Global Blended Finance Hits US$15 Billion
Climate-focused transactions are also on the rise, but private investors’ efforts have been limited by data availability.
Catalytic capital flows to de-risk projects centred around sustainable agriculture, renewable energy, and health and education projects across emerging markets (EMs) have increased in 2023 after a ten-year lull.
According to blended finance network Convergence’s latest State of Blended Finance report, the market rebounded to a five-year high of US$15 billion in new transactions in 2023 after ten years of consistently low volumes, with multilateral development banks (MDBs) and development finance institutions (DFIs) investing greater sums.
Convergence recorded 1,123 blended finance transactions totalling US$213 billion, outstripping the yearly 85 deals average of the past decade. Around 40% of these deals were valued at over US$100 billion in 2023, compared to 17% in 2022 and 28% in 2021. The report noted a 122 annual transaction average in 2021-23.
“Climate has become an even stronger focus [within blended finance], with financing flows increasing by over 100% in the last year and around half of these climate-focused deals worth US$100 million or more,” confirmed Convergence Manager Nick Zelenczuk during a webinar that launched the report.
Within that, the energy sector was the most active segment, accounting for nearly a third of total deal activity and US$101 billion of capital flows.
“Much of this investment targets renewable energy development,” the report mentioned. “Over the last year, 91% of blended transactions in the sector channelled financing to renewable energy, with nearly US$10 billion going towards solar projects.”
In 2022, Convergence had warned that climate-oriented blended finance transactions were on the decline, having dipped 60% from US$36.5 billion in 2016-18 to US$14 billion in 2019-21.
In its 2023 climate-focused blended finance report, the network highlighted an uptick in climate-focused blended finance, with large transactions such as the US$1.11 billion SDG Loan Fund devised by Allianz Global Investors and the Dutch Entrepreneurial Development Bank.
Developing countries currently face an estimated US$4 trillion annual investment gap to meet the UN Sustainable Development Goals (SDGs). Blended finance is seen as a vital tool to contribute the capital flows needed to fulfil both these and the Paris Agreement goals.
Cards on the table
Despite the significant growth observed in the blended finance market, there remain areas for improvement. Data transparency, in particular, should be prioritised to showcase the actual risk of investing in developing markets to regulators and institutional investors, Convergence noted.
As part of this, DFIs and MDBs should aim to more extensively share the payment track records of their portfolios to better support the mobilisation of private investors, said Andrew Apampa, Data and Research Manager at Convergence. “The first step was taken recently with the publication of the Global Emerging Markets Risk Database (GEMs) report.”
GEMs contains data on almost three decades’ worth of MDB loan performance and defaults. Until recently, this information was only available to the GEMs consortium of 24 MDBs, which includes the World Bank.
“With access to an adequate dataset, rating agencies could be more actively involved in rating blended funds and instruments to better reflect the credit enhancement benefits,” Apampa continued.
During COP28, MDBs published a joint statement outlining their progress on promises made to collaborate with each other and multi-stakeholders on upscaling blended finance instruments to drive climate action. World Bank CEO Ajay Banga also committed to devoting 45% of the institution’s annual finance to climate by 2025.
According to Convergence, commercial financing from DFIs and MDBs jumped 140% from US$2 billion in 2022 to US$4.9 billion in 2023.
But alongside more information on blended finance transactions and funds, better data on the performance of public and private sector assets in EMs would also help to inform risk assessments carried out by financial institutions, regulators and supervisors.
“[Data] needs to be very granular at the country- and sectoral-level to be useful,” suggested Ben Weisman, Executive Director of Capital Mobilisation at the Glasgow Financial Alliance for Net Zero (GFANZ). “This is going to be very challenging for MDBs and DFIs in the GEMs consortium. Perhaps there is an interim step to sharing this specifically with regulators and supervisors?”
One of the ongoing issues surrounding the lack of data transparency is that regulators are not privy to the risks associated with investing in developing markets.
“Private investors’ ability to participate in blended finance as a stepping stone to investing in EM transactions with acceptable risk-return ratios is most affected by regulatory factors,” said Apampa. “There’s a significant lack of understanding of expected losses and probability of default for large swathes of EM assets in general, leading to inherent conservatism among regulators and standard setters.”
Engaging with regulators on the importance of blended finance remains challenging, Weisman conceded. He highlighted GFANZ’s work with governments via Just Energy Transition Partnerships (JETPs), through which official donors from developed countries contribute concessionary finance to fund capital-intensive aspects of the climate transition – essentially, taking on the risk to encourage private actors to invest.
“What we really need is better data that can be used as a basis for engagements, showing why existing regulations are not reflecting the real underlying risks [in blended finance vehicles] that we [private investors] are dealing with,” Weisman said.
The post Global Blended Finance Hits US$15 Billion appeared first on ESG Investor.