Deciphering the Climate Resilient Investment Blueprint Backed by Global Insurers

Something’s brewing in the climate resilient investment space — something big. It involves a who’s who of global insurers, the world’s largest asset manager, and a think-and-do-tank with links to some of the most influential development bodies in action today.

I’m talking about the so-called “Blueprint” for resilient infrastructure investment: a plan for allocating insurers’ long-term capital to climate-proofing projects across the developing world. It’s the kind of big ticket initiative climate advocates have been waiting for, and a chance for the top names in insurance — like Axa, Allianz, and Zurich — to prove that chunky resilience projects in poorer nations make sound investment choices.

The Blueprint is the brainchild of the Insurance Development Forum (IDF), a public-private partnership set up in 2014 to get capital moving to the places it’s most needed. First announced in April, the language used to describe the Blueprint was tantalizingly vague:

“The blueprint is aimed at mobilizing insurance industry investments into the development of smaller to mid-size commercial infrastructure projects in developing and emerging markets. This includes investing in a diversified portfolio of greenfield and brownfield commercial infrastructure projects in sectors such as renewable energy, water, waste, transportation, social (e.g., hospitals, education and government-backed housing), digital infrastructure and telecommunication, as well [as] nature-based solutions geared towards enhancing the resilience of vulnerable communities in emerging and developing economies to risks specifically from climate change and other natural disasters.” 

The “Blueprint” coinage suggests a taxonomy: a means of classifying resilience projects for insurers, perhaps? But the references to investing in real assets and the language of capital mobilization imply some sort of pooled investment vehicle — a fund, in other words. The involvement of asset manager BlackRock, tasked with putting “the blueprint into action,” suggested the same.

At the time of the announcement I called around for further details – to no avail. The Blueprint’s architects showed little willingness to elaborate.

Decoding the Blueprint

However, a little extra light was shed at the Bonn climate meetings earlier this month, where Paul Flavier, head of group strategic asset allocation at AXA and a member of the IDF Infrastructure Task Force, which developed the Blueprint, gave a presentation on the initiative.

The other week I was lucky enough to quiz Axa chief investment officer Jean-Baptiste Tricot, another member of the Task Force, on the Blueprint, too.

At Bonn, Flavier revealed that IDF members, a group which includes insurance heavyweights Allianz, Aviva, Prudential, Zurich — and, of course, Axa itself — had pledged up to US$500mn to the Blueprint. This may be a small amount given the adaptation and resilience needs in the developing world, true, but it’s a start.

Flavier also stressed that the Blueprint is supposed to be the start of something bigger: “If it’s the start of a series of funds, it’s [the US$500mn] a reasonable number to start with,” he said.

“If we manage to put the Blueprint into action, ideally someone would take that idea away from us and replicate this, and we think by replicating this we will be able to address part of the challenge we are facing,” he added.

Flavier further revealed that the first iteration of the Blueprint is scheduled to close in the last quarter of this year.

Tricot confirmed that the Blueprint is supposed to be just that — something that others can use to build their own funds and investment products. “Like any investment, you need to have a bias for optimism. You need to think that things will go well. With this mindset I think we can develop something particularly strong. And hopefully with time and with repetition, I think it can make a difference and attract more attention and also emulation,” he says.

In addition, the Blueprint’s structure appears to lean on the blended finance model that’s proving so popular in the climate space. One of Flavier’s presentation slides, though hard to decipher, suggests investors can pick between two different risk pools. The first, the “blended pool”, is investing in high risk countries, but has development finance institutions pledging to absorb the first wave of any possible losses, providing some level of protection to private participants. The second is a “senior pool” investing in lower risk countries. Less downside protection is included in this pool, but the higher credit ratings of the target countries should mean losses are less likely — though by no means impossible.

A Dual Mandate?

Whether the Blueprint turns out to be a one-off or the first of many such funds will likely depend on two factors: the financial returns generated and the positive impacts produced. Achieving both, and at the appropriate scale, may prove challenging.

