The Brief: Mitigating currency risks, climate insurance in Brazil, green coffee in Rwanda, securitization for adaptation

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ImpactAlpha

Greetings, Agents of Impact! 

👋 Call No. 48: Investable opportunities in high-impact municipal finance. Fiscal justice, community resilience and mispriced risks are creating opportunities for high-impact investments through municipal bonds. Join Ryan Bowers of Activest, Diane Manuel of Adasina Social Capital, Eric Glass of Justice Capital, and other Agents of Impact for a showcase of tangible impact opportunities for fixed-income investors, Wednesday, Feb. 1 at 10am PT, 1pm ET / 6pm London. RSVP today.

Featured: Scaling Impact

How to get more international money flowing in local currency. High debt burdens, rising interest rates, and a global economic slowdown are fueling a debt crisis across emerging markets. Sri Lanka, Ghana and Zambia have already defaulted. The International Monetary Fund says up to 60% of low-income countries are in or face a high risk of debt distress. A critical opportunity: keeping long-term and patient financing flowing for local infrastructure and climate mitigation and adaptation. To do so, global investors must increase local currency participation, argues Osaruyi Orobosa-Ogbeide of Africa Finance Corp. in the latest post in ImpactAlpha’s Scaling Impact series with the Catalytic Capital Consortium. “To put it differently,” asks Orobosa-Ogbeide, “how do we encourage nimble and catalytic sources of international capital to take local currency risk?”

  • Project risk. “There is a currency mismatch” between foreign capital and local currency receipts in most infrastructure projects, says Orobosa-Ogbeide. Infrastructure, in particular, operates locally and generates revenues in local currency. The available long-term and sometimes patient capital is foreign, as are much of the equipment and contracting partners. That project risk “is capable of eroding value for investors, especially in African countries with persistent double-digit inflation rates,” he says. Risk-mitigation mechanisms are sometimes expensive and painstakingly slow. 
  • Lowering infrastructure costs. Orobosa-Ogbeide proposes three catalytic approaches: guarantees from central banks, country-adopted currency pegs, and aid for currency guarantees, in which donors provide first-loss guarantees to mitigate against foreign currency losses. Relying on the credit risk of the donor agency lowers infrastructure costs to the consumer. Investors have no problem investing in markets with weak currencies, says Orobosa-Ogbeide, “as long as there is some stability and predictability that allows for effective planning and risk mitigation.”
  • Keep reading, “How to get more international money flowing in local currency,” by Osaruyi Orobosa-Ogbeide of Africa Finance Corp. on ImpactAlpha. Catch up on ImpactAlpha’s Scaling Impact series. 

Dealflow: Climate Adaptation

BlueOrchard invests $5.3 million in Brazilian insurer Newe for climate resilience. Climate-driven floods, droughts and extreme weather around the world caused more than $268 billion in losses last year. Most vulnerable: smallholder farmers who lack access to affordable insurance. Newe is creating “parametric” weather and yield insurance “targeting small-scale farmers and people with low incomes in rural areas,” BlueOrchard’s Felix Hermes told ImpactAlpha

  • Automatic payouts. Traditional insurance policies pay policyholders based on damages, which requires lengthy processes to document the claims. Parametric models pay out preset amounts when pre-defined metrics are triggered – for example, a certain amount of rainfall in a short period of time. The triggers are verified by digital technology and sensors, saving money and speeding payments to farmers. Newe is now looking to bring parametric insurance to city dwellers facing risks of landslides and flash floods. “The opportunity for insurers in emerging markets lies with the unserved and underserved populations,” said Hermes. “Product innovation, technological capabilities, and digital channels are needed to succeed.”
  • Insuretech. Switzerland-based BlueOrchard’s investment in Newe was made via its InsuResilience fund, which aims to strengthen climate resilience in emerging markets. The initial $80 million private equity strategy was set up in 2017 in partnership with the German government and its development finance institution KfW. BlueOrchard is looking to raise up to $150 million for a follow-on fund. Other portfolio ventures include Igloo, which uses real-time data to help partners provide accessible insurance in Southeast Asia, and Probus, which is expanding insurance coverage for low- and middle-income households in India. 
  • More

Bamboo Capital’s ‘Build Fund’ backs Green Mountain Arabica Coffee in Rwanda. In Rwanda’s Karenge region, women-owned Green Mountain exports green unroasted coffee beans that it sources from 1,200 smallholder coffee farmers, one-third of whom are women. Bamboo Capital invested $360,000 in the company through its BUILD Fund, which it launched with the U.N. Capital Development Fund and the government of Luxembourg. Rabo Foundation, the impact arm of Netherlands-based Rabobank, invested $150,000. More than half of Green Mountain’s suppliers are certified under the Rainforest Alliance’s UTZ standards for sustainable farming practices. 

