Vivek Pathak | Global Head of Climate Business, International Finance Corporation (IFC)
2022-07-29
Vivek Pathak is IFC’s Global Head and Director of Climate Business. In this role, he facilitates business growth, provides thought leadership, new product development and facilitates all work related to climate business. He is responsible for identifying new business opportunities for climate business and facilitating the mobilization of capital into this space. Prior to his current appointment, Mr. Pathak was IFC’s Regional Director for East Asia and the Pacific, leading advisory and investment operations across 18 countries, which in fiscal year 2020 reached US$4.2 billion in long-term investments, including funds mobilized from other investors.
He has extensive emerging markets experience in principal investments, restructuring and risk management. Earlier in his career, Mr. Pathak was Global Head and Director for Investment and Credit Risk, responsible for global coverage of credit risk, investment risk, integrity risk, pricing and credit/equity training. Prior to that he oversaw IFC’s portfolio in the Middle East and North Africa and led business development in frontier markets in the Middle East and North Africa. Before IFC, Mr. Pathak worked at Bank of America and ABN AMRO Bank in new business and risk management. In this episode we discuss Climate Finance, ESG investing, and how an economic downturn might impact Climate Investments. Hope you enjoy my conversation with Mr. Vivek Pathak!
00:00 IntroductionAre you looking to become a leader in clean energy and an expert in cleantech? Do you hope to get noticed in the crowd as you pursue a career in this fastly growing industry? You are in the right place. Join Karan Takhar as he invites clean energy leaders to share industry developments, highlight cleantech investment opportunities and shed light on how you can increase their chances of employment in this high-growth sector. We will also discuss the energy transition across key emerging markets like India and explore partnership opportunities for the US private and public sector. After all, this is the Zenergy podcast.
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He has extensive emerging markets experience in principal investments, restructuring and risk management. Earlier in his career, Mr. Pathak was Global Head and Director for Investment and Credit Risk, responsible for global coverage of credit risk, investment risk, integrity risk, pricing and credit/equity training. Prior to that he oversaw IFC’s portfolio in the Middle East and North Africa and led business development in frontier markets in the Middle East and North Africa. Before IFC, Mr. Pathak worked at Bank of America and ABN AMRO Bank in new business and risk management. In this episode we discuss Climate Finance, ESG investing, and how an economic downturn might impact Climate Investments. Hope you enjoy my conversation with Mr. Vivek Pathak!
Transcript:
00:00 Introduction
00:51 Karan Takhar:
In this episode, we will be speaking with Mr. Vivek Pathak, who is the IFC Global head of climate business In this role, Mr. Pathak facilitates business growth, provides thought leadership, and new product development, and facilitates all work related to climate business. he's responsible for identifying new business opportunities for climate business and facilitating the mobilization of capital into this space, In this episode, we discuss climate finance, and ESG investing in how an economic downturn might impact climate investments. I hope you enjoy my conversation with Mr. Vivek Pathak thank you, Mr. Pathak, so much for taking the time I've been really excited to speak with you and have been following the work of the climate business team for a few years now and I want to start by asking you about what sparked your interest in the climate space, to begin with could you provide some background into how you got involved in the climate field?
02:15 Vivek Pathak:
Well, thank you, Karen, for having me, for speaking with me, so I've been in the axiom, are you already almost a dinosaur? Packs have been here for 24 years, and I've done a number of different things, and I spent about 10 years in risk, and that's when I have seen initially started investing in climate, and I have to say that for a long-time, we're going to be skeptical, and I'll explain why because you know, solar tariffs at that point in time with 26 or 0.28 cents, which was expensive, then you need a lot of risking capital or blended finance or grant money to make it viable, but IFC was the 1st in that space in emerging markets, and I think you opened the door in a number of markets when it comes to renewable energy fast forward to a few years later I was managing Asia and I went in and met a lot of our clients in Asia and these were very big names.
