Currently, COP28 in Dubai is producing a not-unexpected plethora of commitments to finance the transition to a low carbon economy.
One trend which could easily go unnoticed is an increase in so-called blended finance funds, that is funds which bring together different types of capital from public and private sources.
First out of the blocks was the $US1.1 billion Sustainable Development Goals (SDG) sustainable loans fund brought together by the Dutch Government’s development finance arm, FMO, Allianz Global Investors and the MacArthur Foundation led Catalytic Capital Consortium.
This fund targets loans into emerging markets to go towards meeting sustainable development targets.
The largest initiative of its kind to date, the structured approach to FMO taking the first loss of bad debts and a $US25 million guarantee from the MacArthur Foundation provided the confidence and comfort for institutional investors to come in – led by Allianz Global.
Then we’ve seen the International Finance Corporation partner with groups including the Soros Economic Development Fund, Three Cairns Group and Bezos Earth Fund to become Allied Climate Partners, a high-risk fund designed to draw $US11 billion into climate-related solutions in emerging markets.
And, the host country’s Altérra Transformation and Altérra Acceleration Funds, which sees the UAE partner with private equity giants TPG, BlackRock and Brookfield, is a play designed to leverage $US30 billion for transition finance. It includes capital to de-risk investments and crowd in private capital, including into emerging markets.
These initiatives matter for three key reasons.
First, these structures create a multiplier effect for public funds and bring more private capital to the table.
Government budgets are under pressure. Combined with cost-of-living increases and the imperative for transition, this makes for a potent political cocktail.
The challenges to achieving scale in new markets are familiar to economic policy.
The Organisation for Economic Co-operation and Development (OECD) has found consistently that government interventions can facilitate the functioning of markets, spurring further development.
Done well, this can accelerate progress well beyond transaction-based approaches the market can deliver alone.
Secondly, we need the right capital for the job on the right terms.
New bargains need to be struck; no sector holds all the levers. The goal must be more activity and better outcomes.
Breaking down binary distinctions and the contest between public and private – profit driven or social good – is key to the transition. The stakes may never have been higher for us to place governments and market players as key collaborators in delivering climate action and expanding social and economic value in the process.
Thirdly, the transition must be global.
In the shadow of recession in developed markets, we can already see capital flowing out of emerging markets and the trends have been heading in the wrong direction.
The energy transition will be central.
The Group of 20 (G20) and OECD estimate the infrastructure opportunity of this transition at around $US15 trillion. Other infrastructure is needed too; for example, the World Health Organization says the health threats linked to climate change reveal weak health infrastructure.
And we are all vulnerable while these systems are weak.
The track record suggests the potential to mobilise additional resources and impact is real. Well executed, this goes beyond one fund or institution, to enabling a more dynamic, effective market.
The Global Energy Efficiency and Renewable Energy Fund (GEEREF) demonstrates the leverage of the model and multiplier effect on capital and impact.
In 2017, GEEREF committed €166 million of capital to unlock €3 billion of funds for energy efficiency and/or renewable projects. This created more funds in the market, more than 2400 permanent jobs and brought new or improved energy access to over 450,000 developing market households.
A variety of funders and investors can contribute to blended finance options. When they come together on the right terms it amounts to much more than money.
The benefits can flow on to include strengthened intermediary capacity to connect demand and supply; more collaboration among investors and stakeholders on specific problems; building scale and expertise to instil confidence in investment and enterprise; and fostering new financial instruments and innovative approaches.
At this COP, and beyond, there should be much more of it.
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