Policymakers must facilitate the scaling of blended finance structures to fund climate solutions if the world is to achieve both the Paris climate goals and the UN Sustainable Development Goals (SDGs), said the UN-convened Net-Zero Asset Owner Alliance.
In a call on policymakers– signed by UN Special Envoy for Climate Action and Finance Mark Carney and UN High-Level Climate Action Champion, Nigel Topping and supported by the Sustainable Markets Initiative and the Investor Leadership Network – the Alliance said blended finance structures would go a long way to mobilising the flow of climate capital towards emerging markets and developing economies (EMDEs).
Currently, significant capital to finance clean technology, low-carbon infrastructure, sustainable business models and adaptation measures is readily available but not ending up in EMDEs or in the technologies that are most needed. The level of risk for those investments is a major deterrent for institutional investors.
The potential of multilateral development banks (MDBs) and development finance institutions (DFIs) in mobilising private capital through blended finance is also significant, given their experience and expertise, especially in EMDEs, coupled with their higher risk tolerance and their official development mandates.
Günther Thallinger, Chair of the Alliance and Member of the Board of Management of Allianz SE, said:
Using blended finance structures is simply a win-win for the public and private sectors. While the private sector benefits from an improved risk profile, the public sector and the philanthropic community achieves a multiplier effect. At the core, this is not new, but it has been tested multiple times. We have before us an opportunity to incubate and scale investment to create substantial global impact. Let’s finally use this opportunity.
To achieve this, the Alliance asks that policymakers:
- Scale and aggregate pools of concessional capital that create fiduciary investment assets: To close the gap between high investment risk in EMDEs and investors’ obligations to earn risk-adjusted returns, governments and philanthropies must create sizeable and flexible pools of concessional capital to de-risk investments so as to bring them within investors’ risk limits.
- Modernise the governance and business models of MDBs and DFIs to align with the SDGs and Paris Agreement: Despite strong public commitments being made by numerous MDBs and DFIs to prioritise private capital mobilisation, efforts to catalyse private capital have not reached the required levels. Grant-funded technical assistance by MDBs and DFIs is needed at an early stage to secure a robust project pipeline.
- Support accurate risk pricing by providing access to core credit risk data: A systemic lack of reliable information about key issues, such as project risks, yields/returns and historic defaults/losses, pushes private-sector investors to price the perceived risks at disproportionately high levels.
- Prioritise thematic parameters in official development assistance: The majority of donor funding currently requires investments to fit specific sectoral or geographic guidelines. Such restrictions reduce the potential pool of investible projects as well as the scale of respective blended finance vehicles. Attaching region-agnostic thematic parameters enabling easier access to official development assistance (ODA) would help circumvent these barriers.
- Make guarantees eligible for official development assistance: Increasing the use of guarantees would assist in making the economic risk-return profiles for climate solutions and clean technology investments more attractive to private investors.
These actions are urgently needed to incentivise and utilise blended finance structures at scale. The Alliance aims to contribute to the implementation of the highlighted solutions by collaborating with Convergence and by establishing a dialogue with the members of the Coalition of Finance Ministers for Climate Action. Massive mobilisation of capital into EMDEs will only be achieved if donors, development banks, and private-sector financiers all cooperate to bring about systemic change in how private capital is deployed in climate and SDGs finance.