A discussion of market gaps in financing, using legacy data sources, and the risk of network biases with Esther Pan Sloane, head of partnerships, policy and communications for the UNCDF.
In this conversation with Climate & Capital’s co-founder, David Garrison, Esther Pan Sloane shares thoughts on these key points:
- The impact of climate is felt systemically. In that light, the problem we’re trying to solve “isn’t only about how energy is generated and distributed in the future; it’s also about how we restructure distribution and society to deliver some of those assets more equitably.”
- Use the data you already have. “There’s a ton of data that leaders already track, and they may not be thinking about what sustainability elements are attached to existing data.”
- There are known financing gaps in climate markets that must be addressed. “What I see is a structural problem with the international financial system that money is not flowing through. There just aren’t a lot of active funds there because it’s hard to generate pipeline.”
- Leaders must develop strong networks. “Unless you deliberately try to expand and diversify your networks, you’re going to end up talking to people who think exactly like you. Even if they don’t look exactly like you, they’ll probably think exactly like you.“
- Look beyond the leading economies. The work underway by LDCs is important too. “The LDCs are taking action, and there are things we can do to mitigate climate impacts — even if the big players are absent.”
This is an edited transcript.
What’s the burning opportunity in climate change?
Investing in a clean energy transition. There’s a massive opportunity here to reshape the economy and also human life.
Consider the way the global economy is structured: The biggest challenges that we see — poverty, migration, hunger — are not challenges because of a lack of resources. People are not poor because there’s not enough money. They’re poor because the distribution of money in the world is vastly unequal. They’re not hungry because there’s not enough food existing in the world. They’re hungry because they’re not able to access the food that there is, while other people are getting far too much food.
People are not poor because there’s not enough money. They’re poor because the distribution of money in the world is vastly unequal.
This is why the transition to the climate economy is so urgent: This isn’t only about how energy is generated and distributed in the future; it’s also about how we restructure distribution and society to deliver some of those assets more equitably.
We often talk about longer-term outcomes, like an equitable and sustainable economy, but not about the transition itself. Are there actions that are disproportionately important earlier on in the transition?
It’s a great point: I do think vision is important. But we also have to look at what will get us there. It’s all well and good to have a utopian vision, but what are you doing tomorrow?
It’s all very well and good to have a utopian vision, but what are you doing tomorrow?
There are so many steps we can take as individuals who control resources — even at a micro level — to get to a future we want. And leaders are starting to think about the investments they’re making in people, systems, and structures to make sure they’re ready to take those steps.
We see this in the climate targets that corporations are setting. They’re ambitious — some more ambitious even than the U.N. Sustainable Development Goals. AB InBev (which is going to be no-emission by 2025), for example, realized they wouldn’t meet internal SDG targets with existing technology, so they started a venture capital arm to help recycle water, chemicals and bottles.
Governments and corporations consider climate risk as part of their planning or diplomatic processes. The rigor and quality of those discussions vary, whether that’s because of board competence, data quality or something else. Does that concern you?
This is all a little bit Wild Westy. “G” is a new field, and I feel a lot like I did when I was a diplomat and all these Russian experts suddenly became Iraq experts. Demand shifts and supply goes to meet demand.
One place that comes out is in the scramble to find indicators. But there’s a ton of data that leaders already track, and they may not be thinking about what sustainability elements are attached to existing data. So, if you lack data, just start with what you’re already tracking as part of your core business — materially relevant things.
If you lack data, just start with what you’re already tracking — materially relevant things.
You probably know, for example, how much it costs to clean up your factories and dispose of waste. As Tony Milikin, chief supply chain officer at Keurig Dr. Pepper has said, “Waste is relevant.” If there was something leftover in the manufacturing process that Tony had to pay to have picked up but that he could sell to an organic farmer to use for compost, that’s reducing waste.
Is there a danger that, as large pools of capital enter and chase opportunities, we skew the market in certain directions?
The UNCDF faces this all the time: A focus on additionality and development rationale is critical in market intervention. Because if they’re applied incorrectly, you’ll crush free enterprise and massively distort the market.
Before the recent coup in Myanmar, for example, we supported a microfinance lender there. As they were about to launch their product, a development finance institution came in and gave the competing lender a zero-interest loan. That crushed the market — there was just no ability to compete.
Similarly in climate finance, existing structures get overbought. Some funds just have so much money and are looking for a certain kind of deal that you see outsized demand for things like renewable energy credit. Do those then start to water down impact, so that we wake up to find ourselves buying airspace in Denmark to offset our Tesla and not actually impacting places like Fiji or the Bahamas that are at massive climate risk?
There’s also a risk that we’ll see more bad deals when there’s a lot of liquidity sloshing around. The bar starts to lower, not-as-good deals get funded, and more of those fail. The challenge is that there’s the risk that people look at those and say, “Oh, clean water deals are terrible.”
There’s a risk that we’ll see more bad deals when there’s a lot of liquidity sloshing around.
And, of course, there’s a risk that money ignores all the smaller deals that aren’t as flashy or aren’t as easy but that are more impactful. We already see this happening: Finance in emerging markets tends to go to big entities and large projects that are de-risked by development banks; entrepreneurs looking for less than $5 million can’t borrow money.