03:09 Vivek Pathak:
Old clients, that I've seen, but I really found that there was nothing unique that I have seen when offering them these clients have grown the regional and the domestic banks were quite sophisticated They were able to offer them, you know, a fair amount of sophisticated products and cater to their needs, yeah, So for me, it was really what is it that IFC can offer its clients today? This is popular to 2014 and 2015 what the local and regional and even global banks are not offering and cleaning one area that we could provide a value-added service with sustainability and fortunately, a number of them like the idea, and that's really what sparked my interest in, I would say, broadly the sustainability area now I think one of the reasons that this old climate or sustainability is taking a little longer to take off was because initially it was considered more of a CSR activity. So, you know, my analogy is when hundreds of 1,000,000 or 10s of billions of dollars were coming into the digital and the disruptive technology space, very little was actually coming into sustainability or climbing.
04:23 Vivek Pathak:
And that, I think, was unfortunate because the whole sector could have scaled up a lot more if it was able to attract commercial capital or venture capital or early stage capital as against more of a CSR approach, and that stems from the fact that my personal belief is whatever we do in this space should, in the medium to long term, be viable, economically viable and financially sustainable this is not a space where it's for you know it's a good thing. Yes, you're doing good, but if it's not viable, it will not survive there and typically, what we see happening is that you know a lot of this requires a bit of upfront investment, but there is always a payback, so those are the sectors that we.
05:09 Vivek Pathak:
Really focus on having said that, there are sectors there which because of technology and not reaching scale today It's going to take longer for them to become economically viable, but that's exactly what IFC supposed to do, is sort of entering some of these spaces which commercial capital is not flowing into Understood. I'm just curious as to why banks during that 2014 - 2015 period were not involved in the sustainability space. Was it because the economic viability was not there, or was it because they were not aware that these technologies could become economically viable? So I think there are a number of factors and I don't think there's just one factor, so one is the space will still consider more of a CSR activity. It wasn't mainstream with most firms here, so, that's one reason second is banks like scale because they want to develop expertise in a space, so if a bank is getting into solar.
06:10 Vivek Pathak:
And there's very little solar activity as of now in a country; banks will want to have expertise so that we can understand the sector and scale up; that's the way we operate there, so a lot of this at an early stage was relatively risky because it would not prove and we did not have stayed at that point in time in most sectors, and the liability for the long term wasn't always apparent of proving so when we look at these factors, risk, lack of scale, viability still being considered, I think banks were just not willing to jump in now that's not to say no banks were doing there were a few banks at least across Asia and Globally, that was Getting into the spaces, but it was relatively slow at that point in time.
06:57 Karan Takhar:
Thank you for expanding on that. Could you provide some insight into the type of work that the climate business team does? I read that in the fiscal year 2020, the climate business team helped to mobilize and deploy around $7 billion in capital. Could you talk a little bit about where that capital was deployed? What types of projects does the climate business team like to focus on?
07:24 Vivek Pathak:
It's not the climate business team; it's IFC is the whole. That's what we did slightly over $7 billion mobilization and our own account in the last fiscal year. it's spread across a number of sectors; a lot of them are cross-cutting sectors like we do a fair amount in green buildings we do a fair amount of renewable energy, the solar, wind, but we also do a lot of areas like energy efficiency, and then there's the thematic, so we've really stepped up our activity in the blue finance space, we recently bought out blue finance guidelines, so we've done I think almost 4 to 5 blue bonds already, a couple of new loans green bonds, uh we're also focusing a lot now on sustainability linked instruments, which are becoming popular.
08:09 Vivek Pathak:
So sustainability-linked loans, this capability-linked bonds, actually cut across all spaces. I mean, I wouldn't say so we have a breakdown, obviously, but very renewable energy used to be a huge chunk. It still is as a single sort of industry, but it's not that we have climate investments. Would we try and Do is how do you maintain in climate, so we are financing say healthcare, a bunch of hospitals. How do you make those hospitals green? How do you reduce help them reduce their carbon footprint? That's the way we're trying to really mainstream climate into all the sectors, and obviously, a lot of our work is with commercial banks and the financial sector, so then it starts we're helping them understand the green space or the climate space and then helping them deploy capital into the space where we provide a lot of advice via technical assistance as well.
