Barbadian Financial Analyst Avinash Persaud, who is the special adviser on climate change to the President of the Inter-American Development Bank (IDB), is proposing the creation of a fund that could quickly doubling investment in renewable energy “in one step”.
Persaud says the fund would not focus on new green projects in the developing world, but existing loans local financial institutions already have on their balance sheets for performing renewable energy projects in Latin America and the Caribbean.
“The fund buys them with a premium that the banks lose if they don’t re-invest the proceeds in the sector within a tight period like 12 to 18 months. This way, we can quickly double renewable investments in short shrift,” he explained.
“And we can do it again and again until we get to the pace we need. It’s fluid mechanics: getting water to flow uphill by creating a vacuum at the top of a pipe.”
Persaud said his suggestion was based on work being done within the Brazilian G20 Presidency on what the G20 can do given that they account for 80 per cent of emissions, the work behind the Foreign Exchange Liquidity Facility launched in Brazil in March, conversations he had with executive secretary of the Independent High-Level Expert Group on Climate Finance, Amar Bhattacharya about the bank balance sheet problem in India, and discussions with the capital markets team of the IDB.
Persaud said the problem the proposed fund would try to solve was “how to accelerate mitigation in large middle-income developing countries where energy demand is growing exponentially”.
“In Latin America and the Caribbean, the stock of locally funded green projects is more than US$25 billion. Though it is discussed more frequently as a success, the equivalent
figure in India is smaller but is growing rapidly,” he stated.
Local investment
“However, local banks and financial institutions are running out of balance sheets to do many times more, given their size, scarcity of local savings and concentration levels. Local investment in renewables is a good story, but it is in danger of petering out just as the world needs it to switch to a higher gear.”
He believed the suggested fund “could solve this problem without requiring billions of [dollars in] unavailable blended finance”.
“The fund will only purchase bank loans backed by the local currency income streams from existing renewable projects. We are not imagining altruistic money or unbuilt projects. These projects exist, and today’s financial system likes to refinance existing stuff,” the finance specialist explained.
“The fund will only purchase loans backed by contracts and regulations that allow the borrower to raise prices over time, in line with inflation, as is common in Latin America because of its history of hyperinflation.
“This means the foreign exchange risk to a foreign investor in our fund is the much lower risk of a damaging decline in a portfolio of real inflation-adjusted exchange rates, not the decline of individual nominal exchange rates,” he added. (SC)
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