BlackRock explores risk models to add scale to blended finance
[NEW YORK] BlackRock is exploring ways to derisk new offerings within blended finance, as the world’s largest money manager tries to make products intended to speed the energy transition more palatable for private clients.
Blended finance, which combines public and private funds and channels them towards sustainable goals, can help steer capital into transition finance projects in emerging markets, according to Emily Woodland, APAC head of sustainable and transition solutions at BlackRock.
“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,” she said on Monday (Sep 8) during a panel at Hong Kong Green Week.
That means BlackRock 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,” she said.
The energy transition “is complex,” particularly in emerging markets and the Asia-Pacific region, Woodland said, noting that only about 11 per cent of the infrastructure spent in the last five years has gone into emerging markets, including Asia.
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 towards 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.
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And on Monday, the Monetary Authority of Singapore said a government-backed blended finance partnership reached its first close with US$510 million of committed capital from global and regional private, public and philanthropic institutions.
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.”
The risk-return expectations of these investors have been aligned with those in the US and Europe, so “they’re holding back from allocating to emerging markets because of both perceived and actual risks around currency convertibility, sovereign risk,” Woodland said. BLOOMBERG
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