The market for international guarantors for development finance has a new player with the launch on the London Stock Exchange (LSE) on February 2 of the Green Guarantee Company (GGC), the world’s first climate-focused guarantee company.
The GGC will provide guarantee to global investors on green bonds and loans issued from developing countries in global credit and capital markets, filling a gap in the guarantor market by being a new hard currency guarantor dedicated to green financing.
At this point, the GGC’s guarantee only covers green bonds issued and listed on the LSE, and green loans issued in the private credit market, but it has plans to expand its coverage.
The GGC – a programme approved and funded by the Green Climate Fund (GCF), the world’s largest climate fund that is governed by the UN Framework Convention on Climate Change – was set up to address the current inadequate level of climate financing offered to developing ones by aiming to help de-risk the international private sector’s climate-related investments.
The company received a total of US$363 million of initial equity funding that includes US$40.5 million from the GCF and US$322.5 million from co-financing partners consisting of government ministries and sovereign investment entities from the UK, US and Nigeria.
Japan’s MUFG Bank will be in charge of regularly updating and reporting on the progress the GGC’s funding and implementation to the GCF.
The GGC seeks to guarantee 30 to 55 investments with its current capital, according to its funding proposal approved in November 2022, and each of the guaranteed investment will be allocated with a maximum US$200 million. The guarantee fee is between 75 to 150 basis points, charged to issuers.
The proposal further shows the finance provided by the GGC for green investments has the potential of reducing 74.6 million tons of carbon dioxide equivalent and, directly and indirectly, impacting 36.9 million beneficiaries.
“The GGC will provide pivotal support to enable issuers from developing countries to gain the financing they need to combat the impact of climate change on their populations, particularly the poorest,” says Christopher Marks, the company’s director. “This support is critical as both increased fiscal pressure post-pandemic and the downward pressure of sovereign ratings of developing countries will limit their private sectors’ access to global debt capital markets at a time when climate action is becoming increasingly urgent.”
Despite a compound annual growth rate of over 10% of climate finance during the last decade, the Climate Policy Initiative estimates that the world still faces a funding gap of over US$226 trillion by 2050.
A consensus among climate financiers is that private capital needs to be further leveraged to mitigate that funding gap. However, the challenge concerning private sector participation in the developing countries’ finance projects is the mismatch between the appetite of the fund managers who favour investment-grade opportunities and the credit ratings of the bond issuers in the emerging markets.
Having guarantors providing guarantees for the investment deal is one of the solutions to alleviate this mismatch. On the issuers side, guarantors can support emerging markets issuers by increasing their credit ratings for the bonds and loans in the global capital market and expanding their funding capabilities. On the investors side, guarantors can help to increase the confidence of investors and mobilize the funds at scale into emerging markets.
In the Asian bond market, the guarantors that frequently participated in development finance projects include the Credit Guarantee and Investment Facility and the GuarantCo, whose business covers local currency debt financing.