How national-level blended finance can catalyse the climate transition in emerging markets

It is now widely acknowledged that the global climate finance landscape needs a paradigm shift if the world is to achieve its net-zero goals, and the oft-cited statement that we need to go from “billions to trillions” must be our rallying cry.

The current capital flow towards climate transition is insufficient for the monumental task at hand, with a particular shortfall in funds directed at emerging markets and developing economies (EMDEs).

EMDEs, excluding China, will require approximately $1 trillion in annual climate finance, according to the recent What Gets Measured Gets Financed: Climate Finance Funding Flows and Opportunities report by Boston Consulting Group (BCG) and the Rockefeller Foundation.

Unfortunately, as the report notes, EMDEs currently receive just over one-quarter (27%) of the required climate finance flows.

These flows need to increase dramatically, and soon, before EMDEs get locked into ‘business-as-usual’ long-term choices that are detrimental to net zero pathways – for example, investing in new coal power plants, which appear easier to finance.

There are four key investment barriers for climate finance which must be addressed.

The first represents a project pipeline issue, with a lack of scaled investable products for private investors, while the second is the challenging risk-return profile of such investments, particularly in emerging markets and emerging technologies.

Scarcity of flexible capital for production innovation, demonstration and scaling represents the third challenge. Finally, the limited number of players working to deepen climate finance at transaction and market level creates a significant hurdle as the fourth.

Blended finance offers an adaptive funding pathway to help overcome these barriers. This financing model leverages catalytic capital from public or philanthropic sources to energize private sector investment in developing countries, helping nations realize their climate action targets and goals.

If executed correctly, blended finance can help crowds in private and potentially create a three to five times multiplier effect leveraged from concessions or public funds. This will be extremely crucial to help close the funding gap required for climate action.

Blended finance provides a flexible opportunity that enables investors and organizations with different objectives to invest synergistically alongside one another. It empowers different investors to achieve their own objectives as part of a wider model — whether that be financial return, climate action or social impact, or a blend of both.

There are different types of blended finance instruments that can be leveraged, including first-lost guarantees, project insurance and technical assistance, offering versatile solutions for a wide range of funding scenarios. These types of blended instruments can help with project risk mitigation, provision of concessional capital or even funding for technical project preparation.

National blended climate facilities offer a potentially transformative solution for governments in emerging markets to consider in efforts to catalyse climate investments. There are several benefits to such a solution, with a national blended finance facility helping address two key facets of the financing challenge.

First, a national blended climate facility can act to raise ‘multiplier’ capital for the energy transition. It can co-invest concessional capital in key projects to get them off the ground. It can partner with or invite multilateral development banks and development finance investors to co-invest and attract wider development capital.

A national blended climate facility can also act to coordinate with government-linked investment companies, local financial institutions and global funds to capture even greater capital pools. In addition, alongside attracting widespread investment, it can enhance the ecosystem by developing, building and promoting a bankable project pipeline of relevant climate investments.

Such a facility can also provide a matching platform that aggregates sub-scale opportunities into investable propositions, creating effective investment at scale.

It can also provide technical assistance for key feasibility studies, helping demonstrate the validity of projects that might otherwise go unverified, and further develop proof-of-concept projects that inform or unlock wider opportunities in the climate transition ecosystem.

There are already important examples of blended climate finance facilities being established in emerging markets around the world. Malaysia recently announced its National Energy Transition Facility, which allocates about $400 million of initial seed funding to enable catalytic blended financing targeted towards energy transition projects.

In Singapore, government-owned investment firm Temasek partnered with HSBC, ADB, and Clifford Capital Holdings to launch Pentagreen Capital – a company designed to accelerate development of sustainable infrastructure across Asia.

Pentagreen Capital has a $150 million seed fund designed for initial targeting in Southeast Asia. Its objective is to catalyse financing for ‘marginally bankable’ clean infrastructure projects, advancing climate change mitigation and adaptation efforts by pushing marginal projects towards realization.

It's vital that the initial design principles of a national blended climate facility are developed correctly, ensuring integrity and independence from the start. These key design principles include:

In conclusion, the steps outlined above provide not just a foundation, but a powerful catalyst for a trusted blended finance facility.

By embracing effectiveness, knowledge, and transparency as its guiding principles, such a blended finance facility can transcend boundaries and inspire transformative change, beyond unlocking the financial resources necessary to power up the climate finance sector across emerging markets.