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By Andrew Johnstone, CEO of CFM

At the onset of COP28, the world faces crisis upon crisis. Humanitarian disasters and armed conflicts puncture a world still reeling in the wake of the pandemic, whilst the climate crisis looms and continues making headlines for all the wrong reasons thanks to the slow pace of progress on the delivery of the objectives of the Sustainable Development Goals. Yet amidst the sombre narrative, a beacon of light has emerged in the race to address and end the climate crisis. Blended finance has proven it can drive climate action at scale and at pace: and it’s time to accelerate its impact; before it’s too late.

Blended finance: the context

Global energy demand is rising relentlessly, largely driven by emerging markets and population growth. Should fossil fuels fulfil this demand, it would lead to a global temperature increase of 4°C instead of the 1.5°C outlined in the Paris Agreement. An unconceivable outcome the consequences of which exceed our, and science’s, ability to model or forecast.

To achieve net-zero emissions by 2050, clean energy investment in emerging economies must more than triple by 2030 to around USD 2.8 trillion a year¹. This far surpasses the capacity of public financing but is digestible by the enormity of the private sector capital markets which stand currently at more than USD 200 trillion. The answer therefore, lies in mobilizing the private sector, yet the perceived high risk of infrastructure projects in emerging markets makes attracting this capital a challenge.  A solution is blended finance, and its ability to accommodate different investor risk appetites within a single structure.

A proven concept

Blended finance involves the strategic use of public capital to remove or reduce risk, thereby enabling private capital to participate at a risk/return profile that meets their requirements.  An example is in the early development stage of a project. Does it work? The evidence speaks for itself.

Climate Fund Managers (CFM) is a climate-centric blended finance fund manager. To date, we have catalyzed over USD 2.5 bn in private sector funds into the construction of climate-resilient infrastructure in emerging markets.

Our blended facilities include a concessional capital development fund (similar to a preparatory facility) to absorb the risk and a tranched equity fund, allowing the mobilization of private capital.

Risk mitigation is embedded throughout. Technical risk, for example, is managed by working with highly-rated engineering and construction partners and operational risks by employing experienced and knowledgeable local teams on the ground.  Currency risk is mitigated by constructing diversified local currency portfolios and implementing foreign exchange hedging on a project level and credit risk is mitigated by credit enhancing a portion of the capital through the use of guarantees. Political risk is controlled by specialist insurance from partners such as the World Bank.

This approach not only opens the door for institutional investors but also tackles regulatory constraints that have historically restricted their involvement in countries with sub-investment grade debt—a category marked by a low credit rating.

Blended finance track-record

Through our blended model, CFM has developed and built the first wind farm in Djibouti, two further wind farms in Vietnam, the first waste-to-energy platform in South Africa and implemented the world’s largest debt-for-nature swap in Ecuador. Once completed, our operational and under-construction assets will help avoid circa 1.5 million tonnes of C02 equivalent emissions a year.

Given the scale of the financing gap in this critical area of climate response, investment opportunities exist in renewable energy, transmission lines, water, sanitation, waste and oceans infrastructure projects and increasingly in energy transition and green hydrogen initiatives.

The power of partnership

Blended finance is a testament to what can be achieved when the public and private sectors join forces. It is an instrument that can level the playing field, ensuring that emerging economies have access to the financial resources required to propel them to sustainability whilst also accelerating their contribution to a global climate solution.

There is good reason for institutions to get on board. As Oliver Bäte, the CEO of Allianz notes: “investors, especially institutional investors like insurance companies and pension funds, are willing to do their share to assist the green transformation – including for a very obvious reason: our long-term pension obligations have an investment horizon that often extends far beyond 2050, and we need to safeguard our portfolios.”²

Of course, the geopolitical landscape poses challenges. The conflicts in Ukraine, Gaza and beyond raise questions on funding priorities. Moreover, the retreat of major oil and gas players from the climate affront, exemplified by Shell’s recent shift away from specific carbon targets, demands urgent attention. Shouldn’t these industry giants be at the forefront of blended finance, contributing significantly to the transition.

The race is on

While the Global Stocktake reminds us of the challenges that lie ahead, blended finance has proven its ability to overcome investment barriers and drive climate action at scale and at pace. Now the private sector must respond, and respond fast.  Blended finance needs to be adopted by many more financial institutions as a means of deploying capital at scale and pace, and investors need to be aware that such a vehicle exists giving them access to markets, opportunities, and impact outcomes which suit their risk appetite.

The race is on, and we invite investment houses from both the public and private sectors, along with cross-sector partners across the climate ecosystem, to join us and help amplify our impact. The time is now. Will you be part of the solution?