Climate Finance and CleanTech

Blended finance for scaling up climate and nature investments

A new report was prepared by Hans Peter Lankes (Visiting Professor in Practice at the London School of Economics and Political Science’s Grantham Research Institute on Climate Change and the Environment). Below is the summary of key findings. 

1. The need to act

The climate crisis and biodiversity loss demand urgent action. The world needs investment into a greener capital stock, as well as better policies and innovation. This report, which builds on experience and has been consulted with a broad range of stakeholders, focuses on mobilising private finance for investments.

2. Private finance for the public good

Stepping up requires partnership, since the financing gap far exceeds the capacity of the public or the private sector alone. The chart below, by the Climate Policy Initiative, shows the huge and urgent step up in financing that is needed globally. Under a stretch scenario, private funds will have to account by 2025 for US$430 billion of the $780 billion in additional annual financing in developing countries alone (excluding China). At the same time, budgets and official climate finance will remain critical for investment in areas that can only be tackled through public channels. The world must scale up by linking public and private initiatives and working in a joined-up manner, harnessing private finance as an agent for the global public good.

3. Address obstacles and create country platforms

If set against the needs, the mobilisation of private finance today is far too low and will have to increase many times over. Climate and nature finance are being held back:

  1. ‘upstream’ by weak and unstable policies and regulation, which shrink the space for private investment;

  2. ‘midstream’ by scarcity of well-prepared, bankable projects;

  3. and ‘downstream’ by a lack of financial channels connecting deep sources of funds with investments.

There needs to be action at all three levels for private finance to grow. In view of the accelerated timeline it is crucial to give common overall direction to these efforts at the country level. Country/ Sector mobilisation platforms as proposed at the Venice G20 could provide a focal point for consultation and coordination, combining development of Long- Term Strategies and NDCs; translating these into shared action and engaging the private sector; and support on the policy and institutional level to tackle upstream constraints. As underlined by the UN-affiliated Global Investors for Sustainable Development Alliance (GISD), these efforts should be backed by leading governments, including through the governance of Development Finance Institutions (DFIs) and Multilateral Development Banks (MDBs) who must set ambitious targets for mobilisation.

4. Blended finance can unlock risky investments

Investments can be too risky for private finance, especially when they are at the ‘frontier’ geographically, in terms of technologies or business models. This is a problem in poorer countries, in areas where there is little experience, such as adaptation finance or biodiversity, but also in more established climate projects when country and other risks are below investment grade. Markets can fail to produce socially desirable outcomes in these cases. Blended finance, which combines concessional public funds with commercial funds, can be a powerful means of rebalancing risks and enabling investment. There is by now a track record of successful blending operations, and this report provides illustrations.

5. Governance can ensure value for money

Despite its potential, development partner commitments to blended finance remain limited at around 2% of official development assistance (ODA) and US$10–15 billion of project volumes annually. Strong governance frameworks around decision-making and reporting would help ensure that blended finance achieves value for public money, providing comfort to donors. Testing blended finance proposals against benchmarks for impact and additionality is especially critical, as are better data and transparency around blended finance.

6. Tackle the public–private culture gap

Underpinning any public action to mobilise private finance there must be understanding and accountability: mutual understanding of each other’s goals, abilities and constraints, and accountability to build trust. Bridging the culture gap will require education, initiatives that bring the parties together – and humility. A co-benefit of blended finance is the blending of knowledge and skills, which can contribute powerfully to addressing challenges that today often straddle the public and the private.

7. Aim for both impact and volume

The impact and additionality of blended finance will tend to be particularly high at the geographical and technology frontier. But the potential for larger volumes and meaningful contributions to closing the global climate and nature financing gaps is much greater ‘inside the frontier’, where country and other risks are less extreme but still hold back private involvement. Blended finance can be justified in both situations as long as effective governance is in place. For impact and scale, there is a need to design and resource strategies for both impact at the frontier, and volume inside it. The balance in frontier investments should be towards project development and preparation first – including through local financial intermediaries – and enabling finance second. Inside the frontier, the balance should be towards opening up access to deeper sources of finance, in both the domestic and international capital markets.


8. Scale up with portfolio approaches

Most blended finance projects are developed individually. But fragmentation is costly, process-heavy, creates assets that are too small for institutional investors and does not invite rapid replication or scaling. To deliver climate investments with the necessary pace and urgency it is necessary to move from individually tailored to portfolio-level approaches.

  1. For project development this means replicating rather than innovating, delegating, de-fragmenting project preparation support and simplifying and standardising policies and documentation. There are successful schemes that achieve these aims by building local partnerships especially with national development banks, commercial banks and developers, or offering ‘full-package’ solutions such as for solar energy.

  2. For mobilising finance downstream it means standardising, aggregating, and creating asset classes and electronic funding platforms. Market scale can be achieved through structured blended finance vehicles, sustainable bond markets, and the creation of a sustainable infrastructure asset class. It will be crucial to tap local as well as international capital markets not least to mitigate currency risk.

9. Increase mobilisation ratios

Mobilisation ratios for blended finance, i.e. ‘private bang for the public buck’, are often low. There can be good reasons for this, and one must beware of simplistic approaches. But higher mobilisation can be achieved by:

  1. Selecting the blending instrument that most directly addresses the underlying obstacles.

  2. Systematically enforcing additionality and proportionality in the use of blended finance. This requires a methodology and governance that subjects blended finance requests to strict additionality tests and that ensures a balance in the risks borne by each party in a transaction.

Risk-oriented blending instruments such as guarantees and first-loss structures would have significant potential to mobilise private funds and are underutilised. For instance, a 20% first-loss tranche in a recently launched blended finance vehicle (BlackRock CFP) will enable at least $400m of institutional investor money that would not have been invested in developing country climate infrastructure.

10. Build on successful models and initiatives

There has been much experimentation and innovation in the blended finance area in recent years. There are promising existing initiatives, including under the auspices of the One Planet Summit, some of which are presented in this report. Development Finance Institutions (DFIs) can play an important connecting role by working across and addressing challenges at different levels: upstream, at pipeline generation, and financially. Given the urgency to act and scale up private finance for climate and nature, the priority now must be to move forward, back key initiatives that meet governance, strategy and design conditions, and give them scale many times over.

Full report is available here. 

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