Make sustainable finance reassuringly boring (again) with UNDP's Neto and Sener

Uxolo: What message for cooperation are you encouraging? We’re together at the Berne Union Annual General Meeting in Ottawa, with an audience of ECAs and private insurers and the theme of this event is adaptability. How is UNDP demonstrating and encouraging adaptability for ECAs and private insurers?

Marcos Athias Neto (MN): What are we offering? A series of products, of standards, some capacity to do pipeline development and, perhaps more important, a long-standing trust from governments to deal with regulatory issues that might be necessary to let private capital flow.

 I'm learning about ECAs at the same time, that they are not all the same. Some are 100% demand-driven toward national companies, others have capacities and mandates to provide guarantees to foreign [companies’] and some have market-oriented programmes. It's difficult to generalise. In a nutshell we see ECAs as being able to de-risk an investment. From our perspective, money itself is not a problem, but money is not going to where it is needed the most. We want to work with anyone that plays a role in this chain of investment that signifies de-risking, that allows money to flow. 

 Uxolo: In your keynote conversation about breaking barriers, you asked what the UNDP brought to the event, and your answer was ‘a small word, trust’, and that ECAs are in the business of trust. How will this help mobilise capital to go where it needs to go?

 MN: The element of trust is vital. Around $2 trillion last year was invested in renewable energy, far more than was invested in fossil fuel. But only 2% went to Africa. Why? Africa's potential in renewable energy is unlimited. It is not that the private sector doesn't understand the cash flow returns on renewable energy, it is the risk perception of Africa. For instance, if the Danish ECA wants to export wind because that is Denmark's competitive advantage, I will partner with them to figure out how they provided the guarantees necessary for large wind farm to be created in Tanzania. That's my job, that’s the adaptability that I'm looking for in conversations with ECAs.

Uxolo: How is UNDP making the most of specific risk sharing mechanisms and partnerships? For instance, you partnered with Mizuho Financial Group in Asia in 2024 to encourage private sector investment in high-risk frontier markets.

Şebnem Şener [SS]: We worked with Mizuho to implement the impact management and measurement framework for them to be able to assess how to catalyse private finance, to identify where it's needed the most and what's the impact.

 Mizuho was the first financial group in Asia to work with us on implementing this framework. This framework, in a different shape, is coming to the market in partnership with the International Standards Organization (ISO) as a management system of standards for sustainability. Mizuho was one of the first implementers of a form of it and is acting as its champion to increase awareness in other companies they work with.

 MN: We went to the ISO with the standards we had developed, and said, ‘it works, but we’re not a standard setter and it has to become widely used.’ They assessed what we had done and partnered with us.

 Uxolo: ISO standard numbers ISO/UNDP 53001 [and 53002] are the forthcoming international standards for management system requirements for the United Nations Sustainable Development Goals (SDGs). Forgive me, but that’s not very ‘catchy’. How is it going to provide a structured, certifiable framework for organisations to integrate sustainability into financing decisions?

 MN: I've learned in this fascinating process that even a complaint about the numbers is important because one of the things that ISO gives it is its total familiarity. Everywhere in the world the documents modelling systems all look the same, boring, colourless. They're all marked by numbers that nobody can remember. But that means to the people that use it, it is very standard. Because some Mizuho company probably has done ISO 14,000 or whatever, and that gives it the feel of ‘another thing I have to/can do’.

 This is brilliant, and in today's geopolitics, some of the new standards that have been put into the market, mostly disclosures like the ISSB, have become politically charged.

Nobody sees politics in the ISO, as it is as technical as they come.

Uxolo: Make it boring, make it happen?

MN: Yes, we don't care if it's ‘sexy’ or not, we care that it happens.

Uxolo: This is more of a depressing question. What are the most persistent roadblocks you're seeing for mobilising large scale private investment in emerging or conflict affected regions? And how is UNDP working with partners to overcome them?

 MN: Risk, or the perception of risk is the biggest bottleneck. The second one is the existence of bankable projects. Combine the two and that is the two main reasons why private capital, even domestic capital, doesn't flow.

 What are we doing to ease that? Again, policy reform. Policy can de-risk, and we've seen that done for entire sectors. But in certain countries it's not enough to change the credit rating to a place that allows capital markets, pension funds, etc, who have fiduciary rules, to come in and invest.

 That is why what we do, our bread and butter, which is the policy regulatory framework that is at play on the risk is not enough in certain countries. That's where ECAs and others with financial instruments [for] de-risking become an important partner. If you combine policy of derisking with the financial instruments of derisking, there is no reason why money shouldn't flow.

