New risk tiered structure is targeting US$1 billion in climate finance, earmarked for EMDEs.
Allianz Global Investors is planning to accelerate its commitment to scaling blended finance through a US$1 billion climate solutions blended debt strategy for emerging markets.
The Allianz Climate Solutions Emerging Markets (ACSEM) strategy will be launched in partnership with Allianz Group and a regional development finance institute (DFI), targeting assets in low-carbon sectors that are contributing to both climate mitigation and adaptation. It will invest in energy, transition infrastructure, financial institutions, agricultural businesses, and manufacturing and services.
ACSEM will incorporate a risk tiered structure, within which junior capital will absorb the first losses of the portfolios, thus lowering the potential risk of financial losses for bigger institutional investors.
“Given the increasing shortfall in investment capital needed to finance the UN Sustainable Development Goals, it has become obvious that the involvement of the private sector will be crucial going forward,” said Matt Christensen, Global Head of Sustainable and impact Investing at Allianz GI.
“As a public-private finance partnership with appropriate risk structuring, blended finance provides urgently-needed funds into emerging and developing countries.”
Blended finance refers to development finance from public financial institutions upscaling sustainable projects or companies to then attract private investment; this approach is particularly popular among investors targeting emerging markets and developing economies (EMDEs).
Allianz GI also announced that its Germany-domiciled fund AfricaGrow has invested in Venture Platform, an early-stage pan-African venture capital firm based in Nigeria that is financing West African tech start-ups. AfricaGrow has committed €80 million to start-ups across Africa, with a further €25 million in an advanced stage of approval.
Research by the BlackRock Investment Institute has estimated that around US$1 trillion a year needs to be invested in EMDEs if they are to achieve net zero by 2050.
However, a recent market assessment conducted by global network Convergence noted a “significant decline” in the scaling of climate-focused blended finance transactions. Between 2016-18, climate-oriented blended finance transactions totalled US$36.5 billion; this fell to US$14 billion between 2019-21, Convergence said. Further, of the US$108 billion in aggregate financing mobilised for climate transactions to date, just US$6.9 billion has gone towards climate adaptation efforts.
Typically, the majority of blended finance vehicles tend to be too small to attract larger asset owners, due to concerns around overexposure if their investment makes up a large percentage of a small fund, which is why a blended finance vehicle reaching US$1 billion will prove more attractive.
The UN-convened Net Zero Asset Owner Alliance (NZAOA) has previously outlined the importance of upscaling climate-focused blended finance solutions, and called on policymakers to facilitate the scaling of blended finance structures.
Blended finance is expected to be a core topic of discussions at COP27 in Sharm El Sheikh, beginning on 6 November. Mark Carney, Founder and Co-chair of the Glasgow Financial Alliance for Net Zero (GFANZ), has also emphasised the importance of connecting private finance with ambitious nationally determined contributions (NDCs) decided by countries.
This latest planned launch from Allianz GI follows US$2.5 billion in commitments across five blended finance vehicles since 2017.
In 2021, Allianz GI and the European Investment Bank launched the Emerging Market Climate Action Fund (EMCAF), a fund-of-funds targeting €600 million in order to provide early-stage equity financing to greenfield climate transition infrastructure in EMDEs. It was endorsed by the Group of Seven in June as an example of an effective blended finance vehicle.