Global bond markets, along with banks and governments, are the main source of funding for investment in environmentally friendly infrastructure and the transition to clean energy. Although such bonds are a relatively recent innovation, the green bond market has grown rapidly from its start in 2008 to around $800 billion in outstanding issues. The problem, however, is that green bonds, which represent less than 1% of global bond markets, have been issued disproportionately by government-sponsored entities, corporations, and municipalities in developed markets. In the emerging market countries where the infrastructure investments are most needed, they barely exist.
The authors describe a new investment vehicle, called the AP EGO fund, whose mission and MO are to channel the vast global pools of institutional savings that are now invested in low or (even negative) yield fixed-income assets—as much as $17 trillion in 2019—to higher-return emerging markets green investments, in particular sustainable infrastructure, by creating a new asset class: emerging-market green bonds issued by banks.
The AP EGO fund is premised on and involves a reworking of the public-private partnership (PPP) into a form they call the global public-private investment partnership (or GPPIP). Unlike the PPP, which combines a public agency with a private operator, the GPPIP has four instead of just two partners. In addition to the standard public agency and the private concession operator, there is a development bank—in this case the International Finance Corporation (IFC), which is the financial markets affiliate of the World Bank—and private investors that include emerging-market banks as well as global institutional investors.
Along with the mediating role played by a public agency like the IFC, the AP EGO Fund is fundamentally different from other PPPs in that it takes the form of a special purpose securitization vehicle whose shares are backed by a pool of green bonds issued by emerging market banks in multiple emerging market countries. And besides its application to a new asset class, the fund also breaks new ground by applying a securitization technique with a fund structure designed with an embedded “first-loss” protection to a global pool of green bonds originated in emerging market economies. By means of this structuring, the green-bond-backed fund shares issued by the AP EGO are now providing developed market institutional investors with somewhat higher-yielding fixed income securities that nevertheless carry an investment-grade rating.