Climate change is the risk on everyone’s radar. Following high profile losses like the PG&E “first climate-related bankruptcy”, more investors are considering strategies to protect their portfolios. Great strides have been made in recent years to better assess and manage exposure to climate-related financial risks. But we see climate change as more than a risk to be managed. We see it as an unprecedented opportunity to successfully anticipate the technologies and services that are needed to adapt to and mitigate climate change.
By focusing our investment strategy on projects and investments that support sustainable development, we can move beyond climate-proofing to investing for climate action. Read more about how we align our investment objectives with the Sustainable Development Goals (SDGs) here.
Together with the Responsible Investment Association (RIA) we convened leading impact investors Fernando Alvarado (CEO, Caribbean Basin Sustainable Energy Fund) and Sandra Kwak (CEO, 10Power) to learn more about investing for climate action in one of the planet’s most vulnerable regions: the small island developing economies of the Caribbean. We shared insights on how these investments are generating strong returns in green infrastructure and technology; replacing diesel with solar, facilitating energy efficiency by empowering the energy services industry, adding hydro capacity and creating high quality jobs. Here are some of our key takeaways from that session.
1. The Caribbean offers unique opportunities for financially sounds investments that advance the SDGs
Caribbean energy markets are diverse, but most are characterized by continued reliance on imported fossil fuels, such as diesel, to generate power. This has two major effects: extremely high electricity prices (4 to 5x higher than prices in Canada) and dirty grids. By investing in renewable energy and energy efficiency projects in this region, impact investors can dramatically decrease the cost of electricity for retail and commercial customers (SDG 7 Affordable and Clean Energy) while at the same time displacing high carbon alternatives (SDG 13 Climate Action), and improving the air quality of indoor and outdoor spaces (SDG 3 Good Health and well-being). Many of these projects also have important benefits for women and girls (SDG 5 Gender Equality), such as building street lighting for safer communities or training women to become solar installation specialists (SDG 8 Decent Work and Economic Growth).
2. Experience and relationships are key to maximizing impact and achieving returns
Caribbean economies are relatively small, and renewable energy and energy efficiency projects often need to be “bundled” to make economic sense, especially for institutional investors. Fernando Alvarado shared several examples of investments made by the Caribbean Basin Sustainable Energy Fund (CABEF):
- Small-scale solar rooftop systems for commercial customers in the Dominican Republic aggregating 12MW for Commercial & Industrial consumers. Expected to displace 120,000 tons of CO2 in a 10-year investment period.
- Hybrid power solutions for remote telecommunications towers in Honduras. Expected to displace 150,000 tons of CO2 in 10 years while increasing reliability and reducing cost to customers.
- Energy efficiency solutions and equipment upgrades for corporate clients in Trinidad and Tobago, particularly hotels and resorts. Expected to displace 30,000 tons of CO2 during a 10-year investment period and provide savings of 5-15% on customer energy bills.
Identifying and assessing these opportunities takes considerable experience. Local presence is critical, including a deep understanding of local culture and ways of doing business. Developing relationships that lead to serial investment opportunities is an important way of scaling the initial effort involved to bring opportunities to the investment-ready point.
It is also important to identify strong local partners for environmental and social risk assessment. Not all renewable energy projects have the same impact, and in fact some can have negative community impacts (for example, run-of-river hydro projects that disrupt fish habitats). To manage these risks, experienced investors will go beyond what is required by the permitting process to apply international best practices such as IFC Performance Standards.
3. Blended finance is allowing a more diverse set of investors to participate in the sector
Sandra Kwak is building a solar development business in Haiti, the poorest country in the Western hemisphere. She was drawn to work in Haiti to demonstrate how compelling the investment case for solar has become; it is now economically viable in virtually all markets without the need for subsidies. She emphasized the tremendous strength and resilience of the Haitian business community despite the challenges of extreme weather events, poverty and political instability.
Sandra’s company, 10Power, is a perfect example of how blended finance can create sustainable businesses and drive lasting impact. The company was initially financed with grants and “soft loans” (i.e., loans with flexible terms or a lower interest rate) until it was able to secure its first major client with a flagship installation at UNICEF Haiti. Now the company has a pipeline of over 50MW of projects representing over $100 million and is poised to raise its first commercial capital.
10Power is an instance in which blended finance has been successfully used to absorb specific business risks and unlock private sector capital for investment in the region. Fernando Alvarado’s other managed fund Honduras Renewable Energy Financing Facility (H-REFF) that co-invests alongside CABEF has similarly benefited from blended finance innovation, including a $5 million “first loss” investment provided by the Scaling-Up Renewable Energy Program on Low-Income Countries (SREP), a program of the Strategic Climate Fund. H-REFF has also received a technical cooperation facility from the Inter-American Development Bank (IDB) designed to incubate opportunities and ready them for commercial investment.
Now, a diverse set of investors is committing capital for climate action in the Caribbean, including development finance institutions, foundations, family offices, and individuals. The next wave of capital is expected to be from “mainstream” investors; pension funds, insurance companies, and listed investment vehicles.
It was an inspiring conversation drawing the Responsible Investment Association’s largest crowd in Vancouver to date. The bottom line? If you’re ready to invest for climate action, the Caribbean offers a rich set of opportunities for knowledgeable and experienced investors that can obtain market returns while contributing to the Sustainable Energy Goals in a vulnerable region where the positive impacts are evident.