This op-ed was originally published in Environmental Finance.

The consensus coming out of COP29 is that achieving global climate goals will require increased participation from the private sector. Convergence's recent report on the State of Blended Finance (Climate Edition) found that private sector investment into blended transactions targeting climate goals surged from $1.8 billion in 2022 to $6.2 billion in 2023.

Yet, the bulk of this money flows to climate mitigation rather than adaptation. In the global climate adaptation market, only 1.6% of financing comes from the private sector.

Private investors can be more hesitant to consider investments in blended funds that target adaptation.

Mitigation transactions often have direct revenue streams, such as through the sale of renewable energy, or cost savings from energy efficiency. Conversely, adaptation transactions, which aim to reduce vulnerability to climate impacts and increase resiliency, often do not have an obvious or immediate revenue stream.

Blended finance can be used as a structuring approach to mitigate risk for private sector investors, making it more likely for them to invest in deals aimed at climate adaptation.

Adding a concessional debt or equity tranche in the capital structure, for example, can provide a risk cushion to senior tranche investors. It thereby allows pension funds, insurance companies, or commercial banks to invest in line with their fiduciary responsibilities.

Experienced fund managers play a critical role in structuring such funds. They act as market builders for blended climate adaptation, supplying investors with investment opportunities in line with their (minimum) investment size and their risk-return expectations.

Two examples highlight how fund managers can use blended finance to attract private investment at scale into adaptation.

First, let's look at Climate Investor Two, a blended facility targeting adaptation, specifically water, sanitation, waste, and ocean infrastructure projects in emerging markets.

It is managed by Climate Fund Managers, a Dutch-based joint venture between the Dutch development bank FMO and Sanlam Infraworks. Established in 2019, the fund reached its third close in 2023 with $875 million in commitments, including from institutional investors, such as a Nordic pension fund, a prominent US investment firm, the IMAS Foundation (under the IKEA umbrella), and a commercial bank.

Climate Investor Two is a great example of how a fund manager was able to build on its track record to venture into a more nascent sector. Many investors that took part in Climate Investor Two had already been investors in its predecessor, Climate Investor One, which focused on mitigation (renewable energy infrastructure) in emerging markets.

Climate Investor One was conceptualized in 2015 and reached a final close at $850 million in 2019. By participating in Climate Investor One, commercial investors had already gained an in-depth understanding of the firm's fund architecture and unique full investment cycle approach.

This helped them build strong arguments internally for investing in an adaptation-focused product, despite it being a first for many of them.

Another example is Incofin Investment Management's Water Access Acceleration Fund.

Incofin, a Belgium-based impact fund manager, launched this private equity fund in 2023 to invest in safe drinking water enterprises, primarily in Africa and Asia.

Incofin has a strong track record in using blended finance to catalyze investments in emerging markets: the firm has managed several blended funds focused on the microfinance and agriculture sectors (e.g. Incofin Fairtrade Access Fund).

Now turning to the water sector, the $55 million fund brings together diverse investors such as Danone, BNP Paribas, US International Development Finance Corporation, the Danish development finance institution IFU, Norfund, European Investment Bank, Aqua for All, and the US Agency for International Development.

Here as well, investors trusted the captains that had done it before.

To be sure, first-time fund managers also play an important role in launching adaptation-focused vehicles. In fact, the first adaptation-focused blended fund, the Climate Resilience and Adaptation Finance and Technology-transfer facility, was launched in 2019 by a first-time fund manager (the Lightsmith Group).

However, we need to see more money flowing towards adaptation, urgently. The time to market (from incubation to first financial close) will arguably be shorter when experienced managers steer the ship to new waters.

To all established fund managers: this is the time to use your experience and track record to bring along private investors into adaptation focused financial vehicles.