Industry

Blended Finance Market for Climate Shrinking in 2022

More solutions needed to fund climate adaptation in EMDEs, according to Convergence report.  

Despite growing calls for private capital to tackle the climate crisis, there has been a “significant decline” in the scaling of climate-focused blended finance transactions, according to global network Convergence.  

Ahead of COP27 next month, the network has published its sixth annual stocktake of the blended finance market, for the first time focusing on contributions to climate change adaptation and mitigation. It noted that climate-oriented blended finance transactions are in decline, from US$36.5 billion between 2016-18 to US$14 billion between 2019-21 – a 60% decrease. 

The report partly attributed the decrease to the macroeconomic and geopolitical challenges being experienced across markets, including the energy crisis prompted by Russia’s invasion of Ukraine.  

Adaptation overshadowed 

Adaptation, in particular, is an “underdeveloped area” within climate-focused blended finance compared to mitigation, the report said. Of the US$108 billion in aggregate financing mobilised for climate transactions to date, only US$6.9 billion has been purely focused on adaptation.  

The UN Environment Programme’s 2021 Adaptation Gap report noted that adaptation costs in developing countries are five to ten times greater than current public adaptation finance flows into these countries, thus underlining the importance of increasing levels of private investment.  

“It isn’t necessarily the case that investors don’t want to invest in adaptation projects, but rather that there is a more limited pipeline of bankable and scaled projects,” Leticia Ferreras Astorqui, Vice President of Development Finance at Allianz Global Investors, said during a webinar launching the report.  

The Adaptation Fund received US$356 million from governments at COP26, and climate adaptation is expected to be a big focus for discussions at the climate summit in Sharm El Sheikh. 

The report said there has been a recent “modest uptick” in adaptation-focused blended finance transactions, with investments made being 72% higher between 2019-21 than those made between 2016-18, albeit starting from a low base. 

Blended finance refers to the use of catalytic capital from public and/or philanthropic sources to attract private sector investment in sustainable developments, most commonly in emerging markets and developing economies (EMDEs). 

Slowly but surely 

Convergence noted that an increasing percentage of climate-focused blended finance commitments are coming from institutional investors, increasing from 18% in 2016-18 to 25% in 2019-21. 

This has been driven by a growing number of net zero commitments being made by institutional investors, Astorqui said, adding that blended finance products are a useful vehicle for investors looking to direct investment into EMDEs while contributing to the UN Sustainable Development Goals (SDGs).  

“[Asset managers] are also more and more aware of the climate-related expectations of their clients, including pension funds and insurers, so there’s definitely a push to invest in more blended finance solutions,” she said. 

Last year, the Investor Leadership Network (ILN), representing 14 global institutional investors managing US$9 trillion in assets, called for the creation of a rolling pool of funds offering first or second loss guarantees to blended finance vehicles funding EMDE projects. 

The UN-convened Net Zero Asset Owner Alliance (NZAOA) previously outlined the importance of public and private investors collaborating more effectively to increase the flow of private capital into climate-focused blended finance solutions. In September, NZAOA called on policymakers to facilitate the scaling of blended finance structures to fund climate solutions. Their recommendations to governments included supporting accurate risk pricing by providing access to core credit risk data and prioritising thematic parameters in official development assistance.  

Plan of action 

Beyond macroeconomic and geopolitical volatility, there are a number of hurdles limiting an increase in climate-focused blended finance transactions, the report said. 

It cited the lack of strategic coordination and unguided implementation of high-level capital mobilisation plans, as well as siloes between climate mitigation, adaptation and conservation finance investment communities which have led to “a lack of coordination around taxonomy, impact measurement and management”.  

Shortfalls in climate data, transparency and investor expertise in the market were also identified as ongoing challenges. 

To increase blended climate transactions and mobilise private sector capital, Convergence said policymakers should implement high-level actionable plans for delivering private investment, track nationally determined contribution priorities and facilitate investments accordingly, and ensure that development agencies have definitive climate agendas.  

They should also look to accelerate and expand adaptation investment, integrate climate and regulatory expertise into investment processes, and ensure maximum transparency through the investment process.  

Last month, the Organisation for Economic Cooperation and Development (OECD) published its own guidance for utilising blended finance to accelerate the clean energy transition, including aggregating multiple off-grid clean energy projects into investable and tradeable assets of sufficient size to attract larger investors.  

“At a time when the rhetoric around mobilising private capital for climate action has been mounting, this decrease in blended finance flows towards climate was disappointing and unexpected,” said Convergence CEO Joan Larrea.  

“It’s a stark reminder that we must go from talk to action. Our hope is that we are at a tipping point and that the real-world data and opportunities presented in this report can act as a catalyst to get us to where we urgently need to be.” 

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