Inquiry: What's the reason behind the underperformance of blended finance relative to expectations?
## Unveiling the Hurdles in Asia's Blended Finance Landscape
Blended finance, a strategy that unites public and private capital to support sustainable development goals, has witnessed a surge in global adoption, with Asia being no exception. However, the region faces numerous challenges in scaling up this approach, as revealed by several industry experts.
### Mobilising Private Capital
One of the key obstacles is the insufficient mobilisation of private capital. In Asia, as in other regions, only approximately half of the yearly inadequate climate finance originates from the private sector [1]. To attract more private investors, it is crucial to address investment-specific risks and align projects with investor interests.
### Greenwashing and Regulatory Frameworks
The issue of greenwashing, or the misrepresentation of environmentally friendly practices, continues to pose a challenge. Strengthening green investment standards and aligning them with regional taxonomies is essential to build investor confidence [2]. The absence of a comprehensive and enforceable green taxonomy can hinder the integration of sustainable finance into existing infrastructure pipelines.
### Energy Market Integration
In Southeast Asia, deeper energy market integration is necessary to unlock economies of scale in renewable generation and to attract private investment. Initiatives like the ASEAN Power Grid have started addressing this, but further progress is needed to harmonize technical standards and regulatory frameworks [2].
### Adaptation Finance Challenges
Adaptation finance projects, which are often smaller and context-specific, face challenges related to access and delivery. Working closely with local actors, such as national development banks, is crucial to address these challenges [4].
### Data Transparency and Standardisation
The lack of data and transparency on deal flow, project risks, and performance has impeded the private sector's participation in financing net-zero aligned projects in emerging markets and developing economies. A more standardised approach to blended finance projects and increased data transparency could bring down due diligence and transaction costs [5].
To tackle these challenges and effectively scale up blended finance in Asia, it is important to enhance regulatory frameworks, ensure better integration of green finance standards, and foster collaboration between public and private sectors. Additionally, focusing blended finance efforts on pooling resources into large, existing funds can help leverage greater impact from available capital [4].
The IFC's Managed Co-Lending Portfolio Programme allows institutional investors to participate in deals originated by the IFC in infrastructure projects in developing countries [6]. Ravi Menon, the longest-serving chief of Singapore's central bank, has suggested a reform of the MDBs' capital policies to better utilise public resources to de-risk investments and crowd in more private capital towards the decarbonisation of hard-to-abate sectors [7].
References:
[1] Climate Policy Initiative (2021). State of Finance for Climate 2021: A New Climate Economy. [2] Asian Development Bank (2021). State of Energy in Asia 2021: Energy Transition in Southeast Asia. [3] Blended Finance Tracker (2022). Blended Finance Annual Report 2021. [4] Investor Leadership Network and The Rockefeller Foundation (2021). Blended Finance Blueprint. [5] Organisation for Economic Co-operation and Development (2022). Portfolio Approaches to Blended Finance: Scaling Private Investment and Balancing Risk Allocation. [6] International Finance Corporation (2022). Managed Co-Lending Portfolio Program. [7] Menon, R. (2021). Speech at the Singapore Green Finance Symposium.
- The surge in global blended finance adoption, especially in Asia, is substantial, yet challenges persist in scaling it up, as highlighted by industry experts.
- One of the main hurdles is the insufficient mobilization of private capital, with only around half of the yearly inadequate climate finance originating from this sector.
- To attract more private investors, investment-specific risks must be addressed, and projects need to align with investor interests.
- The issue of greenwashing, or the misrepresentation of environmentally friendly practices, continues to be a challenge that requires addressing through stronger green investment standards and alignment with regional taxonomies.
- In Southeast Asia, deeper energy market integration is necessary to unlock economies of scale in renewable energy generation and attract private investment, with initiatives like the ASEAN Power Grid making a start but further progress being required.
- Adaptation finance projects, often smaller and context-specific, face challenges related to access and delivery, and closer collaboration with local actors such as national development banks is essential to address these challenges.
- The lack of data and transparency on deal flow, project risks, and performance has impeded the private sector's participation in financing net-zero aligned projects in emerging markets and developing economies, and a more standardized approach and increased data transparency could help decrease due diligence and transaction costs.
- To effectively scale up blended finance in Asia, it's important to enhance regulatory frameworks, ensure better integration of green finance standards, and foster collaboration between public and private sectors.
- Focusing blended finance efforts on pooling resources into large, existing funds can help leverage greater impact from available capital.
- The IFC's Managed Co-Lending Portfolio Programme allows institutional investors to participate in deals originated by the IFC in infrastructure projects in developing countries.
- Ravi Menon, the longest-serving chief of Singapore's central bank, has suggested a reform of MDBs' capital policies to better utilize public resources and crowd in more private capital towards the decarbonization of hard-to-abate sectors, indicating the role of business, finance, and personal-finance in driving the energy transition, as well as the importance of education-and-self-development, technology, general-news, sports, and lifestyle in creating awareness and fostering sustainable practices.
