Skip to main content
You are currently impersonating the user:
().
Blog
07 Jan 25

Climate blended finance is surging, maintaining momentum will be critical

By Andrew Apampa, CFA
Climate blended finance is surging, maintaining momentum will be critical

This article was originally published in Alliance Magazine.

First, the good news: last year was a landmark year for climate blended finance, as our latest report shows. The slowdown in 2022 that saw financing volumes fall to a ten-year low was defied.

Instead, financing flows into climate-focused blended transactions surged by 120% in 2023, reaching its highest ever annual total of $18.3 billion. Large-scale transactions also surged, with six deals exceeding $1 billion in size.

The amount of donor capital entering blended finance (blended finance is the use of catalytic capital from public or philanthropic sources to increase private sector investment in sustainable development) has stayed constant year-on-year, indicating that the increase is coming from the private sector and commercial capital, who are primarily investing equity.

Indeed, while public sector spending continues to outpace private investment, private capital flows grew by almost 200% in 2023 to reach the highest annual aggregate total recorded by Convergence, at $6 billion.

The rise of private equity in climate blended finance

This growth was driven largely by increased financing from financial institutions and institutional investors, with the former investing more than $1 billion in 2023 alone. Financial institutions are increasingly tightening their lending criteria to align their portfolios with climate goals, which is expected to limit the availability of debt financing for fossil fuel projects, particularly in coal.

In the last three years, financial institutions invested $7.2 billion and $4.2 billion in renewable energy and energy efficiency/emissions reductions, respectively.

Meanwhile, over the same period, 60% of all blended deals involving institutional investors have focused on climate initiatives. These investors have primarily committed capital to climate-focused funds, such as the Emerging Market Climate Action Fund.

In 2023, financing from institutional investors rebounded sharply to $1 billion, following a significant decline in 2022 and several years of relative stagnation.

Lack of clear taxonomy inhibits climate finance

So, the market is finally getting smarter, more efficient, and bolder with how it uses limited amounts of catalytic capital. However, much more remains to be done. For example, the scalability of adaptation finance continues to lag mitigation, and private sector participation in these projects remains limited.

The lack of a clear taxonomy defining the parameters of climate adaptation remains a core challenge here. Adaptation and physical risk disclosures have not been widely integrated within robust regulatory bodies such as the Task Force on Climate-Related Financial Disclosures (TCFD), for example.

Going forward, establishing a common taxonomy that can better identify and qualify adaptive technologies and companies will be critical.

The importance of technical assistance

How climate transactions are being structured is also shifting. We’ve seen more guarantees and risk insurance in recent years, with the number of transactions benefitting from guarantees rising by 185% in 2023, driven by increased evidence of guarantees’ mobilisation potential and capital efficiencies. However, we’ve also seen a decline in the use of technical assistance (TA) – non-financial support.

TA is critical in bolstering the capacity of local stakeholders to identify, assess, and manage risks effectively, and in helping governments formulate climate-friendly policies and regulatory frameworks. It must be deployed to help developing countries create comprehensive, time-bound investment roadmaps detailing the climate sectors where private investment will be supported and incentivised. These roadmaps should also address and reform any policy disincentives to investing in climate-aligned sectors.

The hurdle of sovereign risk ratings in developing countries

Blended finance’s existential challenge, however, is that the sovereign risk ratings of most developing countries are beyond the mandate and criteria of many investors (their median risk rating is “B-”, which is sub-investment grade).

For key financial institutions considering investments in riskier assets, like the kind supported by blended finance, the capital requirements and investment caps mandated by international regulators presents an immediate hurdle.

For climate investors, high variation in the quality and detail of different countries’ nationally determined contributions (NDCs) presents a further challenge, with information on how policymakers might implement them in practice often lacking.

Within national-level climate policy planning, then, fostering greater collaboration and understanding between governments, regulators, and the private sector becomes key to progressing blended finance and also climate action.

About the Author
Andrew Apampa, CFA
Andrew Apampa, CFA

As a Manager, Andrew is responsible for developing Convergence’s data and research activities, including building out Convergence’s database of historical blended finance transactions and developing blended finance trends analysis and benchmarks. Prior to joining Convergence, Andrew worked at the African Private Equity & Venture Capital Association (AVCA) as a Research Associate. While there, Andrew inaugurated the Special Report series, publishing in-depth studies on thematic issues within African private equity, such as political and currency risk in African PE, and the rise of the private credit industry in Africa. Prior to joining AVCA, Andrew worked at HSBC as an Emerging Markets Equity Strategist, where he published reports focused on investing in frontier equity markets. During his time at HSBC, he also worked on the European Equity Strategy team and the Global Research Marketing team. Prior to his time at HSBC, Andrew was at the University of Cambridge, where he completed his master’s thesis on protest and mobilization in Sub-Saharan Africa. He is a CFA charterholder.

  • Convergence
  • Connect