Institutional investors can catalyse transformative change in EMDEs
Mobilising institutional investment for sustainable development of EMDEs is not a mere ambition; it is an imperative for a better future, writes Nana Maidugu, head, sustainability and environmental, social and governance, Nigeria Sovereign Investment Authority.
Emerging markets and developing economies represent a vast frontier for sustainable development. The regional demand for essential infrastructure, renewable energy, healthcare and education is not just a call for progress; it's an opportunity for innovation and investment to unlock local and global growth. Mobilising institutional investment is key to accessing this potential.
Estimated at trillions of dollars, institutional investors, encompassing pension funds, sovereign wealth funds, insurance companies and asset managers provide a large pool of patient capital that fit the long-term returns profile of infrastructure projects. By marrying financial prudence with environmental and social responsibility, institutional investors can catalyse transformative change in EMDEs. However, mobilising this capital has been difficult and has been further exacerbated for sustainable project development in EMDEs.
Challenges to mobilising institutional investment
Despite the environmental and social benefits of sustainable projects, most projects are not properly structured or considered bankable by investors. Factors such as insufficient data and implementation capacity of project developers contribute to this issue. Additionally, project preparatory facilities are scarce, difficult to access and often disconnected from subsequent development funding. These challenges are further amplified in the context of sustainable investments, where many EMDEs lack clear policies, regulations and frameworks on climate change and sustainability.
To add, emerging markets face significantly higher costs of capital than developed economies, spurred by the high perception of risk, absence of robust financial infrastructure and ever-evolving political and regulatory landscape among other factors. All these undermine the attractiveness of sustainable projects in such regions, even for sound business models. For institutional investors where risk mitigation and liquidity preservation are paramount, this is a major deterrent. This is precisely where sovereign wealth funds can play a transformative role. In the case of Nigeria’s sovereign wealth fund, the Nigeria Sovereign Investment Authority, this challenge has become an opportunity to conceive and execute pioneering solutions, transcending the conventional role of a traditional investor.
Mobilising and unlocking capital for sustainable investments
Blended finance and risk-sharing mechanisms, like credit guarantees, are examples of proven catalytic instruments that reduce exposure to risks and unlock capital in EMDEs. Studies show that guarantees can mobilise at least five times more capital than other instruments, such as loans, which are essential to address both the rising cost of capital as well as perceived risks. An example is InfraCredit, a triple-A ‘AAA’ rated local currency financial guarantor co-developed by the NSIA. Since its inception in 2017, InfraCredit has supported the development of strategic Nigerian infrastructure projects, unlocking over $250m long term capital through the provision of guarantees. InfraCredit's guarantees enhance the attractiveness of bond issuances, experiencing oversubscription of up to 60% from local pension funds and insurance companies. Some of these projects have issued subsequent bonds without relying on InfraCredit guarantees, underscoring the long-term impact of guarantees in ultimately reducing the need for risk-sharing tools. To scale up this impact, NSIA, in collaboration with some DFIs, is setting up an EMDE-focused credit guarantee company, like InfraCredit but with a more global scope, to mobilise capital into climate mitigation and adaptation projects.
Although guarantees can be highly effective, they cannot resolve underlying economic factors that impact the commercial viability of projects. The early stages of developing infrastructure projects require significant investment and expertise. As a result, project preparatory facilities are needed to help develop greenfield projects into viable investment opportunities. More scale for preparatory facilities will be crucial to build the pipeline of bankable sustainable projects that capture growth opportunities. For instance, the NSIA, in partnership with African Export-Import Bank, launched a joint project preparatory facility that provides pre-development capital to eligible infrastructure projects. This facility will mitigate early-stage risks thus improving project bankability to attract private and institutional investors. Furthermore, to strengthen the linkage between preparatory finance and development finance, the NSIA has launched a construction facility which provides construction finance for eligible sustainable greenfield infrastructure projects by pooling capital from several investors in a downside-protected manner. These projects will be subsequently refinanced through an InfraCredit-guaranteed long-term financing sourced from the domestic capital markets.
Governments and regulators must develop clear, consistent and forward-thinking regulations as well as supportive policy frameworks that encourage and incentivise sustainable development projects. Transparent and standardised reporting of environmental, social and governance metrics is essential, as a shared understanding of how investments align with ESG goals and impact communities.
Mobilising institutional investment for the sustainable development of EMDEs is not a mere ambition; it's an imperative for a better future. While the NSIA has developed and invested in solutions specially structured to unlock and attract third-party capital towards sustainable projects, a lot more can be done to enhance the scale and coverage of such solutions. This requires a collaborative and innovative effort by the private and public sector, as well as DFIs and MDBs, to create ecosystems that incentivise sustainable development. By addressing challenges and seizing opportunities, we can collectively contribute to building resilient, inclusive and prosperous economies that benefit not only investors but also the communities and the planet at large.