09:02 Karan Takhar:
Got it and are there any particular projects specifically that come to mind as a major milestone that was achieved recently?
09:12 Vivek Pathak:
So I think I would say as a categorization, I think for me the whole blue finance space is being very heartening the weights taken off it's something which I sort of stumbled upon accidentally a few years ago when I was living in Asia I hope, I think you should be touching the billion dollar mark in that space so we did the first blue loan for a company called Indorama Ventures which is a large plastics or a PT company in Thailand It's a global company but it's get watered in Thailand you did the first blue bond for a bank called Bank of Qingdao we followed that up with a few more blue bonds this year and you know, so we're only live streaming the different sort of space are green buildings business is growing very rapidly and we've done some very interesting networks and sometime about a year ago we did something in gas flaring in not in Basra so it's a number of different sort of topical areas that we are growing in where I think we are leading the way in setting standards and also helping deploy capital.\
10:13 Karan Takhar:
Yeah, I would love to hear, given all of your incredible experience working on risk management and now waiting for the climate businesses team, the IFC, could you talk a little bit about how the risk appetite for ESG investments has evolved over the past few years? Do you feel that itchy investing is now here to stay for the long term?
10:39 Vivek Pathak:
Yeah, I definitely think it is, which is why I'm doing what I ask, but I would again like to come back to what I said earlier that it's very important that we focus and we are able to differentiate between projects or sectors which are financially viable over time, and those that will require a lot of data scheme capital because to me investing in climate or sustainability is really about opening new markets, new market segments, but it's important that over time initially till you reach scale, a lot of these sectors may not be economically viable but I'm hoping over the medium to long term a lot of these will be so to me, it's definitely here to stay, but you know, we have to also recognize that we are facing a lot of pressures today.
11:29 Vivek Pathak:
Rising interest rates, inflationary pressures, food security, energy security some people look at that as a huge challenge I look at it as an opportunity so when I look at energy security, the best way to secure your energy needs is by having your power generation capacity within your own country so solar and wind if you have the ability or hydro, those are the best way that those are today have the prices have come down significantly so as we start to look at these sectors, I think it's important that we again make sure that as we are rebuilding after the pandemic and as we're setting up infrastructure that it's done in a sustainable manner now you may argue that given the potential downturn which is being talked about in inflationary pressures will companies want to invest in sustainability I do hope so, but we also need to be realistic if a company is facing a downturn, a limited amount of free cash flow, should they be paying their employees in keeping their factories or their supply chains running?
12:33 Vivek Pathak:
Or should they invest in sustainability? I would argue that the first and most important is to keep your business going, so this may mean a few days here in there, but I still feel confident that in a lot of areas, people have understood the importance of sustainability, and they will try and make their future investments a lot more.
00:12:55 Karan Takhar:
So but that makes a lot of sense in your work with financial institutions. Do you find that financial institutions are coming to you to figure out which avenues to invest in, as in, are they excited to invest in different sustainability?
13:15 Vivek Pathak:
Businesses and work streams, yeah, I think we're definitely seeing a lot more interest from the financial sector in the last few years, and that's quite evident if you look at the growth of renewable energy across emerging markets; not a chunk of it is being financed by domestic, commercial banks or regional banks clearly there is a lot more interest scale I think banks have also recognized that with the emergence of dedicated pools of capital globally for climate or sustainability if we want to track those tools of both debt and equity capital, they need to green their operations and come into that category, so I definitely think we are seeing a lot more interest amongst our clients to help them get on or no carbon pathway that's definitely happened.
14:00 Karan Takhar:
And what about with large institutional investors I know just a few years ago there weren't a lot of institutional investors, particularly in renewable energy has that changed?