 Projects must be bankable though. If you don't have that, the risk can come down, but still nothing happens. That’s where the major roadblocks are and what we are trying to do without being a financial institution. We can't close the gap as UNDP [without] financial instruments. To de-risk, we need to partner with an ECA, with a Multilateral Development Bank (MDB), with somebody whose business it is to provide that financial instrument.

 We can come back with the policy reform.

Uxolo: Can you give practical examples?

MN: We are working with some [parts of the insurance industry]. For example, the government in Uzbekistan wanted to create an insurance product for small farms, the agricultural sector. We asked the big insurance companies, and they replied that the regulatory framework is not in place and the premium might be too expensive.

 I asked ‘what happens if I give you the regulatory framework? If I work with the government and with you to structure the product in a way that is valuable to you but viable for the farmers. Would you do it?’ They said yes. Now the first ever agricultural insurance product exists in Uzbekistan. The legislation is in place. The government pays 50% of the premiums, the farmers pay 50% of the premiums, and the insurance companies come in and provide the product.

 We also have parametric flood insurance in Lagos State in Nigeria and we are working on one in Argentina, which is [effectively] insuring jaguars. The innovation is that it’s not insuring the animals, it is insurance for the people and farmers who are under incentives not to kill jaguars.

Uxolo: And these are not new instruments.

MN: No. I get a bit frustrated with discussions of how we need to innovate with blended finance instruments. We've known these instruments for centuries. Where the innovation comes is in the partnerships, putting together players that haven't necessarily talked to each other, like us, the insurance industry and governments.

 That allows them to say UNDP, you have got to get that piece of legislation changed with the government, and then we can come in with an insurance product.

Uxolo: How will you measure the success of what you're doing in financial terms?

MN: We look at the success of our work in in different ways. How much money are we able to align to the policy objectives of government, whether that be SDGs or the Paris Agreement? By knowing governments’ Nationally Determined Contributions (NDCs), we know transparently what those policy objectives are on transition/energy adaptation. We can ask how much of the national budget is going to the prioritisation of policies. Most governments answer that they have no idea. 

All right, let's tag everything. We've tagged the entire federal budget of Mexico to all 169 targets of the SDGs. When that was done, we helped Mexico to release the first ever SDG bond in the world. [The inaugural €750m ($890 million) SDG Sovereign Bond was launched in September 2020, with several subsequent issues, the most recent €2 billion offering was in January 2024, due 2032, carrying a 4.49% coupon.]

They didn't need a series of projects to do these procedures. They just put the budget lines because it was targeted and said what they would invest it in according to the national budget. I can measure year after year how much growth the national budget is having against the SDGs.

Another example in is Colombia, since we did the first tagging, in the last four years, $7 billion extra has been aligned in the national budget to the national priorities of the government of SDG. Simply by showing them how to structure the budget, then we can work on the billions of dollars of bonds that can be invoked.

We structure the budget. Then we work on the bonds, billions of dollars of bonds that will be invoked. We measure that as mobilising new capital, while the other one is aligning existing capital.

Now, for every dollar we receive as a grant, we've leveraged $60 on our sustainable finance work.

 Uxolo: You are making a distinction between the concept of aligning capital and leveraging new capital, what has the impact been?

MN: We have calculated that in the last four years we had an impact of about $870 billion globally. That’s the finance, what is more difficult to measure, but we want to become better at, is, for instance, what impact this extra $7 billion in the Colombia budget has had in people's lives.

An interesting example is Uruguay. We supported Uruguay, and we are the verifiers in its [inaugural sovereign sustainability-linked bond (SLB) in 2022, the second ever in the world, tied its KPIs to preserving natural forests, as well as reducing GHG emissions, raising $1.5 billion at a 5.75% coupon.] 

If they do not achieve it, they are going to pay back less 0.1% on that coupon.

When we designed it, I was worried the market wouldn't buy because of the fluctuating coupon. It was oversubscribed five times. Some players couldn't buy it because their fiduciary obligations would not allow them risk being paid less than the coupon. But the market is eager for this [kind of paper].

Uxolo: You seem exuberant and optimistic. There's a massive elephant in the room in the form of US policy. Is that causing you any concern for development finance?

MN: Changes in policy of any UN member state happens daily. Sure, the US is a big player, but what I've seen this year is that the world is moving in the right direction. The Seville conference [4th International Conference on Financing for Development, FFD4, held in late June/early July] and the commitments made there was a consensus of 192 out of 193 United Nations members.

[In the Seville Commitment, ECAs were explicitly recognised as important catalysts for private capital mobilisation towards sustainable development].

And the climate negotiations are not stopping, with 121 countries bringing their NDCs forward. You want everybody to be engaged, but you respect the sovereign choices of a government which is elected by the people, and the world moves on.

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