Emerging markets investments are high risk endeavors at the best of times. See-sawing foreign exchange rates are one headache; political instability another. And let’s not forget reputational risk. After all, rich world institutions don’t want to be dragged through the mud back home for supporting projects masterminded by unsavory regimes, or those that have the whiff of neocolonialism about them. 

At Bonn, Flavier showcased a whitelist of countries targeted by the Blueprint, ranging from big, rapidly-developing nations like India and Brazil, to smaller, more economically challenged states like Rwanda, Botswana, and Guatemala. In all, 33 countries feature on the list. Flavier noted that the investable universe for institutional investors is “shrinking” because of geopolitical and political risk — a trend that policymakers should hurry to reverse if they want to spur more private sector capital into climate-vulnerable regions.

Investors in the Blueprint are likely expecting attractive returns in exchange for taking on lofty amounts of risk in these countries. Moreover, these being climate-resilient investments, the expectation would be that they are long lasting, meaning they reliably throw off cash year after year. At Bonn, Flavier conspicuously made the point that if we want developed markets institutions to get stuck into climate resilience, “compelling returns” have to be part of the equation.

The Blueprint offers investors other benefits beyond pure alpha, however. “There’s always a bit of a free option in finance and investment, which is diversification,” says Tricot. “We can finance all the same projects, the same wind farms, the same solar panels in Europe, in the US, and you will bring liquidity, you will bring narrower spreads — that's great. But you want also to diversify.” To massive investors like Axa, which has €946bn (US$1trn) in assets under management, diversification is valuable in and of itself. “We can make a decent living out of this,” Tricot adds.

As important to the Blueprint as good financial returns, however, are meaningful climate resilience outcomes. After all, if the investments don’t harden communities against climate shocks, what’s the point of having a resilient infrastructure blueprint in the first place? 

From the investors’ perspective, measuring and monitoring their investments’ contributions to climate resilience is likely to be a challenge, though not an insurmountable one. For his part, Tricot makes it sound like analysis paralysis is something the IDF wants to avoid. “There’s much more cost in looking for perfection than cost in trying something,” he says.

At Bonn, Flavier explained that potential investments would be filtered through a sector exclusion screen and have to map to three impact-oriented themes: Resilience, Access, and/or Support to Local Economies. A hard-to-read slide shared during his presentation includes metrics for tracking progress against these themes:

For those who can’t make out the text, under the Resilience theme are metrics including “project/corporate budget/CAPEX committed to physical resilience measures” and “increased protection of population against natural disasters.” The Access theme includes “number of schools, hospitals and housing units built/financed” and “number of individuals served”, among others, while Support to Local Economies has “jobs created in construction phase” and “salaries paid locally.” These are vague, as you would expect from a presentation slide, but it’s already clear a broad view of climate resilience is being used to define eligible investments. 

Perhaps the nebulous quality of the themes and metrics is deliberate, though. We know that climate resilience needs differ from place to place, and from asset to asset. Trying to cobble together a fund out of assets that all subscribe to a narrow definition of resilience would be a tall order, and may not actually lead to the most positive outcomes. “I prefer that we find a pragmatic route that will enable us to deploy good risk, to good projects, with a good financial profile and good outcome profile,” says Tricot.

This is also where the ‘public’ aspect of the IDF’s public-private partnership could come into its own. At Bonn, Flavier stressed that the public sector has an important role to play helping gauge the climate resilience contribution of insurers’ investments. 

What Next?

When reached directly for comment on the Blueprint earlier this month, the IDF did not provide many additional details beyond those included in the April press release. A spokesperson said insurers “have shown strong interest in the ideas presented in the Blueprint and look forward to putting them into action”, then promised further details would come in due course.

What’s going on behind the scenes delaying a more fulsome disclosure of the Blueprint escapes me, but the broad contours outlined in Flavier’s presentation suggests it could have a big impact on the climate resilient investment space.

That’s his hope, certainly:

“We can draw a line — and a very obvious line from our point of view — between resilience, infrastructure, financing, and insurance. And I think if we can create this conduit that will pave the way to success in terms of financing and channeling more flows toward developing economies and to address the theme of resilience,” he said.

Thanks for reading!

Louie Woodall
Editor