8 JUNE 2023
Global Asia Insurance Partnership (GAIP), in collaboration with the Monetary Authority of Singapore, organised a roundtable on 8 June 2023 to increase understanding of the role the insurance sector can play in upscaling and de-risking blended finance. This document is the summary of the Roundtable – "The Role of Insurers in De-Risking and Scaling Blended Finance.
BACKDROP
Climate change is one of the most critical challenges facing humanity. Its far-reaching consequences threaten the well-being of people and the planet. Significant investment is needed to avert the most dangerous and systemic impacts of climate change. Alternative financing mechanisms – innovative and scalable enough to increase the availability of funding – are required if we are to fill the transition finance gap. Blended finance has emerged as a powerful tool in the fight against climate change.
Blended finance is the strategic use of concessional (public or philanthropic) capital to help mobilise private capital to finance projects that advance countries' net zero transition (e.g., sustainable infrastructure). The financing needed for the net zero transition exceeds the capacity of public finances, and blended finance can help open-up the needed transition funding into climate-related projects.
The Global Asia Insurance Partnership (GAIP), in collaboration with the Monetary Authority of Singapore, organised a roundtable on 8 June 2023 to increase understanding of the role the insurance sector can play in upscaling and de-risking blended finance. The roundtable brought together senior representatives of academia, the regulatory community, multilateral development banks, international organisations, banks, asset managers and the insurance sector to discuss the challenges and opportunities of blended finance, with a focus on activating the insurance sector. Participants explored the required scale and magnitude of the transition finance gap and the various challenges and opportunities for maximising the insurance sector's participation. Alternative financing mechanisms – innovative and scalable enough to increase the availability of funding – are required if we are to fill the transition finance gap. Blended finance has emerged as a powerful tool in the fight against climate change.
ACTIVATING THE INSURANCE SECTOR IN BLENDED FINANCE
There are several obstacles to blended finance in Asia that could undermine its impact, such as lack of sufficient projects at scale, insufficient data to assess risks and viability, as well as concerns of political risk, construction risk, accountability, and project ownership.
Roundtable participants recognised the key roles the insurance sector can play with blended finance – as investors and underwriters. In addition, the sector can leverage its analytic capabilities, supporting risk assessment of underlying projects. Participants also noted there are significant challenges if we are to activate the insurance sector.
The next section details the various challenges and potential opportunities and solutions for insurers to help scale up and de-risk blended finance.
Early Involvement in Contractual Arrangements
Insurers are usually approached quite late on their participation in blended finance transactions – whether they are providing risk underwriting, advisory services, and/or investment funds – often only after key financial arrangements are finalised. This late involvement limits the sector's capacity to come in as an advisor, as well as to assess risks of the underlying projects or activities and offer other risk management tools. Limited say in such complex contracts can increase the perceived risks of blended finance instruments and thereby discourage insurance companies from participation as underwriters, advisors, and/or investors.
Engaging insurers (or insurance brokers or other parties who have comprehensive understanding of the role and potential added value that insurance can provide) earlier in the process of structuring blended finance instruments would enable a wider range of contributions from the insurance sector and ultimately support the robustness and attractiveness of blended finance deals to insurers. Earlier involvement of insurers would also provide benefit from the capabilities of the insurance sector as a risk advisor and through enabling greater access to insurance risk management tools.
Product Innovation & Adaptability
Heterogeneity between markets, particularly within Asia, makes scalability of blended finance difficult. At a macro level, varying economic development levels across regions, countries, and governments makes it difficult to structure blended finance investments which can meet the thresholds of size, project tenor and quality that institutional investors, such as insurers, are looking for. Influenced by such heterogenous markets, this lack of scale and scope may result in increased risk and result in very niche instruments directed towards very specific industries or project types.
One way is to take a system approach which integrates insurance and lending opportunities. Through connecting both aspects of the financial system, we can potentially unlock greater opportunities and encourage more sophisticated risk decision making. Moreover, new and specialised insurance products, e.g., geothermal exploration insurance, could help encourage investments, in turn supporting our transition to net zero.
"One way of finding a more feasible solution is combining different elements of financial markets. We can combine insurance with lending approaches. We need to talk about different stakeholders coming together to resolve capacity in insurance markets and financial markets, and, if you really think about the scale of the problem of a global pandemic, the public sector as well. Generally, in these situations where you have partial market failure because of the systemic risk nature and high expected loss, I think combining these different instruments is useful."
Projects Consolidation & Aggregation
The limited size and supply of transition projects that can be financed through blended finance transactions, can impede long-term planning, risk management and deployment of capital.
Aggregation of projects will help enhance the supply side. Participants noted that aggregation could enhance access to risk advisory and risk management services from insurers as well as increase the funding opportunities for otherwise smaller projects (less than S$100M).
Underlying projects, particularly those located in emerging markets, could benefit from greater access to the capabilities of global (re)insurers to pool such projects and build enough capacity for insurers to underwrite. It can be difficult, particularly for smaller projects, to access such capabilities independently.
Platforms, facilitating consolidation and presentation of such project portfolios could help strengthen the supply of investable projects. Such platforms could also help various stakeholders towards the application of consistent standards and KPIs towards multiple projects (e.g., Paris-aligned Projects), present opportunity to learn moving from one project to another, and allow the accumulation and consolidation of data for analytics and scenario testing.
