Money is available to help the low-income global south mitigate climate change, but to get private investors to spend it, blended finance is critical, a range of experts say.
Africa alone needs $3 trillion by 2030, and the world needs between $3 and $6 trillion by 2050, according to the International Monetary Fund (IMF). Private investors control assets worth about $210 trillion, and banks, $200 trillion. But investing in low- and middle-income countries is risky, so much so that it could be construed as a failure of fiduciary duty to pension-holders, shareholders, and stakeholders, according to Chris Clubb, Managing Director at Convergence Blended Finance.
So, the key is to reduce the risk, and blended finance is a way to do it. Blended finance uses public sector finance to shrink the risk level to a manageable amount in order to reduce the barrier to entry. And investors seem interested.
“[I]f you can, through blended finance, create fiduciary investments, we will be investing,” the United Nations-convened Net-Zero Asset Owners Alliance, which has $10 trillion in assets under management, told Reuters.
After the launch of the U.N. Sustainable Development Goals (SDGs) in 2015, some thought that the notion of blended finance would take off, but that was not the case. “We are not blending to scale. We are blending small — project by project. And so, we've got to break some glass in order to blend more,” Jay Collins, Vice Chairman of Banking, Capital Markets, and Advisory at Citigroup, told an audience at COP27 in November.
Often in blended deals, just one donor government provides funding, which limits the size of the blended finance vehicle. Typically around $70 million, these vehicles are too small to change the landscape, said Clubb, who has analyzed more than 700 such deals over 15 years.
Combining governments, multilateral development banks, and the private sector may be a solution to the problem. Successful examples have taken place in Latin America, Asia, and Africa, but they don’t come close to the total funds needed.
In addition to the matter of the scale of funding, there is also its allocation. About 90% of climate finance projects are aimed at mitigation, not adaptation, which generally does not produce revenues.
Since the physical risks of climate change affect investors’ assets, they’ll need to build resilience for them. The Asia Investor Group on Climate Change has urged governments to clearly demonstrate financial strategies that combine private and philanthropic funders, governments, and multilateral development banks to identify co-investment opportunities.
“[W]e’ve had two north stars, the Paris Agreement and the U.N. SDGs, that have allowed us to begin to quantify the amount of investment that’s actually required,” said Clubb. “A significant challenge is the multilateral development bank and development finance institution system — legacy mandates and processes are not aligned to the speed required or to increasing financial commitments and mobilizing private finance. Their shareholders need to reset their compass towards those north stars.”