MAS to seed S$5m blended finance innovation grant amid call to scale up transition funding
THE Monetary Authority of Singapore (MAS) is injecting seed capital into a S$5 million Asia Climate Solutions Design Grant to fund innovations in blended finance, managing director Ravi Menon said on Tuesday (Oct 4) as he urged a fresh approach to blended finance.
The grant, hosted by Convergence, a global network for blended finance, will provide early-stage grant funding for proof of concept and feasibility studies on innovative and scalable blended finance solutions to fund sustainability projects.
It will also seek solutions to mobilise capital into high-impact target sectors that are significantly under-capitalised in Asia.
MAS will also participate in an initiative by the Asia-Pacific network of the Glasgow Financial Alliance for Net Zero to develop guidance for financial institutions on how they can facilitate the managed phase-out of coal power generation in Asia-Pacific.
Speaking at an MAS-organised conference on scaling transition finance, Menon said that blended finance programmes are too few and too small, with global annual flows averaging less than US$10 billion since 2015.
“We need a more systematic and coordinated approach to mainstream blended finance,” he said.
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Close partnership between the public and private sectors is required to bring about effective transition finance, which refers to providing funding support for hard-to-abate sectors, such as steel and cement, to adopt cleaner and greener technologies.
Menon highlighted three ways blended finance needs to change.
Firstly, there needs to be a pipeline of shovel-ready projects. Currently, there is insufficient capacity and expertise to prepare projects that are attractive to the private sector, especially in emerging markets where regulatory and political risks increase the likelihood of a default, large amounts of startup capital are required, and transaction lead times are long.
Secondly, the risks in marginally bankable transition projects also need to be reduced to attract private capital.
“To reduce overall risk and improve bankability, we need more catalytic and concessional funding from the public sector, multilateral development banks, and philanthropic sources. Such funding can be in the form of grants, risk-sharing arrangements, debt at below-market rates, technical assistance, and structuring advice,” said Menon.
However, while public capital can do more to mitigate risk, he noted that private capital must still bear a fair share of project risk and exercise the appropriate due diligence on a project’s viability and performance.
Finally, there is also a need to shift towards a portfolio approach to blended finance deals through the structuring and securitisation of typically illiquid green and transition assets.
While banks typically lead the financing of sustainability projects, they need to offload loans to institutional investors who have more absorptive capacity due to limited balance sheets and regulatory and liquidity requirements.
Kruskaia Sierra-Escalante, senior manager for blended finance at the International Finance Corporation, said the mainstreaming of blended finance can help to ensure highly impactful projects that otherwise wouldn’t proceed or would take a long time to develop are implemented sooner, at a larger scale and serve as a positive demonstration for other projects moving in the same direction.
“Using blended finance, more projects would be able to cross the threshold of bankability and deliver impact,” said Sierra-Escalante, in response to queries from The Business Times.
She added that the leadership MAS brings and its convening power in the push for blended finance is of “crucial importance”.
“From design funding, the establishment of new partnerships, knowledge and lesson-sharing to a clear call to action, MAS is playing a leading role in rallying the private sector to address the climate crisis, and also supporting the growth of the blended finance market as a critical part of the solution.”
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