- November 10, 2023
Blended financing is key
Blended finance is combining concessional finance from donors or third parties alongside MDBs’ normal own-account finance, and/or commercial finance from other investors, to develop private sector markets and mobilise private resources.
India will require substantial climate finance flows to meet its developmental and climate ambitions. This scale of finance can’t be met just by public funds. Rather, public funds should be used to catalyse private capital to meet the scale of climate investments. It is crucial to engage institutional and private investors, as they possess much larger capital reserves than MDBs. An investment environment that offers bankable projects, hedges risks of new technology adoption, promotes regulatory stability and stimulates financial sector innovation is the need of the hour. A compelling rationale exists for substantially expanding the application of blended finance, where the risk-reward equation is managed, consequently fostering greater private investor confidence.
Blended finance is combining concessional finance from donors or third parties alongside MDBs’ normal own-account finance, and/or commercial finance from other investors, to develop private sector markets and mobilise private resources. Be it fund-level, project-level, company-level or outcome-based, blended financing from all sources is critical for India’s climate ambitions. With a lot of upcoming climate infrastructure being planned, the private sector, based purely on its interests, may not invest in the new-age clean energy technologies due to uncertainties, high risks, foggy rewards, and no assurance. However, MDBs, IFIs, donors, and philanthropists have a higher tolerance for risk and can chip in here. A prudent combination of public and private funds is critical to enhance the expected returns of high-risk climate projects, thereby attracting substantial capital.
From 2026-2030, India will require annual clean energy investments in the range of $253- 263 billion to align with its development and climate ambitions, which will rise to $325-355 billion over the 2031-2035 period. To achieve net zero by 2070, India would require cumulative investments worth $10.1 trillion, which is almost thrice the size of India’s current GDP. Green finance in India sits at ~$44 billion per annum—less than a fourth of what India actually needs. Domestic sources continue to account for the majority of climate finance (80%) in India. Of these domestic sources, the private sector contributes about 59% or ~$22 billion. More private investment needs to be unlocked and mobilised as the finance required to reach the climate goals is now in trillions of dollars.
India has successfully deployed blended financing instruments in the past. For example, the Water and Sanitation Pooled Fund (WSPF) in Tamil Nadu issued a pooled bond worth $6.2 million to facilitate access to long-term domestic capital markets for small and medium Urban Local Bodies (ULBs) to finance water and sanitation services. We have also observed the remarkable success of the REVIVE Alliance in India, a $20 million multi-stakeholder initiative, enabled during the liquidity crunch of the pandemic. It encouraged micro-finance institutions to invest in high-risk communities—focusing on women—by leveraging concessionary and philanthropic capital to offer a First Loss Default Guarantee (FLDG) for loans. It’s now time to champion this mechanism and learn from our experiences to mobilise private capital for climate-friendly investments.
The growth of climate change-related ventures in India necessitates a well-balanced mix of equity and debt financing to effectively transition from early-stage development (prototypes) to advanced stages (market-ready). This will aid projects in overcoming the challenging “commercialisation valley of death.” Various blended finance instruments, such as grants, technical support, guarantees, concessional or subordinate debt, first-loss provisions, risk mitigation guarantees, and junior equity, are commonly employed, particularly in emerging sectors. Their widespread adoption in India should be considered, taking into account factors such as the instrument’s suitability, legal framework, project size, and the expertise and confidence of the institution providing the blended finance instrument. These instruments play a critical role in risk mitigation for high-impact projects or in adjusting the risk-reward dynamics, thus bringing the project closer to achieving commercial viability. Mobilising these investments in India is also critical for businesses to diversify their operations and reduce dependence on traditional markets while hedging against economic downturns in other parts of the world.
India’s G20 Presidency has been instrumental in aiding the reform of MDBs, critical to mobilising larger private capital flow. Today, MDBs only mobilise $0.6 in private capital for each dollar they lend on their own account, they should aim to at least double this target. G20 has thus advised MDBs to shift their approach by focusing on three key aspects: making private capital mobilisation a central element of their sustainable development strategies, supporting governments in reducing policy and regulatory risks to private investment mobilisation and aligning their financial product offerings to private capital market gaps.
India stands ready to further mobilise private capital with its robust national and state-level policy environments. It is already witnessing remarkable momentum, particularly in critical sectors such as infrastructure, clean energy, healthcare, and education. For instance, Bloomberg Philanthropies and Goldman Sachs-backed Climate Innovation and Development Fund recently financed the decarbonisation of 100 of the 255 e-buses by deploying solar, power-plus-battery energy storage systems, as part of its $5.2 million blended financing instrument. We have also witnessed Indian cooperative banks providing credit enhancement and credit affordability, as seen in the case of YES BANK’s blended finance facility in Rann of Kutch where it facilitated access to mainstream debt finance for women salt farmers, to transition away from energy-inefficient diesel pumps.
The Union government has taken several initiatives to address the impediments of this financial instrument. US-India Clean Energy Finance (USICEF) is a standout example, whereby the multi-stakeholder partnership identified and supported nearly 50 enterprises operating since 2017. The grant investment of $5 million further mobilised $285 million in debt, generating 670 MW of renewable capacity and 20,000 jobs. India’s leading role in the green bond market, with over $10 billion in issuances, coupled with the RBI’s membership in NGFS, will be critical in further stimulating domestic blended finance initiatives.
Climate change is allowing us to reimagine traditional modes of financing. It is now imperative that India’s private sector proactively amplifies its efforts and seeks out additional opportunities for collaboration in the realm of blended financing.
Amitabh Kant and Soham Kshirsagar, India’s G20 Sherpa and policy officer (climate & energy) respectively at the G20 Secretariat, penned this piece for Financial Express.
Views are personal and do not represent the stand of this publication.