Unlocking climate solutions at scale through blended finance

The failure to solve the climate crisis so far is not the result of a lack of resources. While the trillions of dollars needed for low emission, climate resilient development drastically exceeds that of all international aid funding in the world - amounting to approximately 20 times the budgets - this level of capital exists in the private sector and institutional investors. Market conditions, however, create obstacles and restrictions that make it unfeasible for these actors alone to achieve the impact required for systemic transformation.

The right collaborations, on the other hand, can break through these barriers and open new pathways that unlock untapped capital for climate and nature solutions. Partnering with philanthropic organisations that provide catalytic capital can bring new fresh ideas, remove obstacles for market players, unlock stalled processes, convene communities, mobilise civil society, and in occasions use de-risking tools or participate in capital stacks (though this is rare due to the scarce nature of such capital). By combining the diverse tools that philanthropy offers with government policy instruments and corporate purchasing power and value chain signals, we can stand a chance at sector-side transformations, in shorter periods of time. These types of public-private-philanthropic constructs can act as “acupuncture points” to put pressure to help pave an enabling environment to crowd in institutional investors, who are the ones with the ability to turn these green market transformations, into the new realities.

This approach aligns with the current evolution of the role of philanthropies, with many now seeking transition from traditional grant-giving to taking a more active seat at the table of ideation and implementation. They also come with greater ambitions of leveraging more capital for every dollar they give to further their goals significantly through the multiplier effect.

Blended finance, for example, is one of the key tools that can be employed with this method as it connects interests across the capital stack, both providing returns to investors and progressing climate goals. Philanthropies can play a critical role in reducing risk and enhancing market incentives in this context by issuing guarantees and providing first loss tranches to enhance the risk/return profiles of projects and attract institutional investors. In addition, they can help to build trust across all stakeholders and advocate for policy change that further enables sustainable transitions.

The International Energy Agency estimates that to achieve net zero by 2050, over 70% of clean energy investment in emerging markets and developing economies must be financed by private sources, with nearly 60% of this financed by debt. A paper produced by GAEA in collaboration with ETH Zurich and the Rockefeller Foundation - Labelled Bonds for the Net-Zero Transition in South-East Asia: The Way Forward outlines how exchange-traded securities, such as corporate and government bonds, are key to scaling such debt finance as well as allowing access to an international investor base, particularly when linked to sustainable development. Long-term bonds, especially, also enable a better investment horizon match with the investment needs for net-zero transition: these needs tend to require significant upfront capital investments and have relatively long payback periods.

Sustainability-linked bonds (SLBs) are another key instrument, with their financing tied to pre-defined sustainability or ESG related KPIs, meaning coupons will typically increase or decrease depending on whether or not these targets are achieved. In some cases, the issuer must make payments to third parties if the targets are not reached. A fairly new product, transition bonds, on the other hand can finance projects that, while not necessarily low or net-zero, may be an essential part of the journey to achieving it. They provide a way to support the transition, such as through decarbonisation activities in hard-to-abate and highly polluting sectors.

The time is ripe to harness the rising level of ambition. Particularly in Asia, a new generation of philanthropists are emerging with a very high focus on climate, aware that achieving all other SDGs - from health to zero hunger to sustainable communities - will not be possible if the climate crisis is not effectively addressed. Equally, governments are in need of extensive support to protect their constituents in the face of the overlapping challenges it presents and the private sector realises that transformational change to sustainable business practices throughout their value chains is vital to maintaining the credibility and durability of their operations.

Countries in the Asia-Pacific - both one of the most climate-vulnerable regions as well as responsible for producing half of global GHG emissions - are at risk of losing 35% of gross domestic product (GDP) by 2050 from the effects of climate change and natural hazards, effectively undoing over 30 years of efforts to reduce poverty, tackle food security and advance human development. The other side of this coin is the pertinence of the inherent opportunity here too as, conversely, the region is also projected to contribute around half of all global emissions reductions needed by 2050: a sustainable future for Asia means a sustainable future for all.

Adding to the complexity, though, the pursuit of emissions reductions must also be carried out in tandem with just development pathways. For example, with the region’s energy consumption 80% reliant on fossil fuels, making it an obviously critical sector in which to focus reductions, we must also prioritise equity for the vast number of people who lack basic services such as electricity or who depend on this industry for their livelihoods.

