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Finance

Japan's top banks back zero-carbon infrastructure with new funds

Sumitomo Mitsui, Mizuho and MUFG look to ride rising global tide of investment

A wind farm in France: A $3.7 trillion in annual infrastructure spending will be needed worldwide until 2035, McKinsey & Co. estimates.   © Reuters

TOKYO -- Japan's three biggest banking groups will channel hundreds of millions of dollars of fresh capital into overseas infrastructure projects through new investment funds as countries around the world make new commitments to cutting carbon emissions.

Spending on renewable-energy projects in particular is expected to swell around the world as countries aim to reach net zero greenhouse gas emissions over the next few decades. U.S. President Joe Biden's move Wednesday to return to the Paris climate accord is likely to add to this momentum.

Sumitomo Mitsui DS Asset Management, a unit of Sumitomo Mitsui Financial Group, launched its first international infrastructure debt fund in late December. The roughly 10 billion yen ($96 million) fund buys debt for projects including solar and offshore wind farms, airports, toll roads and other infrastructure.

The fund has seen strong interest from institutional investors such as life insurers and pension funds, and with more demand expected, the asset manager plans to set up a 20 billion yen fund as early as fiscal 2021.

Fighting climate change is not the only driver for infrastructure spending. Emerging markets need more capital for transportation and other improvements to support both their expanding populations and continued economic growth, while advanced economies have to rebuild their own deteriorating infrastructure.

Asset Management One, part of Mizuho Financial Group, will roll out a third fund investing in domestic and foreign infrastructure. At 100 billion yen, this will be more than double the size of its two previous funds in this area.

Mitsubishi UFJ Financial Group plans to launch as early as next month an infrastructure fund that incorporates environmental, social and governance factors into its investment decisions.

Mizuho and MUFG will raise capital from institutional investors overseas, in a departure from big Japanese banks' typical focus on domestic investors.

McKinsey & Co. estimates that $3.7 trillion in annual infrastructure spending will be needed worldwide until 2035. Infrastructure funds can serve as a substantial source of funding for both governments and private-sector businesses.

Such funds also fit well with the interests of the yield-starved investors. With interest rates mired at historic lows, project finance debt, which typically offers a return of about 2%, is an attractive target. The ability to invest directly in projects rather than companies also makes the ESG impact of these investments clearer.

Infrastructure funds raised a total of $115 billion in 2019, well over triple the 2010 total, according to data from alternative asset tracker Preqin.

Though the annual tally dropped for the first time in six years in 2020 amid the coronavirus pandemic, there is still plenty of interest in the sector. U.S. private equity firm KKR said this month it had raised $3.9 billion for its first Asian-Pacific infrastructure fund. Japan's Monex Group will set up a fund as early as March to invest in clean-energy infrastructure and other projects, a first for a Japanese online brokerage.

For banks, selling debt to infrastructure funds has its advantages as well. Though they may lose a source of interest income, they can bring in fees for providing financing without having bonds sit on their balance sheet -- a plus for investors keeping a closer eye on capital efficiency.

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