Time for Asset Managers to Scale up Blended Finance

Net-Zero Asset Owner Alliance calls for greater public-private collaboration on climate solutions.

Asset managers need to reverse prevailing trends if they are to support asset owners’ efforts to decarbonise portfolios by offering a wider range of blended finance solutions.

Compared to major banks, asset managers have been laggards in blended finance, according to a 2020 report, which flagged a growing need to expand the sector.

In its latest annual report, global blended finance investor network Convergence said blended finance had a vital role to align “the private, public, and philanthropic sectors in developing innovative solutions that can turbocharge the post-crisis economic reconstruction”.

Blended finance refers to the use of catalytic capital from public or philanthropic sources to increase private sector investment in sustainable development, often by absorbing much of the up-front risk.

The report found that “asset managers only accounted for 11% of commercial participation in blended transactions in 2017-19, down from 15% across all years [2014-2019]”.

From 2014 to 2019, most prominent financial institutions in blended finance were Standard Chartered, Société Générale, Mitsubishi UFJ Financial Group, Sumitomo Mitsui Banking Corporation and Deutsche Bank, the report said.

Earlier this month, the UN-convened Net-Zero Asset Owner Alliance, a group of 33 institutional investors committed to achieving net-zero GHG portfolio emissions by 2050, called on asset managers to step up their role in this field.

A spokesperson for the Alliance said “larger established asset managers” with “global reach” need to service large institutional investors and scale up the market.

Alliance members announced their intention to work with a number of selected asset managers to design blended finance vehicles that meet core criteria and support them in refining their strategies.

One key area for the Alliance is financing the transition of the real economy, which focuses on identifying priority investment segments to scale-up future climate solution investments and technologies, a statement by the Alliance said.

Fiona Reynolds, CEO of the Principles for Responsible Investment (PRI), commented: “Asset owners are looking for investment solutions and wanting to work with innovative fund managers to design the investment vehicles of the future.”

She warned that “without the investment community, the transition to a zero-carbon future, will not happen with scale or the urgency that is required”.

Development of blended finance

From 2014 to 2019, blended finance flows averaged US$11 billion, the Convergence report said. In this period, the number of private equity funds have increased in the market, accounting for 48% of all funds launched.

Among the large-scale blended funds launched are the Climate Finance Partnership, a collaboration including BlackRock, and Climate Investor One, supported by Aegon Asset Management.

Gautier Quéru, Investment Director for the Land Degradation Neutrality Fund at Mirova, told ESG Investor that “the role of public investors is pivotal for the success of such structures, as it demonstrates the endorsement of the strategic objectives by the public sector”, while providing a more attractive risk/return profile for private investors.

Quéru highlighted, however, barriers such as coordinating a wide range of actors and aligning timelines.

“It can take more than three years for a public entity to allocate resources to a blended finance vehicle, while fundraising horizons for private equity like funds are usually 18 months,” he noted.

More standardisation of the processes of public actors could reduce such delays, he suggested.

To unlock a pipeline of investable projects – a major barrier to blended finance – Quéru recommended the establishment of donor-funded technical assistance and project preparation facilities alongside blended finance vehicles.

The Alliance spokesperson commented: “We have seen that substantial improvements in the supply of bankable projects to the market can be achieved when public players join their forces and design interventions that are aimed at setting up transparent regulatory frameworks and improving the level of ease of doing business.”

As best-in-class examples, the Alliance named initiatives such as the GET FiT (Global Energy Transfer Feed-in Tariff) programme, which supports East African nations on their climate resilient low-carbon development path; and Zambia’s Scaling Solar programme, which led to the development of two large-scale solar projects.

In emerging markets, blended finance has become a key source of financing sustainable infrastructure, but success depends on a clear understanding of investor needs.

“The most suitable way for us to participate in the underlying markets is by investing in investment vehicles that aggregate a large number of diversified investments into a portfolio, with donor capital serving as a first loss to absorb losses from the portfolio,” the spokesperson said.

The Alliance is looking for blended finance vehicles at least in the range of US$300-500 million, with a focus on climate solutions and investment in financially viable and sustainable business models.

Günther Thallinger, Alliance Chair and Member of the Board of Management at Allianz, said: “We need to ensure asset managers are supporting us in achieving our climate-related targets.

“Asset management must change and fully incorporate these climate-related targets. Our interactions from the request for proposal, to mandate definition and then to performance dialogues will cover climate impact.”

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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