There’s tons of impact investor money looking for the $50 million streetcar deal in Senegal. Everybody wants the same thing, but nobody’s willing to put in the time and effort and investment to grow a pipeline with deals that aren’t as beautiful.
So how do you ease the selection process to make smaller investments more interesting to institutional investors?
The UNCDF’s been wrestling with that for the last forty years. What’s needed is a pipeline to move companies from very-promising-but-no-chance-they’ll-ever-get-funded to being attractive to commercial investors. Without that deliberate support, they’ll never make it.
So, four years ago, we created an in-house investment platform that uses grant money to make loans and guarantees to small businesses, along with a blended-finance fund that takes those small businesses and gives them follow-on finance in the form of debt and equity.
Through this, we’ll do technical assistance grants and concessional loans up to a million dollars. The business pays us back, establishes a credit history, and gets another loan from a local bank. When it needs $1 million to $5 million of debt and equity, we pass them to our blended-finance Build Fund.
They’re still risky at this point — they don’t have a tremendous track record — but they’re looking better than they did when we got them, and investors in mezzanine and senior stakes are getting a start-up in emerging markets that has de-risking protection in the form of grant money in the fund. Once the company pays off that portion, they have a really good track record, and they can go into full commercial finance.
Investors in mezzanine and senior stakes are getting a start-up in emerging markets that has de-risking protection in the form of grant money in the fund.
Climate is inextricably linked to other issues like poverty. Where do you see promise for reducing risk and making these combinations of social investments more attractive?
We see entrepreneurs (like Aptech Africa and Mwezi) in solar panels, in water pumps, and in digital payment systems that target intersections like climate and poverty. Fantastic solutions are coming out of places where the problems are the greatest.
And there is finance here, but it’s not reaching that population. This was the idea behind our blended finance fund: If you provide 20% first-loss, that would be enough cushion to attract a mezzanine stake that pays 5% and a senior stake that pays 3%. That gives you an emerging-market investment that’s massively impactful and de-risked by the U.N. And you’re getting 3% to 5% a year. Isn’t that appealing?
That gives you an emerging-market investment that’s massively impactful and de-risked by the U.N. And you’re getting 3-5% a year. Isn’t that appealing?
We’re finding, though, that impact investors look at that structure and say, “I want 50% or 70% first-loss.” At a certain point, it’s like, come on! I get frustrated by the difference between the wonderful rhetoric we hear from governments, investors, high-net-worth people and family offices and their absolute reluctance to move.
It’s not like we’re asking you to lose money; we’re just asking you to try something new!
So what can we do about that?
Let me be clear: I’m asking people to invest on top of grant money or to buy an ETF that’s in the top five percent of the category. Our women fund [NYSE:WOMN], for example, was rated five stars by Morningstar and our NYSE:SDGA fund launched at $18 and is now at $28.
It kills me that we created an ETF in direct response to what the market was telling us it wanted: Something with more impact than what people have in their portfolios and the same returns as if you’d bought it from a big bank. European pension funds came to us and said, “We have $100 million for gender. What do you have?” And we’d respond with, “Well, we have some $50,000 loans in Myanmar. Want one?”
So, our mandate was to make an ETF as non-threateningly vanilla as possible. And we’ve done it not with emerging market stocks but with publicly-traded, wealthy-country-listed stocks that happened to have an extra benefit.
And yet, it’s been hard to convince people to put money in. Those same pension funds that asked for vehicles now say there’s not enough money in it. It’s very chicken-and-egg.
Those same pension funds who came to us asking for vehicles now say there’s not enough money in it. It’s very chicken-and-egg.
The truth is that we will not solve problems unless people are willing to do something. And it’s been frustrating to see a lack of appetite for things that solve a problem that everybody says they want to solve.
So, you now know that the problem isn’t that there’s nothing available. What’s your next step?
Clearly, poverty in the poorest countries is not the primary concern of people who buy ETFs. What’s more appealing? Climate.
We had a working group of banks and pension funds under a U.N. initiative called the Global Investors for Sustainable Development. Through it, 30 CEOs of big banks stood up with the Secretary-General and committed to more private sector finance behind the SDGs. Three years later, everyone’s done initiatives at their own banks, but nobody’s moved any money.
This was our attempt to ask asset owners what this should look like. And they told us: Tracks a major index; diversified; sector-agnostic; tracking error less than 5%; no carbon. So, we created an index that tracks their global equity portfolio, has zero carbon, and is strict on measurable decarbonization cuts by corporations (they have to prove they’ve cut scope one, two and three emissions by at least 7% each year for three years).
Let’s see if anyone buys it.
What are people not telling you that’s going to influence what you do next?
The thing they’re not telling us is that they still make a lot of money on fossil fuels. Despite everyone having net zero targets and talking about decarbonizing their portfolios, clients are not ready to give up the money they’re making from fossil fuels.
That’s the dirty secret: The climate transition is worthy work, but big oil is still a massive category, and most investors — unless they’re Finnish or Icelandic — aren’t ready to give up on all fossil fuels. That’s what scares me: People say they want low-fat ice cream, but they’re secretly eating Haagen-Dazs out of the tub.
