More Blended Finance Needed

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    Stockholm (NordSIP) – A Call on Policymakers issued by the UN-convened Net-Zero Asset Owner Alliance (NZAOA) in the last days of September 2022 argues compellingly that scaling blended finance is essential to achieving the Paris climate goals and the UN Sustainable Development Goals (SDGs). The paper and its recommendations are the result of a recent workshop in Berlin during which NZAOA members convened with leading international actors and thinkers in blended finance from the public, private, and philanthropic sectors. The goal was to explore tangible and impactful measures and more meaningful collaboration for accelerating what remains an underutilised solution to the climate finance gap, especially in Emerging Markets and Developing Economies (EMDEs).

    “Blended finance is a finance structure that leverages public and philanthropic capital to improve the risk profiles of investment opportunities in order to catalyse private-sector funding, particularly in EMDEs and innovative climate enterprises,” state the authors of the report. “These structures create a win-win situation for the public and private sectors. While the private sector benefits from an improved risk profile that meets requirements, the public sector (and the philanthropic community) achieves a multiplier effect. Public and philanthropic money serves as an incubator and leads to the scaling effects required for substantial global impact.”

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    According to the paper, numerous good examples of blended finance success have been produced over the past few years. However, its use is yet to be normalised, standardised, and rapidly scaled. For this to happen, the role of multilateral development banks (MDBs) and development finance institutions (DFIs), with their experience and expertise in EMDEs, higher risk tolerance and official mandate, is crucial. At the same time, the levels of cross-sector understanding need to be enhanced if public lenders are to fully accept asset owners and asset managers as partners in climate finance.

    Acknowledging the complexity of the task ahead, NZAOA has opted to formulate five key recommendations to international policymakers:

    1. Scale and aggregate pools of concessional capital that create fiduciary investment assets. Doing this would help de-risk investments and bring them within investors’ risk limits.
    2. Modernise the governance and business models of MDBs and DFIs to align with the Sustainable Development Goals and the Paris Agreement.
    3. Support accurate risk pricing by providing access to core credit risk data. Making public the Global Emerging Markets’ Risk Database, for instance, would mark a significant step towards accurately pricing actual risks.
    4. Prioritise thematic parameters in official development assistance. NZAOA recommends, for instance, attaching region-agnostic thematic parameters, like decarbonising energy or Paris-aligned activities, and enabling easier access to official development assistance.
    5. Make guarantees eligible for official development assistance. According to the paper, amending the OECD’s rules for guarantees could incentivise a more extensive use.

    “Massive mobilisation of capital into EMDEs will only be achieved if all stakeholders collaborate and make their contribution, and if established practices are revised,” conclude the authors.

    Image courtesy of krakenimages on Unsplash
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