Aerial view of the Red Gate power plant

Could blended finance be the answer to faster climate adaptation?

Even as countries across the world work towards achieving Sustainable Development Goals by 2030, a shortfall in spending coupled with rising public debt is expected to be a barrier. To counter this, blended financing might emerge as a winner. Here’s why.

You might have felt the summers getting much hotter and winters becoming harsher. Add to this flooding in major cities and unseasonal droughts and it is easy to see how much climate change has already begun to affect the world around us. The latest report by the Intergovernmental Panel on Climate Change (IPCC) warns that without immediate and deep emissions reductions across all sectors, it would be almost impossible to limit global warming to 1.5°C.

So, what will it take to reach this ambitious target? According to the IPCC, emissions across all sectors must be halved by 2030. A key element of this is the United Nation’s Sustainable Development Goals (SDGs), a blueprint designed to ensure more sustainability for all. As such, the SDGs are the framework around which governments, businesses and other organisations are marshalling their expertise, finances, and resources, to achieve sustainability targets.

The cost of such a mammoth endeavour is not cheap. The Global Commission on the Economy and Climate says as much as USD 90 trillion will be needed over the next 15 years to develop sustainable infrastructure around the world. That’s a tall ask given challenges like the pandemic, rising energy and commodity prices, and a hanging sword in the form of a possible recession. According to Organisation for Economic Co-operation and Development’s (OECD) Global Outlook on Financing for Sustainable Development, developing countries faced a shortfall of USD 1.7 trillion in financing in 2020 alone.

As policymakers look for ways to mobilise and enhance access to finance, particularly for vulnerable regions, sectors and groups, blended finance models have emerged as a potent tool to help bridge the gap.

Institutional investors and commercial assets managers are expressing interest in blending their commercial capital with concessional capital, as this means lower risks and higher returns.

Martin Stadelmann, Director of Climate Investments, South Pole

The potential of blended finance

Simply put, blended finance takes shape when public or large philanthropic funds are blended with private investments and used as a model for sustainability initiatives. It's designed to provide an attractive alternative to traditional financial institutions, including pension funds, insurance companies, and sovereign wealth funds.

While standalone investments in technology or sustainability-enabling innovations may not be an attractive standalone investment for the private sector, this model could lure more funds into initiatives that create a positive environmental impact when blended with public finance. Capital inflow into sustainability projects through blended finance, especially in developing and third world countries, has the potential to create social impact and improve standards of living. It can also help the private sector manage high-risk projects more effectively since traditional financiers could ask for a higher premium.

According to Martin Stadelmann, Director of Climate Investments at South Pole, a leading climate project developer and solutions provider, “just 5% of overall climate finance goes towards climate adaptation – and virtually none of it comes from the private sector. Of the tracked adaptation finance, over 95% or around USD 30 billion per year is public. And this is just a drop in the ocean when considering the projected costs for adequately financing adaptation over the next decade is a whopping USD 140 billion to USD 300 billion per year for developing countries alone.”

Blended finance to the rescue

Dedicated funds designed to leverage blended finance are already being set up to fund projects across the world. In September 2021, the Energy Access Relief Fund (EARF) was launched and closed USD 68 million in funding, with a target of USD 80 million to protect energy access for nearly 20 million people in sub-Saharan Africa and Asia. The fund managed by Social Investment Managers and Advisors (SIMA) will be deploying the money to provide relief capital as short-term loans to around 90 energy companies in sub-Saharan Africa and Asia which were impacted by the global pandemic.

“Institutional investors and commercial assets managers are expressing interest in blending their commercial capital with concessional capital, as this means lower risks and higher returns. We have a good example of this: South Pole's Technology Fund provides loan guarantees to promising climate ventures, who in turn have no issues in finding commercial banks to provide them with a loan,” Stadelmann adds.

Another example is the Nigeria Electrification Project, where blended funds from the World Bank and the Rockefeller Foundation are enabling the setting up of solar mini grids to provide clean electricity to 55,000 rural homes. The structuring supported by the Cross Boundary group is showing an early internal rate of return estimated at over 10%.

According to trends analysed by Convergence - a global network for blended finance, in 153 blended project transactions representing a total committed financing of USD 73.3 billion, most of the financing is going into sectors like energy (42%), energy efficiency (17%), and natural gas (10%).

“While still in its nascency, most of these actors – governments, development banks, asset owners, asset managers, entrepreneurs – don’t usually work together, or know each other, or know exactly what the other parties should bring to the table. In other words, there isn’t a well-functioning “blended finance marketplace”, which makes effective collaboration hard,” explains Harald Walkate, ESG advisor at the Dutch Founders Fund, in a post.

If we could effectively address the challenges around consensus, framework, and transparency, blended finance could be the silver bullet we need to save our planet.

Written by
Rukmini Rao
Contributing Writer at Spoon Agency