09/25/2024

Blended Finance – a powerful tool to scale up private climate and biodiversity finance

Skyscraper in Johannesburg — Johannesburg

Blended finance mobilises private investment and closes financing gaps to tackle the climate and biodiversity crisis.

To meet the Paris Agreement, the Global Biodiversity Framework and the Sustainable Development Goals (SDGs), the mobilisation of finance from all sources is urgently needed. Especially private finance has to be scaled up to close the existing finance gaps. However, private capital flows to emerging and developing countries are very low and often hindered by the limited expertise of companies and investors regarding risks and returns. The risks of investing range from political and regulatory risks (laws against investor protection, unstable legal environments), to macro-financial (inflation, currency risks) or technical risks.

How blended finance works

In the international fora blended finance is therefore becoming an increasingly used mechanism by countries to bridge the SDG and climate and biodiversity financing gaps by mobilising private sector investments. But what is blended finance and what does it mean for the future of international and bilateral climate and biodiversity finance? The Organisation for Economic Co-operation and Development (OECD) defines blended finance as “the strategic use of development finance and philanthropic funds to mobilise private capital flows to emerging and frontier markets”.

Blended-finance instruments can be clustered in four categories:

Grants are funds provided without expectation of financial return, often from philantrophic or development institutions. They help kick-start projects through e.g. research and capacity development. Technical assistance supports projects by offering expert knowledge, like e.g. improving local operations or adding a social focus, such as gender equality.
These instruments reward investors based on specific, measurable social or environmental goals. For example, investors might receive payments only if a certain amount of CO₂ emissions is mitigared. Impact bonds use private funds to achieve pre-agreed goals, while impact-linked finance ties investment returns directly to the success of positive social outcomes.
These are traditional financial instruments, where debt (loans) must be repaid with interest, and equity (investments) offers ownership in a company or project. Some loans or investments come with more favorable terms, such as lower interest rates (concessional finance) or extended repayment periods. These are often used to encourage private sector investment in socially impactful projects that might otherwise struggle to attract funding.
First-Loss and Guarantees

These tools are designed to reduce the risk for other investors. First-loss capital is the first to take a hit if a project doesn’t perform well, which gives other investors more confidence to participate. Guarantees are promises from a third party (like a development agency or government) to cover losses if the project fails, making it easier to secure private investment.

Scale up climate finance through the financial sector – “30 by 30 Zero”

One of the lighthouse projects supported by the International Climate Initiative (IKI) that uses blended finance instruments is Scale up climate finance through the financial sector – “30 by 30 Zero” implemented by the International Finance Cooperation (IFC). The project aims to build a Climate Finance Ecoystem in Mexico, the Philippines, South Africa and Egypt. At the policy level, guidelines, roadmaps, and tools are developed and capacities strengthened to manage climate risks in the financial sector and enable bankable green pipelines. At the market level, the infrastructure and capacities to issue and invest in Green/Sustainability Bonds are improved. Through blended concessional finance in the form of non-returnable capital instruments such as performance-based incentives provided by the IKI, financial intermediaries are accelerated for climate lending activities. The programme is designed to increase climate lending by participating banks in the partner countries to 30 percent of their portfolios by 2030, while reducing exposure to coal.

The Federal Ministry for Economic Affairs and Climate Action (BMWK) EUR 30 million blended finance contribution is expected to enable at least US-Dollar 600 million in IFC own-account and private sector mobilisation by de-risking investments. Increasing climate lending to support the creation of domestic markets for climate financing will enable critical private sector mobilisation.

In May 2024 the first blended finance activity of the programme reached commitment in South Africa. IFC provided a 250 million US-Dollar senior loan to FirstRand, South Africa's second largest bank by balance sheet, to further scale-up the bank's lending to property developers and home buyers for green buildings. Designated portions of the home loan portfolio will be specifically allocated to the affordable housing segment and to women. The investment is supported by a performance-based incentive (PBI) of 4.35 million US Dollar coming from the IKI, as well as additional funds from the UK, that will be available to eligible developers and buyers constructing green buildings or purchasing green homes.

More blended finance in the future

The IKI is convinced that blended finance stands as a key instrument in the mobilisation of the essential private funds needed to safeguard our climate and biodiversity. Recognising its vital role, the IKI will continue to integrate blended finance into future funded projects, ensuring that private sector contributions complement public efforts in addressing these global challenges. By fostering such innovative partnerships, IKI remains committed to driving sustainable solutions for a greener, more resilient future.

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