That’s what scares me: People say they want low-fat ice cream, but they’re secretly eating Haagen Dazs out of the tub.
In your role as head of partnerships, policy and communication, you see patterns in how the market and companies think about relationships. How are networks evolving around climate?
If you’re looking for new investments, there’s a ton you’re not seeing just because of where you sit, who you talk to and who your relationships are with. So, leaders need to broaden their networks — not just for climate, but for retention, diversity, equity and inclusion and new business opportunities.
I recently took a course at the University of Capetown with a bunch of my colleagues: Impact Investing in Africa. There were amazing African entrepreneurs in that course. But your average New York- or London-based VC never meets those people and doesn’t get pitched by them. We see the same issue with female entrepreneurs: They don’t have access to networks with money.
In any field, people group with people like them and work with people they’ve worked with before. That means you tend toward doing the same thing over and over.
So, unless you deliberately try to expand and diversify your networks, you’re going to end up talking to people who think exactly like you. Even if they don’t look exactly like you, they’ll probably think exactly like you.
Unless you deliberately try to expand and diversify your networks, you’re going to end up talking to people who think exactly like you.
What’s the UNCDF doing to consistently challenge the biases in its own networks?
I don’t think the U.N. does a very good job of that. Everyone at the U.N. believes in multilateralism and they believe climate change is caused by human activity, which is wonderful. But there are a lot of reality checks in this world.
Look, development is hard. And seeding companies is hard. Lots of things fail along the way. So, we need to interrogate ourselves and ask how we can prove we’re achieving impact. We need to show donors (and ourselves) that our assumptions are correct. Was there something that impacted our results — a coup or violence? Would this have worked otherwise or were we just wrong?
I love the idea of [Climate & Capital Connect and] having a non-partisan venue where people can share ideas because you could be an oil and gas person that has extremely valuable knowledge. How do you manage a grid? How do you store energy? How are you transforming to be more resilient?
I like the idea of not demanding orthodoxy. Because you don’t want everyone to believe the exact same thing. What you want is for them to share what knowledge they have.
And if you create a space where people can have long-form discussions and go into topics in-depth, where they share views and feel they’re respected, where other people take them at face value … Well, then you’d be creating one of the rare venues where people meet and have reasonable discussions. That would be amazing.
Discussions of climate generally focus on China, the U.S. and large banks. What do we need to understand about the smaller players?
Everybody thinks if China and India don’t do it, it won’t happen. But the LDCs are taking action, and there are things we can do to mitigate climate impacts — even if the big players are absent.
We have a program called LoCAL, for example, that helps local governments in LDCs plan and execute climate-resilient infrastructure projects, designing a plan they can take to the Green Climate Fund. It’s official guidance from the UNFCCC that will be adopted at COP and will expand to twenty countries over the next few years.
Steps like that are being taken for small businesses, countries and municipalities everywhere. New York City, for example, just built two megawatts of solar power on a massive housing project that I can see from my apartment. That’s part of its commitment to bring solar power to poor communities while reducing the cost of electricity. The New York City Housing Authority will actually make money on it because they’re renting their roof space to a solar panel company. There are so many exciting and optimistic movements like this happening.
What unexpected market constraints and infrastructures are going to rise in importance in the coming years?
That’s a good question.
Humans want to build relationships. And if I come to trust you, I’ll do something with you again. So, the technologies that will help us ask how it becomes possible to meet more people, but also to build good relationships with them and accelerate the process. If there’s a fantastic female entrepreneur in Malawi with a dairy, how do I get her in front of five VCs who wouldn’t see her otherwise?
The technologies that will help us ask how it becomes possible to meet more people, but also to build good relationships with them and accelerate the process.
The U.N. gives us a shared vision and framework against which we can align our actions. We’re all leaders going through a constant transformation with that as a backdrop. What do you most need to solve for as you lead your team and the UNCDF in this great climate transformation?
It’s that constant struggle to keep the faith. People join because they’re idealistic. And the UNCDF has more freedom than most U.N. agencies, but it’s not easy to come to solutions — the U.N. is bureaucratic and slow and there are barriers.
Plus, there’s the challenge any manager faces keeping a team together when you haven’t seen anybody in person for eighteen months and your team’s spread across fourteen time zones. Despite the pandemic, we have to deliver impact.
And then there’s the challenge of making sure we’re focused on the right thing. The world is changing and this model of the multilateral system of the United Nations getting money from rich countries to spend on the poor countries isn’t going to last forever.
The question is how we position this entity for the future, how we try new partnerships, how we create new income streams, all while keeping our development impact and bringing people along who don’t really want to change.
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Climate & Capital’s Leadership Interviews is an ongoing series of in-depth discussions with a wide range of leaders in the climate economy. It explores the nuance and tension in leading bold transformations — of individuals, organizations and markets — at the intersection of climate and capital. We hope these conversations give you food for thought and spark conversations as you lead in the climate age. We’re looking forward to hearing from you. (Twitter: @davidcgarrison)
