Climate blended finance deals more than doubled to a record high of US$18.3 billion in 2023, found a new report by Canada-based blended finance network Convergence.
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The increase was driven by the private sector, development finance institutions (DFIs) and multilateral development banks (MDBs). Private investments into the climate theme rose by almost 200 per cent last year to a record US$6 billion, while commercial financing from the latter two players rose by 60 per cent to hit a six-year high.
Multilateral development banks have previously been accused of using their positions to compete with private investors for deals, rather than work with them to mobilise more capital for developing countries.
For DFIs and MDBs, the World Bank’s private sector arm International Finance Corporation leads in the number of deals, while the US International Development Finance Corporation is ahead in terms of aggregate investment size. Image: Convergence
The amount of donor capital entering climate blended finance, meanwhile, has stayed constant. Official development assistance (ODA) funding – or concessional aid from wealthier nations to aid developing ones – declined to a four-year low in 2023.
“This tells us the market is finally getting smarter, more efficient, and bolder with how it uses limited catalytic capital,” said Joan Larrea, chief executive officer of Convergence, in the report.
The report found that financial institutions have emerged as “the most consistently engaged in climate blended finance”, putting US$7.2 billion and US$4.2 billion into renewable energy and energy efficiency respectively in the last three years.
Institutional investors, in particular, have also started playing a bigger role in climate blended finance of late.
Over the past three years, six in 10 blended finance deals involving institutional investors are focused on climate initiatives – rebounding sharply to US$870 million in 2023, after a significant decline in 2022 and years of relative stagnation.
Among private investors involved in climate blended finance, Japanese megabank MUFG leads in terms of number of commitments and aggregate investment size. Image: Convergence
In 2023, 78 climate blended finance deals – which made up a new high of 80 per cent of the total market value – were recorded. Over half the climate deals were at least US$100 million in 2023, up from 23 per cent in the previous year.
From 2021 to 2023, climate blended finance were concentrated in a handful of countries. India led with 22 transactions, followed by Nigeria (21), Kenya (17), Brazil (15) and Vietnam (13).
In terms of aggregate financing over the same period, Brazil got the largest share amounting to US$7.2 billion, followed by Uzbekistan with US$3.5 billion and India with US$3.3 billion.
In Southeast Asia, one notable 2023 transaction was the US$692 million deal signed by Mitsubishi Corporation alongside other project sponsors to finance a 600-megawatt cross-border wind power project in Laos, which is slated to be the country’s first and the region’s largest wind farm.
The total value of blended finance deals reached a five-year high of US$23 billion in 2023, according to Convergence’s separate annual State of Blended Finance report released earlier this year.
“Taken together, the findings from the two reports, as well as the presence on a number of very large transactions recently, signal to us that the blended finance market is maturing and that private investors, long reticent, are investing in these structures at volumes never before seen,” said Ayesha Bery, manager at Convergence and one of the report’s lead authors.
Climate adaptation lags mitigation
Despite the “landmark year for climate blended finance”, the report noted that climate adaptation continues to be underfunded, with limited private sector participation.
Between 2021 and 2023, there were only 32 adaptation blended finance transactions amounting to US$3.5 billion, less than a quarter of the 132 deals targeting climate mitigation totalling US$26 billion in the same period.
However, the report noted an opportunity in scaling hybrid deals that cut across both climate adaptation and mitigation components, which has tripled to an average of US$6.6 billion since 2014.
Within the climate theme, mitigation deals mobilise the greatest amount of private and commercial financing per transaction, with an average leverage ratio of 3.6 – surpassing the 2.8 and 2.12 for cross-cutting and adaptation deals respectively.
