The innovative landscape of climate finance has witnessed the rise of securitization as a game-changing financial instrument, playing a pivotal role in meeting the demands of climate change.
Securitization involves consolidating loans or assets into diversified portfolios, which are then sold to investors. This approach allows originators to access capital at lower costs, while investors profit from interest and principal payments on the underlying assets.
This innovative approach addresses the constraints of traditional climate finance models by facilitating the mobilisation of substantial capital, spreading risk across diverse projects, and making climate finance more appealing and accessible.
Recognising the potential of securitization, the World Bank, in collaboration with leading financial institutions, has established the Global Climate Action Partnership (GCAP). The initiative focuses on developing a securitization platform for climate investments, targeting emerging markets and developing economies.
Led by the Private Sector Investment Lab (PSIL), this initiative aims to devise an “originate-to-distribute” model, attracting deep-pocketed investors to channel significant sums into climate-related projects. The objective is to create an enticing “securitisable asset class” to attract substantial investments from entities like large Pension Funds and BlackRock.
Under the World Bank’s umbrella, PSIL collaborates with 15 Finance leaders from entities such as BlackRock, AXA SA, and HSBC Plc. Their collective efforts aim to mitigate risks for investors, encouraging more significant contributions to climate projects in developing economies while stimulating private capital involvement.
The Co-chair of PSIL emphasises the focus on financial guarantees, highlighting their efficiency and prevalent use as credit support. PSIL explores various guarantee types, such as first-loss and whole-portfolio guarantees, striving to develop a simplified set of guarantee products applicable across different markets.
The World Bank’s President underscores the need for efficient collaboration between public and private entities to scale financing, recognising the limitations in capital availability from multilateral Development Banks, Governments, and Philanthropies.