Unlocking untapped investment for sustainable development
Communities across the world are grappling with the many unknowns of the covid-19 pandemic. In addition to taking a huge toll on human lives and health, the pandemic also represents the greatest shock to the global economy in nearly a century.
The International Monetary Fund has projected a downturn of global growth at -4.9% in 2020, and countries are responding with unprecedented fiscal and monetary measures. In the midst of the crisis, governments, development finance institutions (DFIs), and the private sector will need to think carefully and innovatively about how to mobilize investments to meet needs. For the long term aims of climate resilience, with public finance constrained in dealing with the crisis, the need to leverage private finance becomes more important than ever. According to the World Bank, one way to support the mobilization of capital for developing countries and build resilience in the face of climate change and covid is the use of blended concessional finance.
What is blended concessional finance?
Blended concessional finance can be used to unlock untapped investment for sustainable development, especially from the private sector. It seeks to use development resources to attract trillions in investment for the Sustainable Development Goals in support of the ‘Billions to Trillions’ agenda. Blended finance entails combining concessional finance from donors or third parties alongside DFI’s finance and/or commercial finance from other investors to develop private sector markets. It uses donor funds to mitigate specific investment risks and help rebalance risk-reward profiles of high-impact investments, so that they have the potential to become commercially viable in the long term. Historically, blended finance has been utilized for climate projects that face higher risks due to uncertainties associated with a number of political and economic factors. DFIs have agreed upon a set of Enhanced Principles for blended concessional finance, which guide their thinking. The Principles outline how blended finance can be a powerful tool to develop private sector markets, foster innovation, and crowd in private finance in some of the most challenging settings.
What are the latest blended finance figures?
The 2019 DFI Joint Report showed that blended solutions for private sector operations in 2018 were used for a total project volume of over US$6 billion, using US$1.1 billion in concessional funds and about US$2.4 billion in DFI resources. Private sector finance mobilized for these projects was about US$1.7 billion. The sectors that received the bulk of financing were infrastructure, in many cases for climate. The majority of blended finance for climate projects focused on mitigation. Countries with higher income levels received more blended finance for climate projects than lower-income ones. Concessional funds were used the most in Sub-Saharan Africa and East Asia & the Pacific, both at about US$1.4 billion. Among key donors for DFI blended concessional finance in 2018 were the European Union, sovereigns like Canada and Denmark, and institutions like the Global Agriculture and Food Security Program and the Green Climate Fund. The latter set up a Private Sector Facility, which aims to change the current finance paradigm by de-risking the delivery of private capital and scaling up private sector investment flows for climate mitigation and climate-resilient development.
Building resilience using blended finance
Many initiatives have benefited from the use of blended finance, including those strengthening adaptation to climate change. The Low Emissions and Climate Resilient Agriculture Risk Sharing Facility is but one example. The program supports climate resilient agriculture in Guatemala and Mexico, through the creation of a risk sharing facility to unlock innovative and scalable financial instruments. In Latin America the impacts of climate change are escalating the food and nutrition security challenges faced by farmers. In the Caribbean, rising sea levels are leading to increased agricultural land loss and causing widespread damage to agricultural systems and coastal zones. The risk-sharing facility created by the Green Climate Fund and the Inter-American Development Bank targets agricultural enterprises that demonstrate environmentally sustainable practices. The project supports them to engage lenders for long-term loans and climate-smart investments, thereby attracting local and international private sector stakeholders. The facility is currently in its implementation phase, having so far dedicated US$158 million and reaching over 800,000 beneficiaries.
To advance blended finance, create development opportunities, and reach a wider audience, DFIs need to continue the dialogue and knowledge-sharing on blended concessional finance, including the implementation of the Enhanced Principles. They must also continue updating the blended concessional finance data, refining the methodology for collection and analysis, and publishing annual joint reports. DFIs should drive innovative research into private sector opportunities around adaptation and resilience, to identify how to mobilize private adaptation finance more effectively. In times of extreme uncertainty and market turbulence, development finance institutions need to support their clients and create project opportunities where possible. Blended finance has the potential to boost private sector engagement and build resilience to climate change for the most vulnerable. Alongside its partners, the GCA is driving a number of initiatives to support the public and private sectors to achieve this goal.
The ideas presented in this article aim to inspire adaptation action – they are the views of the author and do not necessarily reflect those of the Global Center on Adaptation.
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