By Andrew Johnstone, CEO of Climate Fund Managers
For the first time in recorded history, global warming has exceeded 1.5°C across an entire year, according to the EU’s climate service. Accelerating climate action has never been more crucial. But how? The answer lies in mobilising private sector capital at scale — through blended finance.
Between February 2023 and January 2024, the global average temperature was 1.52°C higher than the pre-industrial era, surpassing the 1.5°C limit set out in the Paris Agreement. While this does not signify a goal failure — as the limit is based on a long-term temperature average rather than a single year — it does indicate a critical threshold has been crossed and the next decade and beyond looks grim unless emissions reduce drastically.
To achieve net-zero emissions by 2050 and limit global warming to safe levels, clean energy investments in emerging economies must triple to about $2.8 trillion a year by 2030. This far surpasses the capacity of public sector financing alone — yet is digestible by the enormity of private sector capital markets, which currently stand at roughly $200 trillion.
Mobilising the private sector, therefore, is critical to closing the funding gap. However, the perceived risk of emerging market infrastructure projects makes attracting private capital a challenge.
Blended finance overcomes this barrier, with its ability to accommodate different investor risk appetites within a single structure. It involves the strategic use of public capital to remove or reduce a project’s risk, thereby enabling private capital to participate at a risk-return profile that meets its requirements. The public capital, whilst more risk-absorbent than commercial capital, has the same repayment principle as the commercial capital — meaning donors and governments receive back all the capital they provide to the funding structures.
For our part, Climate Fund Managers (CFM) has so far catalysed over $2.5 billion in private sector capital for the construction of climate-resilient infrastructure in emerging markets, including the first wind farm in Djibouti, two wind farms in Vietnam, the first anaerobic digestion waste-to-energy platform in South Africa, and the world’s largest debt-for-nature swap in Ecuador.
Case Study: A transformative clean energy project in Djibouti
Red Sea Power, a 60 megawatt wind farm near Lake Goubet in Djibouti, boosted the nation’s power generating capacity by 50%, promoting energy sovereignty and driving industrialisation, job creation and economic growth through the provision of reliable and cost-effective green energy.
We invested in the project through our $1 billion Climate Investor One (CIO) fund, a blended finance facility whose investors include public and private sector organisations.
The first phase was to develop the project from an idea to an investible proposition. This was funded through CIO’s Development Fund, which provided $1.4 million in concessional capital from donors including the European Commission, with CFM providing hands-on support on the structuring, technical, financial and ESG components.
The development funding enabled CFM and the other equity investors in the project to get comfortable, leading to CFM investing $25 million from CIO’s Construction Equity Fund alongside investors such as the Africa Finance Corporation, Dutch development bank FMO, and the Djibouti government, resulting in an all-equity solution for the construction of the wind farm.
The project would have been immensely challenging to fund with a traditional project finance debt-plus equity approach, given Djibouti’s lack of a track record in renewable energy infrastructure, private financings, and its low credit rating. It simply wouldn’t have gone ahead without a blended finance approach.
Red Sea Power is now fully operational and providing clean energy to over 300,000 people, thus avoiding emissions equivalent to taking 55,000 buses off the road.
Scaling up the solution
Blended finance opens doors for institutional investors to access investment opportunities and impact outcomes in critical climate action areas, including renewable energy generation, transmission, green hydrogen, water, sanitation, waste, and oceans infrastructure. At the same time, it allows emerging economies to access the financial resources required to meet their climate goals.
As we grapple with the reality of global temperatures breaching the 1.5°C warming mark, the need for innovative solutions has never been more apparent. Blended finance has proven its ability to overcome investment barriers and drive climate action quickly and effectively. Its adoption at scale by financial institutions across the globe is both imperative and urgent if we are to tackle the climate crisis and secure a sustainable future for us all.
- Johnstone is CEO of Climate Fund Managers, a blended finance fund manager.
