Mitsubishi Group and UN back $1.5bn climate debt fund that targets ag

Pollination’s Nick Anstett says communities reliant on agriculture for their livelihoods are often least able to make the type of climate change adaptations that will be targeted by the vehicle.

Climate Fund Managers has been appointed fund manager for the GAIA blended finance debt vehicle, which will be advised by Pollination and has a $1.48 billion target.

The platform began as an effort between FinDev Canada and Mitsubishi UFJ Financial Group, who have collaborated with the UN Green Climate Fund and other unnamed investors to contribute about $440 million to the vehicle.

The fund is expected to reach a $500 million first close in the second quarter 2024, with the $1.48 billion target achieved within 36 months.

GAIA’s strategy calls for 70 percent of investments to be devoted to climate adaptation through sectors including food, water, infrastructure, public works and others. The remainder is devoted to climate mitigation investments in transport and industry electrification, green building and mass transport.

The fund has a 30-year term and a 15-year investment period to allow for capital recycle. The strategy targets 25 countries with a focus on Least Developed Countries and Small Island Developing States. It will provide investments in the form of loans, credit facilities and private bonds.

“While water, grid and others are probably the easiest ones to start building pipeline around, from an impact perspective, being able to play around food security, climate resilience and agriculture is going to be really important to everyone around the table at GAIA,” Pollination managing director Nick Anstett told Agri Investor.

Anstett said the fund will lend exclusively to states and municipalities to support relevant businesses in part because such entities have already been the focus of existing financing provided by developmental finance institutions and multilateral development banks. He noted the recent entry of large investors including Brookfield and Macquarie into blended finance vehicles for sustainable infrastructure investments has also helped expand the audience for offerings such as GAIA, which expects to solicit investments from both public and private sector LPs.

“A lot of the early blended finance vehicles that the AXAs and Allianz-es and others of the world got involved in were ones that were co-lending with, or buying participations in loans issued by, the MDBs [multilateral development banks],” he added. “A lot of institutions are already quite familiar with blended structures that are lending to sovereigns.”

Anstett said commitments to the fund will range between $5 million and $75 million, with most likely falling somewhere between $50 and $75 million. In addition to institutions in Europe and North America, fundraising efforts will also include corporates with a strategic desire to lead on climate adaptation in vulnerable markets, according to sources familiar with the effort.

“No longer are you having to describe a brand-new concept around blended finance as well as describe the specific structure of your fund,” said Washington, D.C.-based Anstett, who joined Pollination in early 2021, according to his LinkedIn profile. “Now, you are really just having to dive into what the structure of your fund is and with that, these conversations have become simpler.”

Vulnerable communities 

The GAIA fund’s structure includes junior equity and senior debt investments. Anstett explained that part of the timing and pace of fundraising milestones for the vehicle will be influenced by provisions in the structure of the fund that dictate concessional capital make up a maximum of between 20 and 30 percent of total capital at any given time.

Such provisions, he said, are part of the innovations that have been required to expand the audience for blended finance vehicles, especially those with a focus on the developing world.

“This is a challenge in blended finance,” said Anstett. “Everybody wants to say that they are willing to be able to help, but the return expectations a lot of investors have in developing markets to compensate for the perceived risks of doing business relative to developed markets is too high. It creates a cost of capital for borrowers in those markets that is too high.”

Pollination’s advisory work has revealed that oftentimes there are investments being made in emerging markets agriculture with a focus on economic development that, with small changes, could be categorized as adaptation-related programs, Anstett said.

“Folks that are reliant on agriculture for employment and livelihoods are oftentimes some of the most vulnerable and least able to adapt to impacts,” he added. “It’s our expectation that in the agricultural space in particular there is going to be an abundance of opportunities that folks certainly aren’t thinking about as climate adaptation.”