Added consistency, and a combination of technical assistance from de-risking and risk-tolerant concessionary capital would only add to the confidence of the private sector to come in.
Capacity Building
Lack of talent is inhibiting the growth of blended finance arrangements, specifically related to green and developmental projects.
Talent availability varies across countries and regions, which could hinder insurers' internal capacity in areas like climate-related risks, or the analytical capabilities to carry out project assessment.
"I think it's fair to say that the appetite of the industry in general is faster or better than the talent that's available in some of these sectors, so we would love to grow for example our renewable energy team, we would love to grow our climate advisory capabilities, but there is a talent gap in the marketplace."
Risk advisory and talent development in areas like climate, new and emerging risks, new technologies (e.g., energy storage solutions, future fuels, and distributed energy solutions) are required. Stakeholders will have to collaborate to help upskill the industry and to attract a wider range of analytic skills and technical backgrounds to insurers.
Data & Analytical capability
The scarcity of readily available and standardised data – at project level, country level, and at risk level – leads to heightened risk perceptions and can deter investment decisions.
Identifying, analysing, and managing risk needs data. The lack of data, combined with having multiple and staggered sources of data, inconsistency between sources, data quality and timely availability compounds the problem. Lack of quality data backing insights – e.g., the amount and sources of concessional funding, conditions and terms, clarity on types and probability of risks – makes it difficult to link the blended finance supply to the investment demand.
There is a significant need to increase both the availability of relevant data and the capabilities to utilise this data. Improvements in data consolidation, cleaning and mining will allow more granularity and improve analytics.
Making data available and improving its quality would not only help insurers confidently participate in blended finance, but also enhance their role and capacity as advisors. Utilisation of sophisticated data tools to strengthen integration of historical and real-time data, as well as increasing utilisation of predictive trend data, will support more comprehensive risk assessments.
Taxonomy & Standards
Ambiguity and confusion around the definition and scope of developmental projects can limit the attractiveness of blended finance.
The issue is only amplified when an insurer or other investors may look at multiple markets, to create economies of scale with a sound supply of investable projects. Given that different jurisdictions and countries are approaching green transition in different ways, the need to enable comparability is critical.
Collaboration among regulators, industry bodies and associations producing regulatory guidelines and best practice guides would further help in several aspects, including but not limited to areas of pricing, reporting investment performance attribution and other KPIs and standards.
Clarity around the definition of transition finance, standards and guidelines on thematic areas, tenor, funding mix, KPIs and thresholds of the investment mix would support the sector's participation in blended finance. Information, clarity, adoption of taxonomies and clear sectoral pathways that follow those taxonomies, would give more confidence to the private players.
"So effectively, you need the relevant big data of transition to have adoption of taxonomies, whether it's the ASEAN version or their own national ones. And then clear sectoral pathways that follow that taxonomy, and that will give private investors, like you, a lot more comfort."
Quantitative metrics/guides would serve as KPIs for insurers; they would serve as disclosure to regulators, and as reporting standards to the market. Climate transition guidance – more specifically, how could insurers transition, broader KPIs, qualitative and quantitative metrics etc. – is much in demand.
Enabling and Supportive Environment
Increasingly, the insurance sector is mindful of the risks associated with collaborating; businesses run the risk of being accused of greenwashing and some markets have seen accusations of collusion levied against firms who collaborated on meeting certain ESG commitments.
With this comes the need for supporting polices and regulations, encouraging dialogues, design, and implementation of needed actions to ensure a new capital framework, such as minimum capital requirements or the use of market discipline, to improve risk sensitivity.
There is scope and potential around enabling an inclusive environment, with alignment, understanding, communication and transparency among various stakeholders from the private and public sectors. Regional and global collaborative models backed by KPIs, standards, regulations, and capacity, with the flexibility to adopt and adapt, is needed. With that, the role of a convenor, with the ability to see beyond the silos of sectors, stakeholders, or regions, cannot be over-stated.
Role of a Convenor
The importance of the role of a convenor here cannot be overestimated – enabling discussions and collaboration among the private, public and the non-profit sectors, and multiple-stakeholders – to identify gaps, highlight challenges and work towards the development of innovative solutions and helping with their adaptability across countries and regions, understanding that different countries transition in different ways.
CONCLUSION
Blended finance is pivotal for the net-zero transition and, given the nature of the insurance sector and its strong commitment towards resilience and long-term sustainability – it is critical the insurance sector be engaged as active investors and advisors. With the industry's capabilities to identify, understand, analyse, and price risks, and to mitigate them, additional value in the form of new opportunities get created, strengthening liquidity, and potentially opening up financing to otherwise non-bankable or marginally bankable and risky projects.
"The insurance sector has a lot of experience, appetite, and enthusiasm for working with clients, on extremely complex and large-scale projects, that are looking to be involved with green and transition finance."
All the identified barriers, challenges, and opportunities, point to the need for greater collaboration – towards the development of new products, frameworks, or standards, and talent development and capacity building. Thus, the role of a convenor is crucial to help facilitate the collaboration required.
"If a right convenor can come along, provide the safeguards in a standardized, clear, transparent way, it also helps the insurance sector as an investor. So, let's hope for more of such right convenors to show up, who have the necessary expertise and can guide us."