  • Inclusive economy. Green Mountain will use part of the investment to purchase a dry milling plant. Bamboo’s Jean-Philippe de Schrevel said the financing “will secure decent, secure, well-paid jobs, which in turn support worker’s communities and lift people out of poverty.” Jennet Kem of U.N. Women in Rwanda called the investment “a clear example of a catalytic multi-partner strategic collaboration to expand women’s entrepreneurship and economic empowerment in Rwanda.”
  • Check it out.

Dealflow overflow. Other investment news crossing our desks:

  • Outrider raised $73 million in a Series C funding round to make autonomous electric trucks for distribution yards.
  • Stockholm-based SunRoof secured €13.5 million ($14.6 million) from World Fund, Nordic Alpha Partners and other investors to build solar roofs in the U.S. and Europe.
  • Portuguese fintech startup Goparity snagged €2 million ($2.2 million) to connect investors to social and environmental impact projects.
  • Black woman-owned Oya Femtech Apparel scored $1.3 million in pre-seed financing to make performance wear for women’s health and comfort.

Impact Voices: Innovative Finance

Variations on a theme: Securitizing fees and taxes to finance climate adaptation. Ghana securitized an education tax to improve access to education. U.S. utilities are securitizing fees to pay for and prevent future storm damage. California has proposed to securitize vehicle registration fees to finance electric charging stations. Securitizing taxes and fees by issuing a bond backed by those cash flows, and using the proceeds to strengthen climate resilience and adaptation, “might help meet the most pressing climate finance need for emerging markets,” write the Milken Institute’s Alison Harwood, Rizwan Haroon and Mohammad Rakibur Rahman, scholars in the IFC-Milken Institute Capital Markets Program. Similar to what U.S. utilities have called “stranded cost securitizations” to purchase equipment and pay off debts, they write, “these securitizations are finding new life in the sustainability context.”

  • Timely action. An estimated 30% of Africa’s population faces exposure to destructive droughts, floods and wildfires. Most climate adaptation approaches do not generate revenues, making them less attractive for private investment, the authors say. Many African and other emerging market governments face fiscal constraints to borrowing for climate adaptation activities.  
  • Three principles. To make the transactions work, the bond must be backed by strong cash flows from a fee or tax with a strong track record. Legal protections are needed to make sure the proceeds are dedicated to paying off the bond. Governments must be protected from exposure to avoid creating fiscal pressure. And the taxes and fees must be designed for a population that can pay them to ensure workable economics. In South Africa, below-market utility fees made a proposed securitization to pay for the conversion from coal to renewable energy infeasible.
  • Keep reading, “Variations on a theme: Securitizing fees and taxes to finance climate adaptation,” by Alison Harwood, Rizwan Haroon and Mohammad Rakibur Rahman on ImpactAlpha.

Agents of Impact: Follow the Talent

Kelly McCarthy, former chief impact officer of the Global Impact Investing Network, joins Vistria Group as head of impact… The Clean Fight is looking for a program associate in New York… Re-volv seeks a development director in San Francisco… Calvert Impact is hiring an associate general counsel in the Washington, D.C. area… Antora Energy is recruiting a communications and policy manager in Sunnyvale, Calif… Georgeson has an opening for an ESG advisory director in New York… The W.K. Kellogg Foundation is looking for a mission driven investments analyst. 

Nonprofit Quarterly presents a webinar on Black “food sovereignty” featuring Demetrius Hunter of Black Farmers Hub, Brielle Wright of Black Farmers Market, and LeeAnn Morrissette of the National Black Food and Justice Alliance, Wednesday, Jan. 25… Climate Career Week will host a five-day free virtual event for tech workers exploring career opportunities in climate.

Thank you for your impact.

– Jan. 23, 2023