Stockholm (NordSIP) – Global asset manager Invesco launched a new blended finance vehicle that seeks to help investors support climate change adaptation efforts in emerging markets and developing economies, the Invesco Climate Adaptation Action Fund (ICAAF).
“There are very few similar competitor offerings that combine a blend of public-private placement investment approach, but none with a focus on pure Climate Adaptation in the Least Developed Countries (LDCs), Small Islands Developing States (SIDS) and African States (our target regions). Therefore, our proposed Fund is clearly differentiated and fills a gap in a concentrated market with a lack of choice for investors in relation to dedicated Climate Adaptation products,” Stefan Behring, Head of Nordics at Invesco, tells NordSIP, noting that there has been interest from Nordic Investors.
“We need to adapt to climate change to achieve the transition to a sustainable and resilient world and economies and protect businesses and communities from the consequences it brings, but money is not being directed at the pace and scale needed to the world’s most vulnerable regions, which will be most affected. We believe there is an enormous opportunity to transform how climate adaptation is funded and have created ICAAF to enable institutions to invest to accelerate the scale up of solutions, an approach we believe will create the most impact,” Hamid Asseffar, Head of EMEA Sustainable & Impact Investing, Distribution, at Invesco, said.
How will ICAAF Invest?
Invesco is seeking to raise US$500m for the Fund, which has launched an IPO that will now run for nine months. The Fund’s term is 12 years, comprising a seven-year investment period during which it will target multiple climate adaptation sectors – including food security and agriculture, coastal zones, urban infrastructure, water collection and management, energy and nature-based solutions – and a five-year run-off period.
ICAAF will invest in public and private placement bonds in developing countries with use of proceeds tilted towards climate adaptation and will be managed by Wim Vandenhoeck, Claudia Castro (PhD), Norbert Ling and Yifei Ding out of New York and Hong Kong. According to Invesco, the fund “aims to provide institutional investors with a triple dividend: the opportunity to minimise the economic impact of climate change, realise positive gains, and deliver wider social and environmental benefits.”
The fund’s governance offers a three-step investment process. First, the fund defines its investment universe through exclusions and risk assessments. It can invest in sustainable, social, Green and sustainability-linked bonds (SLBs) focused on climate change adaptation and mitigation. It can also invest in private placements focusing on these two themes. The second stage focuses on impact evaluation, through the use of Rio Markers* and a climate adaptation impact evaluation framework. The third stage focuses on macroeconomic and credit analysis where the sustainable bond frameworks are assessed.
“ICAAF will assess and monitor adaptation and mitigation impact metrics of each project. Impact metrics are based ICMA’s Harmonized Framework for Impact Reporting and are dependent on the projects invested by the Fund. The Fund will provide annual impact reporting summarizing aggregated impacts achieved by holdings of the Fund based on the Impact Reporting Framework,” Behring says, noting that the fund will also target eight sustainable development goals (SDGs).
A Blended Finance Fund
The fund offers a blended finance approach to investing in climate adaptation and mitigation. Blended finance is an investment approach that strategically uses funds from development finance institutions (DFIs), to mobilise additional finance towards sustainable development in developing countries. In so doing, it leverages public and philanthropic capital to improve the risk profiles of investment opportunities in order to catalyse private-sector funding. This is done by providing two share classes of investors, a junior class that is targetted at DFIs and a senior class targetted at private sector investors.
According to Invesco, ICAAF will balance risk and reward for private and public investors. The junior share class – representing 25% of the Fund and aimed predominantly at the public sector – will target a return of 11.75% per annum, while the senior share class – representing 75% of the Fund and aimed predominantly at the private sector – will target a return of 8.1% per annum. ICAAF benefits from Invesco’s proprietary frameworks, including for climate adaptation impact evaluation, as well as its widespread experience in thematic investing, including the expertise of a team already managing eight climate mitigation focused fixed income strategies.
“Blended finance is an emerging asset class at a very early stage. Invesco’s ambition is that ICAAF will contribute to mobilize more capital to adaption and the growth of the asset class. We believe blended finance will be a part of every institutional portfolio in the future,” Behring explains.
“We envisage Development Finance Institutions (DFIs) and public-sector investors to provide the capital for the Junior Class units while we anticipate interest from institutional investors with specific interest in Impact Investing (e.g. corporate pension funds, insurance companies) for the Senior Class units,” Behring adds.
“This is the first climate adaptation blended finance debt fund in the market with an attractive risk-adjusted profile, a robust impact investment framework and an investment approach that will transform the way adaptation and resilience investment opportunities are funded to help Emerging countries implement their National Adaptation Plans,” Behring continues
Keeping up with the SDGs
The Fund is expected to contribute to a range of SDGs, most notably SDGs aligned to Climate Adaptation overtime alongside mitigation in the near-term. Behring highlights the most relevant indicators as SDG6 (Clean Water and Sanitation), SDG7 (Affordable and Clean Energy), SDG11 (Sustainable Cities and Communities), SDG12 (Responsible Consumption and Production) and SDG13 (Climate Action).
In so doing ICAAF hope to expand water and sanitation support to developing countries, ensure access to affordable, reliable, sustainable and modern energy, ensure sustainable consumption and production patterns, reduce the environmental impact of cities, reduce the adverse effects of natural disasters, and support least developed countries in sustainable and resilient building. The Fund may also be assessed on its impact on SDG5 (Gender Equality), SDG8 (Decent Work and Economic Growth) and SDG9 (Industry, Innovation and Infrastructure)
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* The Rio markers are a set of policy markers set up by the 1992 Rio Conventions on Climate Change, Desertification and Biodiversity Loss to monitor and report on the development finance flows targeting the themes of Biodiversity, Desertification Climate change mitigation (i.e. reductions in or absorption of greenhouse gas emissions) and Climate change adaptation (including climate risk mitigation and vulnerability reduction)
