Fuelling investment: the rise of blended finance

Blended finance has gained the attention of philanthropic organisations, governments, and private investors worldwide for its potential to channel investments into projects aligned with the UN Sustainable Development Goals (SDGs).

When public and philanthropic sources step up as initial backers, sustainable projects are more attractive to private capital, and this can drive financial flows into projects that support the SDGs, closing the ‘investment gap’.

According to the latest estimate from UNCTAD, the annual shortfall in investment needed to achieve the SDGs in developing countries currently stands at $4 trillion, more than half of which relates to the energy transition.

“The evidence suggests there's a reasonable amount of investment going into the low-carbon transition in Europe and North America, and to a large extent in China, whereas there's a really big investment gap in
emerging markets outside of China” says Dr John Murton, Senior Sustainability Advisor at Standard Chartered Bank.

As the urgency to meet the SDGs grows - supporting low-carbon and nature-positive outcomes, while ensuring inclusive economic and social development - so does the need for innovative financial solutions. This includes programme-level blended finance, Murton explains, which can further reduce the risk for private investors in supporting sustainable development.

A collective approach

The blended finance solution that works at a project-by-project level may not be the most efficient solution for a whole programme of investment. Host governments would rarely want to change policies to enable individual projects, but when donors and providers of concessional capital pool their resources and coordinate efforts across a whole programme of investment, they collectively engage with a host government and with other private sector companies to address the common barriers that impede investment, such as local regulatory restrictions and sufficient project pipelines. Governments can see the logic in making regulatory adjustment if they are confident it will unlock investments that help them deliver their policy goals.

Once these barriers are removed, private investment can flow without subsidy to many projects that would otherwise have required concessional capital to attract investment. In this way, such scarce concessional capital can be conserved for projects that would never be likely to attract private finance.

"These platform arrangements allow us to scale up and enable finance to flow by creating a framework whereby projects can be matched against concessional finance and commercial finance in a more impactful way" Murton says.

Just Energy Transition Partnerships, or JETPs, are the most high-profile example of programme-level financing. They aim to unlock private capital by offering government-backed concessional finance – such as ‘soft loans’ or grants – for sustainability projects.

South Africa became a focal point after it signed the first JETP agreement in 2021 to accelerate its transition from a reliance on coal to clean energy. Over 3-5 years, $8.5 billion of concessional capital is projected to unlock $87.5 billion in private investment for a range of climate positive projects. Reforms to energy sector policies have triggered a huge wave of private sector investment into generation projects which, once they come online, will contribute significantly to easing load-shedding.

Programme funding can also support developing nations as they navigate the transition away from energy intensive industries and the impact this has on local communities and jobs.

“Just like we saw in the UK in the 80s, when you move away from coal, there can be political challenges associated with that. In South Africa's case, some of the concessional finance is aimed at helping to address those challenges, helping to find alternative livelihoods for those communities affected by the transition to a low carbon economy” adds Murton.

Other emerging markets are looking to replicate this approach, including Indonesia, Vietnam and Senegal.

As well as unlocking capital, JETPs will accelerate learning for both private investors and their public sector partners, Murton explains. "The idea ultimately is for us to learn enough through these processes that private finance can flow more organically to projects around the world, creating a catalyst for more deals of this kind that help to accelerate a just transition."

Moving blended finance into the mainstream

By funding early projects and sharing their learnings, blended finance programmes can help to kick-start private investment in the sustainable economy.

This effect is evident in the UK’s offshore wind sector, says Murton. “The first projects required direct concessional lending, direct subsidy from taxpayers. But we've gradually evolved, as lenders and financial institutions have become more comfortable banking offshore wind projects.”

Beyond renewables, Murton hopes that the JETP model can be applied to support other sustainable goals.

“[The] country platform concept can be expanded beyond the energy sector to other areas where donors work together to try and limit emissions from land use and cut biodiversity loss in a number of forest rich countries.”

Financial institutions must adapt their operations and offerings in order to facilitate and benefit from this emerging trend.

Building teams with diverse expertise, including climate policy, biodiversity, and sector-specific knowledge, can help to broker dialogue between private investors and concessional capital sources to match them with appropriate platforms.

In time, however, Murton expects that new avenues to deploy capital in SDG-aligned projects will attract a wider range of investors. “I anticipate you'll see a good degree of securitization so other lenders, life insurance funds, managed funds and so on, can gain exposure to these investments even if they don't have that degree of expertise in-house.”

Given what’s at stake, the call to action is clear, says Murton. “If we don't accelerate everyone's transition, we will simply fail to meet our climate goals, which has negative impacts for all.”

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Editorial note: As a member of the Glasgow Financial Alliance for Net Zero, a coalition of leading financial institutions committed to accelerating the decarbonisation of the economy, Standard Chartered Bank co-leads the Emerging Market and Developing Economy Capital Mobilisation work stream.