Climate blended finance deal value more than doubled to US$18.3 billion in 2023: report
This is the highest annual financing for this segment, notes Convergence
CLIMATE-RELATED investments within the blended finance market rebounded sharply in 2023, growing by more than 120 per cent to US$18.3 billion, compared with US$8 billion the year before, according to global blended finance network Convergence.
This marks the highest annual financing ever for climate blended finance.
Blended finance is a capital-raising approach that leans on investors with higher risk appetites, such as development funds and philanthropists, to provide concessional or catalytic capital in the hope of drawing in more commercial investors. It is commonly used to finance sustainable development in emerging markets.
Climate-related transactions were the primary driver of the overall growth of blended finance deal value last year, with non-climate blended finance deals stagnating at US$4.9 billion between 2022 and 2023.
“The centrality of climate as an investment theme within the blended finance market is significant,” read the report, released on Wednesday (Oct 30) evening, Singapore time.
Climate blended finance’s share of market capitalisation in 2023 was also its highest ever, accounting for 80 per cent of total market value, exceeding the previous maximum of 74 per cent in 2021.
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To date, Convergence has recorded 1,233 blended finance transactions with a total market value of US$231 billion, with climate-related deals accounting for half of all deals and about 57 per cent of market capitalisation.
While the number of climate blended finance deals only increased slightly by three to 78 in 2023 compared with the previous year, the median deal size grew over 160 per cent to US$105 million.
Also driving the deal value in 2023 was the completion of six transactions sized US$1 billion or more. These six deals alone accounted for 45.1 per cent of the total financing.
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Out of the six transactions, five were large-scale multi-purpose infrastructure or utility-scale renewable energy projects.
These deals were mainly financed through corporate or project finance debt via the private sector, alongside sponsor equity.
Development finance institutions (DFIs) and multilateral development banks (MDBs) were also involved in these transactions on commercial terms, as well as multi-donor funds as the providers of concessional capital.
While the uptick in such large transactions are an anomaly, they “undoubtedly present encouraging signs of appetite from key investor groups for scaled investment opportunities and the ability of blended finance structures to deliver the appropriate assets”, said the report.
Private-sector investments into climate blended finance grew 200 per cent to US$6 billion in 2023, the highest annual aggregate total recorded by Convergence.
The mobilisation ratio for private-sector investments went up in 2023. For every US$1 of concessional or catalytic capital, US$2.65 of commercial capital was mobilised in 2023. The amount went up to US$4 for deals valued at US$250 million or more.
Historically, US$2.20 of private-sector investment was mobilised.
The report also noted a 60 per cent increase in commercial financing from DFIs and MDBs, with both groups ramping up their focus on climate opportunities. They participated in about 85 per cent of the climate deals.
“The more ubiquitous presence of DFIs and MDBs in climate blended finance deals has a ‘confidence boosting’ effect for other investors and can potentially depress the amount of concessional dollars necessary to make a deal financially attractive,” noted the report.
Commercial investment from DFIs and MDBs, as well as the private sector, accounted for approximately 90 per cent of all capital provided to climate blended finance deals in 2023, and 82 per cent on average over the last three years.
When assessing the blended finance market on a longer-term basis, the report noted that low- to middle-income countries in Asia-Pacific, excluding Central Asia, made up the second largest region to receive such financing.
Between 2021 and 2023, about 28 per cent of climate-related deals were directed to this region.
This is a lower proportion compared with the preceding three-year period between 2018 and 2020, when the region accounted for 32 per cent of such financing.
However, deal activity increased by 47 per cent over the same period.
“Blended finance holds great potential to support the region’s transition away from fossil fuels and increase the flow of private climate finance,” read the report.
Sub-Saharan Africa received the bulk of such investments at 41 per cent.
Climate blended finance was primarily concentrated in a select group of countries between 2021 and 2023. India topped the list with 22 transactions, while Vietnam (13 deals) and Indonesia (nine deals) were the other two Asian markets included.
The others were: Nigeria (21), Kenya (17), Brazil (15), Ghana (nine), Colombia (seven), Tanzania (four), and Uganda (four).
While 2023 saw a marked increase in deal value for climate blended finance, Convergence noted that the pace at which these transactions are conceived, launched, and replicated must continue to accelerate.
“Greater structural standardisation of large portfolio and project-level climate blended finance assets is a critical first-step,” added the report.
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