14:13 Vivek Pathak:
I think that's definitely changing. I wouldn't say it's changed, but if you look at large institutional investors, so typically, you know the large Canadian, and European pension funds, they deployed a lot of capital, so they want projects at scale, and you don't always have that in emerging markets you know, body refused, I would say some of the larger countries, Brazil, India, China, potentially Vietnam, Mexico we don't always get scale in emerging markets country by country, but I definitely think their appetite will be institutional investors is to try to invest more. Obviously, they don't take the same risks as us, so we've seen a lot of investments by Canadian pension funds into the India Renewable energy space, for example. Now, that's a program space a lot of these investments have been devious as it had been operational for a few years, so they're playing an aggregation sort of search strategy, I think yeah, but we definitely see interest, but honestly, what I would love to see is not only interest that hopefully over time the risk appetite will evolve.
15:20 Vivek Pathak:
For some of these sectors, that's really what we need to be able to attract capital at scale. The other thing I want to say is that to me, at least, I don't think capital is the main constraint there is the capital, both domestic and international, which will come into these sectors, but we need a lot more of his projects in a good, well structured renewable energy project or anything Just sustainability we'll be able to attract capital even in the most challenging or markets in my view, so we need more projects, so we need to work a lot more with governments and reform project preparation and then hopefully take those to the market where we can crack commercial capital.
00:16:02 Karan Takhar:
What do you find are the major hesitations for these larger institutional investors to invest in emerging markets?
16:11 Vivek Pathak:
So to reiterate what I said earlier, it's not a risk, but what these institutions want is investments at scale, and that's not there in most emerging markets, so that's one constraint. It's not a risk, but it's a constraint; Second is what they would like is transparency, you know, and then, uh, the project is built out it's transparent how it was awarded in just general transparency hands level of certainty that regulations will continue, that you won't change regulations made where the life of the project you will not renege on contracts certainty of contracts and concessions is critical
Dominaria, obviously, is a country risk in emerging markets; many of them do face a challenging political environment.
16:55 Vivek Pathak:
So that's what, uh, Leicester work to minimize how do you minimize political risk then we're talking about currency risk is another major factor because most of these large institutional investors either investing dollars, you know the word typically, so most emerging markets currencies have over the past many years of typically over a timeline depreciated against the hard currencies as we call them, so that's another factor, so it's really about certainty, transparency, currency risk and obviously last but not least is how do you get comfortable that you issue partnering that your partner or your investing company that these people will be fair and you know there will be ups and downs but the choice of partner is critical I think.
17:43 Vivek Pathak:
Are you partnering with like-minded companies or people who share your philosophy? These will be, I think, the major factors that that one considers before investing now; I'm not going to get into the bread and butter stuff for the reliability of the project well, that's a given, and on the currency risk fund, are there any solutions or ways to help maybe institutional investors from the US, for example, mitigate against that risk factor? I mean, in the more developed markets, you can get currency hedges, but with equity, it's a little harder because you don't know when your exit will be when it comes to debt, typically you would invest in dollars, so then it's for the nice company to buy a hedge to make sure that the fluctuation is going to impact them in a big way, but otherwise, the only ways you know currency hedges ready and those are becoming increasingly more popular available but it becomes a little harder when you're talking about equity because you don't know when you plan to end so, but there are different tools available to help some of these people to edge at least part of their exposure.
18:49 Karan Takhar:
Got it. Thank you so much for two or three more questions. We really appreciate this has been super insightful. I know that the IFC climate business team, as you briefly alluded to, does a lot of work On activating green bonds and now blue bonds. Can you talk about how that process works in terms of how the IFC is able to activate these markets?
19:17 Vivek Pathak:
I wouldn't say it's the climate business team. We do it collectively with our colleagues in the operational units, which is the financial sector or what we call infrastructure or manufacturing, Agri, and services, so it really so a huge part of it is to work with our clients and provide with technical assistance on how are these done so there's a lot of preparatory work that goes in with our clients, with the regulators in some cases refining the taxonomy, providing guidelines so a lot of hand holding typically goes in before we can issue the first of its kind then obviously there's a market issue or private placement in that bed. So if there's a fair amount of upstream work, as I'd like to call it, that goes into the first of these issuances good example is the Philippines, where we did the first, second and third, and maybe third or fourth green bond, and in the market, after that took off on its own, we would not need it so now we want to issue the first blue bond hopefully we do another two or three in the market with the capsule there so how work really is about providing technical assistance to our clients, working with the regulators to make sure that the regulatory frameworks are adequate or good, helping define taxonomies or refine the tax ordering and then obviously putting our balance sheet to work in, investing our capital there.
