Blended finance may hold the key to funding the vast sums required to combat climate change.
A Singapore-based fund manager shows how philanthropic catalytic funding can accelerate the low-carbon transition by mobilising private sector capital to raise the trillions needed.
This model is especially suited to emerging markets, where private sector investors are often unwilling to venture.
The Intergovernmental Panel on Climate Change (IPCC)’s recent update, the AR6 Synthesis Report: Climate Change 2023, sounded the latest in an increasingly urgent series of warnings that time is running out if we are to meet the target of 1.5 degrees Celsius of warming by 2030.
To drive the urgent changes required to stay on track toward this goal, large-scale finance is key. According to the IMF, the world needs between $3 and $6 trillion a year until 2050 to finance the net-zero transition – and an estimated 60% to 70% of this capital must come from the private sector.
But BloombergNEF states that energy transition investment totalled $1.1 trillion in 2022. This is a new record, 31% up on the previous year, but well short of the IMF’s estimated requirement. Even though investment is growing, a sizeable gap still exists between what is needed and what is committed.
Yet, while these numbers are daunting, the money exists. Reuters estimates that private investors control assets worth approximately $210 trillion globally, while banks perhaps another $200 trillion.
So, why is insufficient capital being directed into building new clean-energy infrastructure?
Philanthropy can help
The fact is that investors are wary of the high early-stage risks presented by many climate change technologies and businesses – and this wariness is compounded in high-risk developing countries. This risk aversion places the onus on funding effective clean-energy businesses in these regions on philanthropic organizations.
The Climateworks Foundation estimates that philanthropic foundations’ funding for climate change mitigation has more than tripled since 2015, from under $1 billion to a little over $3 billion in 2021. It is a growing potential capital source, but is too small on its own to fund the trillions of dollars needed.
There is clearly a disconnect between the role of philanthropy in committing high-risk, early-stage funding and the reluctance of private capital to similarly commit to climate mitigation investments.
As well as being fundamentally risk-averse, typical funds also tend to lack the specific development finance know-how and local expertise to identify prospects with the potential to thrive – and create a meaningful mitigation impact.
Because philanthropic/catalytic capital is in short supply and the private sector needs to mobilise trillions of dollars, it is crucial that the impact of catalytic capital is multiplied.
A new model
The Southeast Asian Clean Energy Fund (SEACEF), managed by Clime Capital, invests in Southeast Asia where its on-the-ground teams have the local expertise and market knowledge to identify excellent businesses and partnerships. Our executive team has significant experience investing in high-risk, early-stage businesses throughout the region that can help mitigate the worst drivers of climate change.
Clime Capital deploys the high-risk, early-stage capital afforded by impact investors capable of taking the significant risk the private sector is unwilling or unable to accept. Clime Capital directs this capital to new and growing clean energy businesses, such as large wind and solar developers that have the potential to achieve utility at scale.
Clime Capital also focuses on distributed platforms that prepare the grid for clean energy and complementary demand-side reductions, such as energy efficiency and electric mobility. SEACEF’s funding is derived from philanthropic foundations, family offices and recognised investors looking to accelerate the low-carbon transition. It has attracted capital from Microsoft, the Sea Change Foundation, the Children’s Investment Fund Foundation and other leading international climate foundations and investors.
Through its investments via SEACEF, Clime Capital has shown that early-stage, high-risk capital smartly invested with pinpoint targeting and advantageous timing can rapidly produce both climate impact and return.
Leading the way
Global blended finance network Convergence's figures show that blended finance structures’ average mobilisation ratios for this investment type average less than 2x – and SEACEF’s net private sector mobilisation ratio is many times higher.
For example, SEACEF committed funding to Indonesian rooftop energy start-up Xurya Daya Indonesia in August 2020 and within two years it was able to attract Japanese trading giant Mitsui as a shareholder. This followed a previous capital raising in January 2022, which netted $21.5 million – a 20x increase on the initial investment.
Convergence estimates that compared to SEACEF’s overall price sector leverage average ratio of more than 8x today (which is on track to reach more than 20x in the next year], commercial investors are currently achieving 1.9x, development agencies 1.5x and dedicated impact investors 1.6x. Development Finance Institutions (DFIs) and Multilateral Development Banks are able to realise just 1.3x, while foundations’ and NGOs’ ratios are below 1x at just 0.9x.
SEACEF’s approach has passed the proof-of-concept phase. It is showing how to get more bang for the investment buck and is paving the way for the future. In the past three years, it has mobilised significantly more than the average by attracting capital that can accept the high risk and managing it through a professional team that has private sector early-stage development experience to deploy it smartly.
Could this model be the key to unleashing private-sector investment on the scale required to finally make inroads on the net-zero deficit? It certainly demonstrates a fresh approach with compelling results.
SEACEF is one of the examples of how philanthropy is raising the bar and bringing many of its innovative tools to the conversation to help unlock public-private action in climate and nature.
Last year, the Philanthropy Asia Alliance (PAA) was launched by Temasek Trust and its close partners to build bridges between philanthropic actors in the region and work towards creating common solutions across climate and other sectors in the region. The World Economic Forum and PAA have a strategic collaboration and PAA is the first Asian organization to have endorsed the new GAEA initiative.
Seeing all these promising trends and the need to re-think new models to achieve speed and scale in climate and nature action, at the Annual Meeting in Davos, the World Economic Forum launched its new GAEA initiative. With more than 45 partners, it aims to help raise the amount of philanthropic giving flowing towards climate and nature and aggregate philanthropic efforts globally towards unlocking and de-risking critical public-private interventions across climate and nature systems. With this, GAEA hopes to contribute to stopping negative tipping points and enhancing positive ones by helping design a new generation of Philanthropic-Public-Private Partnerships. Both PAA and SEACEF are among the GAEA's growing community of champions.