Emerging markets may need up to US $1 trillion a year to build a net-zero economy, yet developed nations have so far even struggled to deliver on a target of US$100bn climate finance.
The UN-convened Net Zero Asset Owner Alliance released a Scaling Blended Finance discussion paper investigating obstacles to investing in climate solutions in emerging markets and arguing that blended finance vehicles can provide the necessary structures to close the existing funding gaps in climate investment globally. Moreover, the paper lays out the potential solutions for overcoming barriers to scaling blended finance.
The paper emphasises the need for Multilateral Development Banks (MDBs) and Development Finance Institutions (DFIs), in particular, to better use blended finance mechanisms to mobilise and scale green private capital investment in Emerging Markets (EMs) and Least Developed Countries (LDCs). Other solutions proposed in the report include:
Günther Thallinger, Allianz SE Board Member & Chair UN-Convened Net-Zero Asset Owner Alliance explains:
“Financing the transition of the real economy is one of the key working areas of the Alliance both in developed and developing economies. However, the current economic risk-return profiles for some climate solutions and cleantech investments in emerging markets are not fit for purpose for private institutional investors, who must adhere to fiduciary duties and risk-baring capacities. In this context, scaling up the use of blended finance vehicles is a priority.”
The Alliance published a Call to Action to Asset Managers, in February, inviting them to build and work on blended finance vehicles collectively and ensure a climate-friendly and just transition in EMs and LDCs. This Scaling Blended Finance discussion paper contextualizes this Call to Action and assesses that private sector investment in EMs has faltered due to three main obstacles: elevated risk perception; restricted market access; and lack of data transparency.
Blended finance addresses these factors respectively by: de-risking through the provision of a first-loss tranche; expanding market access through the preferred creditor status of MDBs and DFIs on the ground; and working with these same institutions for better data disclosure to close the gap between perceived and actual risk.