20:38 Vivek Pathak:
So that's how typically we do it. Do interest rates impact those issuances? Now that we're entering the world with expectedly higher interest rates, do you think that would have an impact on the bond issuances for green and blue bonds? I don't think interest rate issues, interest rate movements pursued, impacted. I think it's more what is the expectation of demand because if you're raising a green bond or new bond, you need to deploy that capital, and if the expectation is that economies are going to slow down, you know we're going to see a lot less investment in capital assets in fixed asset formation, so then that's what would impact it It's really growth there. Other than that, I don't think interest rates per se would really impact it in a big way I mean, obviously, people where the cost of capital for debt equity, what's an optimal debt-equity structure, and interest rates would have some other way back but I think it's more on the demand side of the product that you're producing is where you have modified impact. Got it.
21:46 Karan Takhar:
Just reflecting on your own career journey and all the amazing success you've had, I'm personally very curious to learn about whether there's any advice that you would give young people like myself or young people interested in entering climate finance. How can one enter this field and succeed in this field?
22:11 Vivek Pathak:
So I wouldn't say it's climate finance I think for me, it's bobbing, so a lot of my things in my life were, to be honest, accidents. If someone asked me 24 years ago, when I joined IFC, whether I become a global head and director of Redness, I wouldn't have guessed that. Or would I be running climate? One day I will be able to predict that, but I mean a couple of things I believe doing that one should do what you really enjoy doing, and you know, when I joined the IC, I was doing a lot of restructuring in portfolio work which will not be considered the cool part of the corporation the presumption of the perception was that the smart folks went to book new assets, which is always the case in most you know this management is not the glamorous part of any institution, but I enjoyed that I did that and I would argue it paid off.
23:00 Vivek Pathak:
So to me, it's about doing what you really enjoy and not doing what everyone else is doing because it's the same thing, and honestly, sometimes that's what worries me about climate because I have a lot of very bright, highly qualified people like you who want to get into this space and for me, it's to figure out do we want to get into this space, but it's really what they want to do or is it because it's the cool thing to do which everyone wants to do the other thing I always say is work for people that you get along with, that you enjoy working with not only your peers, but you're bossing now you can't always decide in your bosses I know, but I want I said I'd like to work for a boss from whom I can learn somebody for whom I can act as a sponge and get knowledge, their experience or expertise to me, that's critical, so I would say these two, three factors and you know there's no harm in mid we're doing through some doing something say this is not working out for me you know how many changing that yeah so you know, advice is free I can give a lot of advice, but to me, this is what I think.
24:04 Vivek Pathak:
These are the factors that count for me, and last but not least is you know and apart of doing what you want could mean taking risks under many different things. I studied physics at university
I spent three years in advertising, I got into banking, I've done many different things in banking, and very often, I jumped into areas where, to be honest, I was worried Do I have expertise am I really the expert in credit risk where I started doing this many years back in the private sector so the ability to take some amount of risks and jump into the unknown I think helps and very importantly I think most importantly is that to start accepting failure in many cultures, in many countries, failure is a bad word, and I think 1 of the things that makes this country the US unique, especially California, is creativity can only flourish when failure is acceptable. Now, that doesn't mean you fail seven times in a row, but a lot of people who succeeded or failed in the first one or two ventures, and I think the ability to bounce back then is critical. Now, having said that, other people prefer a conservative part. They don't want to take this, and I think that's fine again, it comes back to what I said initially Don't do it just because everyone else is doing it. Do it because that's really what you want to do lift your risk-averse. Don't try something that's fine, you know there's nothing wrong with being risk averse if that's what you are, but that's my two cents on this.
25:38 Karan Takhar:
Thank you so much. Thank you so much, Mr. Pathak really appreciate you taking the time to share all that incredible insight Thank you.
25:46 Vivek Pathak:
Thank you for having me; Karan looks forward to staying.
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