Network Voices is a series where Convergence amplifies blended finance opinions and activities from our network - this op-ed was originally published in our State of Blended Finance 2021 report.
By Rael McNally, Senior Portfolio Manager, Global Renewable Power, BlackRock, and Freek Spoorenberg, Global Head of Product Strategy & Investor Relations, Infrastructure Equity, BlackRock
There has never been a better time to invest in climate infrastructure. Governments are embracing policies that encourage climate investment, creating measures to keep global warming under two degrees Celsius. Conversations among investors are centered around the opportunities that this transition will create. It is the largest cohesive, intentional, reshaping of the global economy ever attempted, and the scale and pace of that reshaping touches every country and market sector. The transition to a net zero economy presents a historic investment opportunity requiring at least $50 trillion in funding over the next 30 years. This enormous amount of capital cannot be met by public monies or development finance institutions alone. Private investors have a key role to play.
To achieve the transition to a net zero economy, at least in the first instance, we need to be more innovative and creative in finding ways to bring public-private partnerships to bear on these issues. Partnering with international public financial institutions to help reduce or mitigate some of the idiosyncratic risks of investing in emerging markets is critical to support low-carbon investments at scale. As Blackrock CEO Larry Fink stated in his speech at the Venice International Conference on Climate: “If we don’t have international institutions providing that kind of first-loss position at a greater scale than they do today, properly overseeing these investments, and bringing down the cost of financing and the cost of equity, we’re just not going to be able to attract the private capital necessary for the energy transition in the emerging markets.”
According to Bloomberg NEF, almost 80% of emissions in the next decades will come from developing countries. And those same vulnerable communities and developing nations are those most exposed to the harmful impacts of climate change - as well as being home to more than half of the global population. Working together, we can reduce the climate’s impact on the poor, reduce forced displacement, while creating new markets for the private sector.
We need a cohesive global approach that spans both the private and public sectors, with each side defining their sector-specific pathways to net zero and their intersection with one another.
The Climate Finance Partnership (CFP) is a prime example of our work as part of this effort. Together with the governments of France, Germany, and Japan as well as several leading U.S. impact organizations, we have created a unique blended finance fund structure that seeks to help de-risk the opportunity set in emerging markets for institutional investors. In this case, participating governments and philanthropic institutions subordinate their initial economics to provide downside risk and return protection to the private fund investors, who receive an outsized share of fund outperformance.
This type of public-private partnership and first-loss protection will, we believe, further incentivize private investors to participate in what is expected to be the fastest growing infrastructure investment opportunity of the coming decades, one they might otherwise not consider due to perceived risks. CFP’s blended finance structure is designed to “crowd in” institutional-quality private capital at scale.
Our partnership with these leading development financial institutions has seen CFP gather strong interest at the highest levels in organizations and has resonated, top-down, thanks to our French, German, and Japanese partners’ advocacy for the strategy. Having started capital raising at the start of 2021, the Fund hit 75% of its $500 million fundraising target, on 30 September, with 15 distinct investors, across a wide range of investor groups, backing the partnership. Given demand, CFP is now pulling its final close forward as it is oversubscribed and will be closed in less than 9 months since the institutional fundraising launch.
As we look back on our fundraising journey, one of the most important lessons learned when it comes to mobilizing finance (public and private) into emerging markets, is the need to have an open discussion on the risks and opportunities in these regions and share experiences. Education is needed, across both governments and institutional capital, on the benefits of public-private partnership, of symbiotic blended finance structures, the investment fundamentals present in emerging markets clean infrastructure, as well as the potential benefits of being a first mover in this space.
With investors seeking more sustainable investments, greater impact from their investments, and a just transition, we believe the level of dialogue and investor education on what is needed to achieve those objectives needs to increase. A just transition isn’t simply about expanding investors’ knowledge and understanding about climate change, it speaks to their shareholders’ values, sense of place, and a collective responsibility.
The scale of this historic investment opportunity requires creative, collaborative thinking, and partnership across governments, DFIs, private and other investors and market participants and we are excited to be able to share our experiences at the outset of this exciting journey.