but in this case, they are lower than the investors perceive. It’s true that emerging markets stock-listed equity and bonds can be quite volatile, and on the bond side there can be relatively high defaults. But based on our track record and that of all development financial institutions, it is totally different for senior debt to energy projects. Investors need to have teams with deep sector and country knowledge to understand the risks and know that it can create good financial return opportunities. Those portfolios provide diversification benefits, as they don’t tend to correlate with markets. Renewable energy assets tend to be stable in a crisis. They continue to produce electricity, which continues to be consumed and most countries have preferential grid access. It’s a very interesting impact-risk-return profile, but you must have deep sector knowledge and understand the countries to be successful. In my experience it also helps to have partnerships with trusted developers and like-minded investors. When you choose the right operators, and you structure it in the right way, then actual default rates are in a totally different league to where the corporate debt is in those countries. For Triodos Investment Management renewable energy has been one of the most resilient investment categories in the COVID crisis – our Groenfonds has not only achieved relatively decent impact risk-adjusted returns, it also has a strong pipeline of projects.
Investing in renewable energy in emerging markets has a multifaceted ability to not only tackle climate change, but to also fight poverty, reduce inequality, and create new types of activities and jobs. Now is the time to shift focus away from short-term responses to COVID and turn the light on the opportunity and stability that can be created by investing in renewable energy and other SDG solutions in emerging markets. I urgently call on like-minded investors to explore the opportunities.
Jacco Minnaar is Chair of the Management Board at Triodos Investment Management.