Mobilising sustainable investment in both emerging and developed markets has relied on a number of tools. However, one key instrument gaining traction is blended finance – an approach that strategically combines public and private capital to fund climate-focused initiatives. Yet questions and challenges remain regarding its practical application.
This edition of the Sustainable Policy Institute Journal examines the key role blended finance can and should play in scaling project development and capital flows into transition finance in emerging and developed economies. It features key insights from public investors, fund managers, multilateral institutions and central banks.
Vivian Guo, portfolio manager and co-head of ESG, Templeton Global Macro at Franklin Templeton, notes that blended finance has ‘mobilised only around $230bn for sustainable development, compared to the $4tn per year that the same countries need’ over the past decade. Guo suggests that to unlock blended finance, going above and beyond project-level de-risking to scalable solutions is vital. This strategy alone can leverage private investors to expand multilateral development banks’ balance sheets.
This is echoed by Nana Maidugu, head of sustainability and ESG at Nigeria Sovereign Investment Authority, who explains that the success of blended finance structures hinge on intentional design and execution as well as catalysing scale and solutions. Maidugu highlights blended finance’s potential in addressing ‘critical barriers to investment and development, including high transaction costs, currency risk and immature local capital markets.’ Aaron Vermeulen, finance practice lead at WWF International, enhances this arguing that more attention needs to be paid to ‘deal origination’.
The establishment of the New Collective Quantitative Goal at COP29, calling on ‘public and private sources to scale climate financing for developing countries to at least $1.3tn per year by 2035’ also highlights this need. Marc-André Blanchard, head, executive vice-president and global head of sustainability and Erich Cripton, director of business relations at CDPQ Global, both underscore the critical importance of increasing finance mobilised from public sources and innovative instruments, such as first-loss instruments and guarantees.
Marcus Pratsch, head of sustainable bonds and finance at DZ Bank, goes on to suggest that bonds are well-suited for large-scale investments and a promising tool for blended finance. Issued in large volumes and allowing for significant capital mobilisation, ‘bonds can raise billions of dollars, providing the scale needed for large infrastructure projects’, he writes.
MDBs have the potential to play a huge role in providing technical assistance and risk mitigation for emerging market investment. Yet Vermeulen argues MDBs must embrace reform and ambitious target setting to scale funding, if they are to support blended finance. As Roberta Casali, vice-president for finance and risk management of the Asian Development Bank, says the ADB has made commitments worth ‘over $800m, helping to catalyse projects worth nearly $10bn’. The market is now willing to participate in green infrastructure projects and multilaterals must evolve to play the role of ‘ecosystem builders’ and ‘development partners’ to establish sustainable markets in their respective regions.
Nevertheless, as Isfandyar Zaman Khan, lead specialist for finance, competitiveness and innovation for East Africa and Rachel Mok, financial sector specialist, finance, competitiveness and innovation for East Africa at the World Bank, write, blended finance alone is insufficient. A supportive policy environment that encourages private sector engagement is integral.
Policy-makers should clarify where blended finance is needed, according to Ekaterina Gratcheva, Fabio Natalucci and Cindy Van Oorschot from the Network for Greening the Financial System. In doing this, they should also clarify the right amount of concessional funding necessary to finalise a project, attract private capital and put in place the right climate policies, such as carbon pricing). In addition, they must strengthen the climate information architecture, engage with EMDE project sponsors from the early conceptualisation stage through financing to develop and bring to market a pipeline of viable projects.
Unlocking the potential of blended finance is vital. Innovative instruments, policy and new goals are being established to support capital mobilisation and de-risking of investments. Public investors, philanthropies along with the private sector are increasingly engaging in projects which will support sustainable infrastructure development. There are positive signs, but momentum must not be lost.
Emma McGarthy is Head of the Sustainable Policy Institute at OMFIF.
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