BlackRock Inc. is exploring ways to attract more capital to emerging markets, where efforts to finance the transition to a low-carbon economy have so far been slowed by perceptions of risk.
Clients are “holding back from allocating to emerging markets because of both perceived and actual risks around currency convertibility, sovereign risk,” says Emily Woodland, APAC head of sustainable and transition solutions at BlackRock.
“The energy transition is complex, even more so in EM and APAC, and actually only about 11% of the infrastructure spend in the last five years has gone into emerging markets, including Asia,” she said on Monday during a panel at Hong Kong Green Week.
As the bulk of transition finance gets channeled into developed markets, the goal of directing capital to poorer regions that need it more urgently has dominated climate finance talks. The subject is set to be on the agenda again this year, as government leaders and corporate executives head to Brazil for the COP30 climate summit.
“You’ve really got to pick how you package risks in these markets, because even though clients might want to allocate to this space, they’ve still got internal hurdle rates that they need to maintain, and they can’t compromise on that,” Woodland said.
Models that have shown potential to address the issue include blended finance, which is a combination of public and private money that’s then channeled into sustainable goals. On Monday, the Monetary Authority of Singapore said a government-backed blended finance partnership reached its first close with $510 million of committed capital from global and regional private, public and philanthropic institutions.
Other examples of blended finance that have proved commercially viable to date include debt swaps, whereby private investors buy bonds used to help poorer nations refinance their debt, with savings put toward environmental or social goals. Such deals are often backed by guarantees from multilateral development banks, helping reduce risk for private investors while keeping down costs for borrowers.
In order to attract clients to transition-finance goals in the developing world, BlackRock has found that it has to “deliver them a commercial risk return profile that looks and feels like what they’re used to, and that can sit alongside their existing asset allocation, rather than something that feels really, really niche and funky that’s a little bit difficult to get everybody internally aligned on,” Woodland said.
BlackRock is currently developing its second and third large-scale blended finance funds, which has brought with it “a couple of learnings” around the kinds of risk structures investors are willing to accept, Woodland said. For debt instruments, for example, the goal would be to have a blended finance deal look like an investment grade product “that would sit alongside existing IG allocations,” she said.
For now, developed markets are receiving more capital for transition-finance deals, she said.
“The reality is that, to date, the majority of that capital is still being deployed in DMs rather than EMs,” Woodland said. “And the reality is that the risk tolerances of large traditional investors have not yet been built to allocate to emerging markets at scale.”
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