Blended Finance
Blended finance has proven its ability to overcome investment barriers and drive climate action at scale and at pace. But what is blended finance and why is it so critical to tackling the climate crisis?
Why blended finance?
To achieve net-zero emissions by 2050, clean energy investment in emerging economies must triple to ~USD 2.8 trillion a year¹ by 2030.
This far surpasses the capacity of public sector financing alone – yet is digestible by the private sector capital markets, which stand at ~USD 200 trillion.
Mobilizing the private sector is critical to closing the funding gap. However, the perceived risk of emerging market infrastructure projects makes attracting private capital challenging.
Blended finance overcomes this barrier, with its ability to accommodate different investor risk appetites within a single structure.
What is blended finance?
Blended finance involves the strategic use of public capital to remove or reduce investment risk, enabling private capital to participate at a risk return profile that meets their requirements.
CFM’s blended facilities are supported by public and private sector organizations, including development finance institutions, multilateral finance institutions, public sector banks and institutional investors (including asset managers, pension funds and insurance companies) from across the globe.
Each facility includes a concessional capital development fund to absorb project risk; and a tranched equity fund to mobilize private capital at scale.
Risk mitigation is embedded throughout: technical risk by working with trusted engineering and construction partners, operational risk through experienced and knowledgeable local teams, currency risk via foreign exchange hedging and diversified local portfolios and credit and political risk through specialist guarantees and insurance.
The public capital, whilst more risk absorbent than commercial capital, has the same repayment principle as the commercial capital, meaning donors and governments receive back from implemented projects all the capital they provide to the funding structures.
Blended finance enables public sector organizations to leverage their capital for impactful climate action, gives institutional investors access to markets, opportunities and impact outcomes which suit their risk appetites and helps emerging economies to access the financial resources required to support their transition.
It is a critical component of the global climate solution and its adoption at scale by financial institutions across the globe is both imperative and urgent if we are to tackle the climate crisis and secure a sustainable future for us all.