Blended Finance Vital to Achieve NDCs
Policy cohesion and consistency will bolster private investor confidence and scale investment across emerging markets.
Closer alignment of blended finance vehicles with climate-related policies will help to meet targets outlined in countries’ soon-to-be-updated nationally determined contributions (NDCs), according to new analysis.
Blended finance network Convergence’s latest ‘State of Blended Finance: Climate Edition’ report has revealed a strong increase in climate-focused blended finance commitments in 2023, emphasising the importance of integrating these vehicles into national frameworks.
“Having confidence in the ability of private finance to drive [NDC] implementation is a key factor to unlocking more ambitious NDCs,” said Guly Sabahi, Senior Advisor on Climate Finance at global initiative NDC Partnership, speaking during a webinar launching the report.
“Effective blended finance can provide the necessary capital for aligned priority investment opportunities by optimising the use of public sector and philanthropic capital and mobilising private finance flows at a greater scale.”
Countries’ NDCs can serve as an economic blueprint for use by blended finance vehicles, she said, while input from the private sector can help governments understand the elements required in their updated targets to secure the investment needed.
“NDCs are expected to advance sectoral pathways and priorities to achieve related targets, and they are also expected to signal some clear policy levers in the form of both carrots and sticks for market creation,” Sabahi noted.
Increased private finance flows are seen as crucial to achieve the updated targets of the next round of NDCs – to be submitted before February 2025 – which must include a 2035 emissions reduction target. This should be supplemented by sectoral targets, investment plans, and policies on climate change mitigation and adaptation.
Sabahi emphasised the importance of governments engaging with investors to identify projects that would qualify for blended finance and that have commercial viability.
“[Both sides] need to understand what type of risks need to be mitigated, what type of blended finance instruments would be most appropriate, and who is in the best position to bear which risk,” she said.
“Early engagement with investors in NDC processes would help make them more investable.”
Ahead of the conference next month, the COP29 presidency has encouraged parties to submit early biennial transparency reports (BTR), including sharing progress towards NDCs.
Current NDCs have put the world on track to limit global warming to between 2.6°C to 3.1°C .
Last year, over 500 financial institutions representing US$29 trillion in assets called on governments to unlock public and private capital flows for the net zero transition, including through suitably robust NDCs.
The Convergence report noted that climate-related blended finance reached unprecedented levels in 2023, with financing increasing by over 70% in 2023 – and six deals exceeding US$1 billion.
When compared to the broader global climate adaptation market, blended finance is also seeing higher levels of capital from the private sector, the report added, with 33% of blended adaptation financing between 2021 to 2023 coming from private sources.
“One key factor in the growth trajectory of climate blended finance will be the role of local stakeholders as countries implement their NDCs under the Paris Agreement,” the report said.
Clear signposting
Clear policy signals are crucial to ensure private investors have the clarity necessary to support countries’ climate ambitions, according to Randi Kristiansen, Just Energy Transition Partnership (JETP) Lead at the Glasgow Financial Alliance for Net Zero (GFANZ).
“If there isn’t consistency across policies, the private sector will start to question what the government really wants,” she said, pointing to how governments continue to offer fossil fuel subsidies, undermining their NDC commitments.
Just Energy Transition Partnerships (JETPs) are an example of how governments and private investors are collaborating to direct climate-focused blended finance to support policy-level commitments in countries highly reliant on fossil fuels for energy.
“They are a way to bridge the gap and make the transition investable for the private sector,” Kristiansen said.
Indonesia’s JETP was finalised at the Bali G20 summit in 2022 with a US$20 billion public and private financial commitment – the private side coordinated by GFANZ. It aims to reduce CO2 emissions from the power sector to 290 million metric tonnes (MT) by 2030.
To achieve this, one of the focus areas of the JETP is the early retirement of the country’s relatively young fleet of coal-fired power plants.
However, unlike traditional blended finance, which is project- and profit-based, JETPs are more programmatic and policy-led, which can lead to increased complexity.
In Indonesia’s case, this complexity is largely caused by the country’s ongoing heavy dependence on coal. Indonesia has had the fastest growing per capita coal emissions of any G20 country since 2015.
“From indices to sector policies to implementing climate-related regulations, there needs to be [cohesion] across all of it, because otherwise it creates more discomfort for the private sector,” said GFANZ’s Kristiansen.
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