A blended finance vehicle from the Asian Development Bank is paying to retire coal plants in Indonesia and the Philippines years ahead of schedule.
A government-led investment vehicle in Rwanda is leveraging grants, concessional loans and credit guarantees to coax private investors into green projects in the country.
A new fund from Gawa Capital is layering first-loss, concessional debt and commercial capital to support climate adaptation in rural communities across Latin America.
Private investors, responding to aggressive efforts to de-risk deals and strengthen returns, drove a more than 120% year-over-year increase in blended climate finance transactions in emerging markets to $18.3 billion in 2023, according to a new report from Convergence which breaks out climate blended finance for the first time. Capital flows from the private sector grew by almost 200%, to $6 billion.
The upswing comes amid new warnings that global temperatures could rise as much as 3.1°C this century without aggressive climate action. Trillions of dollars needed to support climate resilience and green development in emerging markets.
Blended finance, which involves layering grants and other forms of concessional capital and security mechanisms to reduce risks and strengthen returns for private investors, is often necessary to unlock private finance for climate change and sustainable development. Deals can be complicated to structure and slow to close. But they’re helping build proof points and track records in markets and sectors where private capital isn’t flowing on its own.
“We typically see a lot of portfolio reorganization away from [emerging markets] in periods of higher perceived risk,” observes Convergence’s Nic Zelenczuk, who cowrote the inaugural “State of blended finance 2024: Climate edition.” “What is encouraging is that blended finance has proved resilient over the last year. It’s showing that blended finance is getting uptake with critical private sector investors who would otherwise be swayed by greater macroeconomic challenges.”
Co-author Ayesha Bery adds that blended finance is helping to fill a gap left by shrinking aid budgets. “2023 marked a four-year low in official development assistance. Some of the balance is being picked up by multilateral development banks and development finance institutions,” she says.
“Leverages of concessional capital are going higher and efficiencies are increasing, particularly in larger blended transactions,” she says.
Climate deals, which make up the majority of all blended transactions, fueled an overall rebound of blended finance, to $24 billion last year.
Billion-dollar deals
Blended climate transactions are attracting more institutional capital as deal sizes grow larger. About 45% of blended climate finance last year went into transactions and funds greater than $1 billion. Another 12% went into deals of more than $500 million. The median blended climate deal size was $105 million, up 160% from 2022.
“The bigger institutional investors who want to use blended finance to diversify and enter new markets can’t really participate in smaller transactions because the transaction costs are too high,” explains Zelenczuk.
The $1.1 billion SDG Loan Fund, led by German insurance giant Allianz, is a case in point: the fund leveraged multiple catalytic layers from Dutch development bank FMO and the MacArthur Foundation to suit Allianz’s risk appetite. It has become a model for other investors, including UK development finance institution British International Investment, which last month rolled out a new catalytic capital facility to mobilize more private capital for climate adaptation.
Historically, every dollar of concessional capital has mobilized $2.2 dollars of private sector investment. Last year, concessional capital crowded in $2.65 in private capital for every dollar, and $4 for deals sized $250 million or more.
Financing adaptation
Funding for much needed climate resilience and adaptation in emerging markets is dwarfed by finance for mitigation efforts. Blended finance for adaptation initiatives mobilized just $1.2 billion last year. Investors admit there’s a long way to go in convincing the private sector that adaptation can generate healthy financial returns, but they’re hopeful – and persistent.
“Adaptation must be where we focus more of our efforts,” Luca Torre of Gawa Capital tells ImpactAlpha. “The issue is not lack of solutions, it’s how solutions are distributed.”
The Spanish impact investor is nearing a first close for Kuali Fund, a planned $300 million vehicle supporting rural livelihood climate resilience in Latin America. It’s brought in institutional backers by leveraging concessional capital from the Spanish government and the Green Climate Fund.
BlueOrchard is in the market with its second blended InsuResilience Fund to accelerate insurance protection in climate-vulnerable communities.
Climate finance in Africa
Africa’s intake of global climate finance amounts to about $44 billion. The continent needs four times as much annually to weather climate impacts and grow sustainably. Local institutional capital, which adds up to about $2.4 trillion in assets, is a greater under-leveraged source of financing for both mitigation and adaptation initiatives, according to a new report by Climate Policy Initiative.
Africa represents the largest share of blended deals – 41% – signifying investors’ efforts to move more money to the continent.
“But the majority are aimed at international sources of finance,” notes Bery. “Thinking about the needs of local investors, whether it’s local currency hedging or what kinds of transactions they’re interested in, is a very big piece of the market that’s missing.”
The Rwandan government, through the Rwanda Green Fund and its national development bank, have set up an investment facility to mobilize private capital in support of its green initiatives. The Ireme Invest facility offers credit guarantees and concessional loans to attract both local and international investors. The Rwanda Green Fund also provides project design grant funding to lay the groundwork for green energy, transit and other infrastructure-heavy deals.
The impetus is mobilizing the $11 billion needed to meet Rwanda’s national climate action plan, which includes cutting carbon emissions by 22% by 2030.
Killing coal
It’s not too late to stave off a 1.5-degree Celcius rise in global temperatures—provided some $1 trillion dollars annually is invested effectively slashing global emissions through the renewable energy transition and natural resources management and preservation.
“Just increasing renewable energy isn’t going to change the equation if the coal isn’t decommissioned,” says Convergence’s Bery.
The Asian Development Bank is testing out a blended finance model to do just that. Through its Energy Transition Mechanism, the bank is mobilizing capital to make an early pay-out of power purchasing agreements with coal producers. In Indonesia, it has inked a deal that will pay off the current energy contract of a 12-year-old coal plant seven years early, and retire the plant as much as 15 years ahead of schedule.
The bank’s Energy Transition Mechanism is also involved in a $2.3 billion initiative with the Climate Investment Funds and the World Bank to phase out coal plants in the Philippines.
Says Bery, “There’s an opportunity there for blended finance to play a greater role.”