NDC Investment Summit SMIAC Investable Asset Classes Working Group

GEMs3.0 Investor and Philanthropy Consultation by Mahesh Kotecha, CFA

The global financing needs for climate initiatives are immense, with estimates indicating a shortfall of tens of trillions, particularly in Africa. Attracting private capital at scale is essential, yet a major constraint is the need for robust risk assessment data and risk migaon structures in emerging markets. The GEMS 3.0 Plaorm addresses this by transforming data on defaults and recoveries into powerful analycal tools, enabling instuonal investors to evaluate the credit and recovery risks of climate debt in African and other emerging markets.

The GEMS Master Scale will segment risks to account for the greater volatility and uncertainties in emerging economies and enable lending institutions to align their internal credit rang systems with the GEMS framework, facilitating improved credit analysis and decision-making. This could lead to increased asset allocations as risk may then be better assessed and perceived. At the heart of GEMS 3.0 is the Master Rang Scale, a credit rang system designed to assess the creditworthiness of sovereign nations, corporations, and other entries in emerging markets. Unlike traditional rang agencies like S&P,

Moody’s, and Fitch, the GEMS Master Scale focuses on the unique risks and opportunies in these regions. This scale serves as a common language for GEMs member instuons and their lending counterpares, ulizing a Probability of Default (PD) rang scale based on observed default rates. GEMS 3.0 will collaborate with rang agencies and others to establish a comprehensive master rang system that categorizes loans based on creditworthiness and risk across global emerging markets. This system will include clear rang categories, definions, and mappings to major rang agencies.

By providing a standardized framework for assessing creditworthiness, GEMS 3.0 will enhance understanding of default and recovery rates globally, ulmately improving investment decision-making. Given the complexity of developing and pilong the GEMs 3.0 Master Rang Scale, we are very fortunate to be able to draw on powerful analytical technologies and the deep expertise and networks of the Sustainable Markets Initiative (SMI) members and Asset Owners, Blended Finance, Banking and Finance and Insurance Hubs.

Proposed Investment Grade Plaorm for African Climate Debt One soluon is to use the GEMS 3.0 framework to create an investment-grade first-loss plaorm, helping African issuers of climate debt access lower-cost funding for climate projects. Such credit enhancement has previously led to higher investment volumes at lower costs from global instuonal investors. GEMS 3.0 data analycs could be used to structure a suitable mix of polical, counterparty, and liquidity guarantees from official and/or private sources, thereby achieving investment-grade rangs for projects in non-investment-grade countries.

Feasibility at the transaction level has already been demonstrated for non- investment grade countries through a €288 million privately placed hospital financing in Turkey rated Baa2 and a two-tranche $335 million renewable energy refinancing for Virtue in Egypt rated BBB+. Both deals received a combination of MIGA’s political risk insurance and EBRD’s liquidity guarantee. If these precedents can be leveraged based on GEMS 3.0 to create a programmatic investment-grade platform for African climate projects, it could boost climate financing by tens of billions of dollars.

If implemented on a programmatic basis, the platform would lower borrowing costs and significantly increase access to capital for African and other climate projects. This innovation could also facilitate the use of single-A or higher-rated financial guarantees for climate finance, offering greater financial leverage (e.g., 10x or more) on the guarantor’s equity for its climate debt guarantees.

Financial Guarantees Could Unlock Hundreds of Billions in Climate Debt Historically, the financial guarantee industry has proven its ability to facilitate capital markets access at scale, guaranteeing around $3 trillion in capital markets debt before 2008. Despite recent contraction, it still supports half a trillion in debt capital markets financings primarily for OECD country borrowers. Efforts are underway to adapt this model for emerging markets. I have proposed a Global Climate Corporation Financial Guarantor (CFCFG) to expedite this process, which could greatly enhance funding for climate projects. Such a financial guarantee company, if combined with an investment-grade platform, could lead to the issuance of single-A or higher-rated debt financings at scale, providing access to more than $50 billion in debt capital.

Pooled Securization and Investment Vehicles The structuring of investment-grade financings through GEMS 3.0 analytics could also foster direct investments in climate debt. This has been demonstrated for Asian and Middle Eastern infrastructure financings in a series of five securization transactions totalling approximately $1.5 billion. Building similar funds could significantly enhance emerging markets climate investments.4

Conclusions

The analycal tools of GEMS 3.0, including the Master Rang Scale, will align global investors’ varying preferences for safety, liquidity, and yield with the appropriate atributes of innovave investment structures. This alignment will unlock investments in African and other emerging markets’ climate debt. This approach requires an evoluonary and phased rollout, inially focusing on selected countries, segments, and instruments. We recommend starng with countries that have strong commitments to Naonally Determined Contribuons (NDCs) and supporve regulatory environments, such as Kenya and South Africa. Priories should also be given to key sectors like renewable energy, e-mobility, sustainable agriculture, and water management, all crucial for climate adaptaon. Instruments such as green bonds, climate-linked loans, and innovave financial products like single-A rated guarantees for climate debt should also be priorized.

In conclusion, GEMS 3.0 should initially target key countries and sectors to maximize institutional investment impact through innovative financial structures including blended finance. The incorporation of the GEMS Master Rang Scale will be essential for assessing creditworthiness and enhancing investment decision- making. By leveraging strategic partnerships and robust data access, GEMS 3.0 can significantly improve the credit quality of green projects, making them more attractive to private investors and accelerating capital flow toward sustainable development goals.