The theory of blended finance was simple, even if the transactions were not. Public and philanthropic capital would help develop projects and de-risk transactions in order to crowd in private institutional investors to finance climate action at scale.
But just as the institutional investors have begun to arrive, public and catalytic capital is in retreat, according to Convergence’s latest “State of climate blended finance“ report.
Blended finance transactions that combine public and private dollars for climate projects totaled $15.5 billion last year, below only 2023’s $20.2 billion. The 23% drop is due to fewer “whales,” or mega-deals; there were just three billion-dollar-plus transactions last year, compared to six in 2023 (for background see, “Lessons from more than three dozen big blended finance transactions”).
Commitments from pension funds and insurance companies to blended finance transactions last year held relatively steady at $1.6 billion. That’s a far cry from what’s needed annually to address global climate challenges. But consider that in 2022, Convergence tallied just $2 million in institutional blended dollars.
For example, Allianz, Cygnum Capital and Meridian all have blended climate funds with a median size of $460 million. Commercial banks invested $2.4 billion in blended climate deals.
“While these volumes are infinitesimal by private sector standards, it’s a positive direction and something we will be monitoring closely,” Convergence’s Joan Larrea said in the report.
Shifting landscape
The glimmerings of an institutional market for blended finance transactions come as providers of the concessional capital needed to make such deals work have departed the scene. Development assistance from the US and Europe was shrinking before the Trump administration gutted USAID and sought to undermine global climate agreements and negotiations. Other players are stepping into the vacuum.
If the conflicting trends in the blended-finance market leave you feeling whipsawed, you’re not alone. A year ago, ImpactAlpha reported on the record haul for blended-finance transactions, only to course-correct earlier this year when the decimation of USAID left a hole in the market (see, “Blended finance loses a big investor and some of its steam”).
Convergence’s new report traces the shifting terrain. With the US’s retreat, Japan and the United Arab Emirates have become the leading providers of development finance for blended climate deals worldwide. Japan’s development agency, the Japan International Cooperation Agency, and the UAE’s $30 billion climate fund ALTÉRRA accounted for about 70% of development dollars in Convergence’s deal tally last year.
A blended adaptation-finance loan vehicle from Japanese financial giant MUFG Bank, Canadian development finance institution FinDev Canada and the Green Climate Fund reached a $600 million fundraising milestone this week. The GAIA Climate Loan Fund is focusing on “markets most severely impacted by, and least equipped to respond to, climate change.” It is aiming to reach a final close of nearly $1.5 billion by 2027.
“The climate blended finance landscape is changing. Longstanding providers of vital catalytic and concessional capital are retreating, and while the current report saw the market holding steady, we’re starting to see the stirrings of a new reality,” Larrea writes.
“We are going to need to be more efficient and ambitious with how concessional money – whether from existing or new sources – is applied within blended finance transactions.”
Ukraine emerged as a top market for climate blended finance transactions, thanks to a focus by the European Bank for Reconstruction and Development on deals merging crisis recovery with green infrastructure investment. The EBRD provided a €200 million ($214 million) guarantee to OTP Bank to sustain green private-sector financing in Ukraine amid Russia’s ongoing invasion by Russia.
Partnerships between domestic financial institutions and development banks are helping channel capital to small and medium-sized enterprises investing in climate resilience. Local investors now provide nearly 40% of private climate capital in Europe and Central Asia, and about 37% in Latin America.
Regional banks, pension funds and corporations represented 29% of blended climate dollars in the period of 2022 to 2024, up from 17% between 2019 and 2021.
Left behind
In a worrisome development, concessional capital is retreating from the poorest and most climate-vulnerable markets. This will likely have a negative impact on their future investment pipeline, delaying urgently needed channels of funding at a time when traditional development assistance is retreating.
Climate deals in the least developed, most vulnerable countries cratered last year, falling to just 5% of deals from 23% in 2023. Lower-middle and middle-income countries, including Nigeria, Kenya, India, Indonesia, and Vietnam, gained most of that capital.
The shift also concentrates resources in middle-income countries that may offer greater scale and mobilization potential — but leaves high-distress nations with fewer options for non-repayable support.
Africa attracted the most deals by count, but ticket sizes on the continent dropped from $58 million in 2023 to $45 million last year. By comparison, the average blended climate deal in Eastern Europe was $129 million and in Southeast Asia, $120 million.
In Vietnam, the International Finance Corp. anchored the country’s first blue bond through SeABank to finance sustainable business and ocean-friendly projects.
Similarly, British International Investment, the UK’s development finance institution, committed $75 million to India-based Blueleaf Energy to expand utility-scale solar and wind projects across India and Southeast Asia, advancing the region’s clean energy transition.
Adaptation finance continues to lag. Blended finance for flood defense, climate-resilient infrastructure and other climate adaptation efforts remains far below what is needed. Just 13% of Convergence’s tracked deals last year fell into the adaptation category. Low-income countries are especially hard hit by the lack of adaptation finance.
The types of concessional capital being deployed is also shifting, reflecting donors’ interest in recycling capital to catalyze new climate initiatives and solutions. Senior concessional debt now accounts for 31% of the concessional capital used in blended deals, up from 17% five years ago. Technical assistance grants, meanwhile, dropped from 33% to 18% over that time. Investment-stage grants have held steady at about 20%, though only 11% went to deals in low-income countries last year.