In the Philippines, an offshore wind project has been conceived and organised by low-carbon transition investor Clime Capital. Aboitiz Power Corporation, a key player in the Philippines’ energy industry, launched a feasibility study for the project in partnership with Rocky Mountain Institute (RMI) to develop up to 3 gigawatts of offshore wind projects in the country, supported by the United States Trade and Development Agency (USTDA), aiming to advance existing research on offshore wind power.

Of 19 sites identified based on wind resource potential, six were selected for further research and engagement with local regulatory bodies and government units has been initiated to further understanding of existing and lacking regulations and permitting processes for offshore wind. The Tara Climate Foundation funded RMI to publicly share the study of the unselected sites in order to support other stakeholders to further advance offshore wind in the Philippines, including technical information as well as an environmental and community impact analysis.

Innovative funding and upfront capital were supplied at the point of need, with the funding from Tara facilitating the crowding-in of technical assistance funding from USTDA and the partnership with AboitizPower. In addition, capacity and capability building was achieved as talent and expertise were fostered on the ground through training, networks and the orchestrated engagement of local consultants and employees.

The project’s success comes down to a strong alignment on the strategy and values between the public and private stakeholders with a joint agreement and clear focus on outcomes and accountability regarding milestones highly prioritised. The model can now be utilised to accelerate other similar multistakeholder projects.

Another example of cross-sector collaboration is found in the use of innovative technology to identify and address air pollution hotspots in Cangzhou, China. A partnership between the Environmental Defense Fund (EDF), the Beijing Huanding Environmental Big Data Institute, Clean Air Fund, Children’s Investment Fund Foundation (CIFF), SUSTech Engineering Innovation Centre, Nova Technology and Cangzhou City Government allowed the full potential of the city’s air quality monitoring system to be unlocked through supporting enforcement officers to use smart tech and an innovative methodology.

The team built a new tool to map air quality across the city, filling the gaps between existing fixed government monitoring stations using mobile instruments fitted to 50 taxis. The result is a hyperlocal real-time view of air quality across the city to identify pollution hotspots, which is then passed on to enforcement officers through a user-friendly app to follow up on. The pilot project was endorsed by Chinese officials and experts and has since informed broader government air quality management strategies. It also demonstrates the potential of hyperlocal air quality monitoring tools in supporting targeted air quality enforcement, serving as a model to help other cities in China and around the world in reducing air pollution.

This is a form of innovative financing from the Clean Air Fund, CIFF and other EDF donors, paired with traditional funding sources such as government grants from Cangzhou that support local enforcement activities. The multistakeholder partnership ensured the securing of necessary resources, such as the research and development of hyperlocal monitoring methods for the project, which might not be feasible through traditional funding sources alone. Philanthropic funding was catalytic in providing not only financial support but also expertise, networks and guidance, helping to mobilise additional resources, attract other funders and raise awareness about the project’s objectives.

While the potential and opportunity in these crucial partnerships is as clear as the urgency to act on climate change and nature restoration, a lack of awareness and understanding has hindered the development of the capital and institutional capacity to support this kind of funding on a broader scale. GAEA plays a key role as convenors to facilitate this approach, which we call the 4Ps model - public-private-philanthropic partnerships - and is working to create a global platform for investment innovation, with Asia as a strategic starting point. We work to illustrate how innovative financing mechanisms can bring both economic returns as well as support climate and nature causes.

With insufficient infrastructure and limited systems for consolidating the work of various entities, there’s a serious need to build the bridge between the public and private sectors through philanthropy to show what finance models, engagement and measurement are possible. A structured ecosystem that highlights Asian innovations and capabilities on the international stage will also help mobilise the resources necessary to achieve ambitions for climate and nature in the region and beyond.

We must view this as a journey of innovation that we co-create together through unprecedented global collaboration. GAEA is building a new kind of community of impact-multipliers that can create positive tipping points to drive systematic transformation. However, only when all the pieces of the puzzle come together can we achieve a whole that creates immensely more value than the sum of its parts - and only then will we be sufficiently equipped to elevate our solutions to the level that the climate crisis calls for.

This article was originally published in Issue 008 of the "Climate Policy and Green Finance (Quarterly Update)" by the National School of Development of Peking University.