Is blended finance the panacea for addressing sustainability issues in developing Asia?

BLENDED finance has been widely championed as a key pathway to decarbonising developing Asian countries, not least among policymakers in the region. However it has been noted of late that this innovative avenue of financing has 'fallen short of its promise'.
Over the past 15 years, annual volumes of blended finance have been stagnant at around US$15 billion, with only 38 per cent sourced from private financing. Given the projected need of around US$9 trillion by 2030 for climate finance alone, the concern raised is not unfounded, as achieving this lofty target needs significant involvement from private financiers.
Convergence, the global network for blended finance, defines the approach as 'the use of catalytic capital from public and philanthropic sources to increase private-sector investment in sustainable development'.
The Organisation for Economic Co-operation and Development sees it as 'the strategic use of development finance to mobilise additional finance towards sustainable development in developing countries', due to the challenges in attracting private capital as the risk premium is usually too high, particularly for longer-term projects. Hence, entities such as development financial institutions (DFIs) and philanthropies are crucial to provide the initial cushion needed for private-capital participation.
However, as the International Finance Corporation notes, it is crucial to ensure that the development finance provided uses the least amount of concessional funds necessary to mobilise private resources. This is in line with Principle 2 of the DFI blended finance principles, that the concessional finance should act as only a catalyst to help develop the market. This has been borne out in practice, where around US$2.5 billion of concessional capital helped finance more than US$13 billion of project costs, according to a March 2023 update by a group of DFIs.
However, the promise of scale has yet to be borne out, with no significant dent as yet on the global needs for sustainable finance, and, in particular, climate finance. That would require active involvement with institutional investors, such as sovereign wealth funds, global insurance entities, asset managers, pension funds and private equity and credit funds, that invest on behalf of their clients. They manage over US$70 trillion of investable assets, and are hence the most relevant segment for private-sector mobilisation.
A NEWSLETTER FOR YOU
Friday, 12.30 pm ESG Insights
An exclusive weekly report on the latest environmental, social and governance issues.
Sign Up
Sign Up
An important requirement is a rapid improvement in the financial markets infrastructure of developing countries. Second, there is a need to design portfolio investment structures instead of lending at individual project levels, so that the investments are meaningful. Finally, to ensure that the capital flow is sustainable and repeatable, it is critical to set up credible monitoring and verification mechanisms that ensure the integrity of the underlying projects. Let us look at these requirements in detail.
The financial markets in developing countries have become increasingly aligned to international standards over the last two decades.
The 1997 Asian financial crisis as well as the 2008 global financial crisis highlighted the need for robust market infrastructure. To encourage capital flows, regulators have taken a more pragmatic view on foreign exchange and fixed-income markets. Derivative instruments such as non-deliverable forwards, which were previously anathema to many central banks, are now being embraced as efficient hedging mechanisms. Government bond markets have also deepened with more offshore participants, following their inclusion in global bond indices.
However, local currency bond markets in most developing countries are still limited to a few large issuers, and secondary market liquidity is a challenge.
In addition, close-out netting regulations have still not been fully implemented in a number of Asian countries, though surveys indicate that this is an important tool to manage credit risk exposure and increase liquidity.
DFIs play a key role in bringing about these market reforms through their capacity-building and technical assistance programmes with the various governments and central banks.
These reforms, if carried out, will increase confidence in the institutional investor community to commit significant long-term capital. However, they are less likely to invest in standalone projects, as that is usually the domain of banking entities in the region.
This creates a role for financial intermediaries that can structure customised portfolio investments.
The European Banking Federation has created a securitisation framework which can be replicated as a best practice in Asia. The intermediaries can embed hedging mechanisms to mitigate foreign exchange and interest-rate risks which may not be palatable to investors. These structures provide investors with their required level of risk participation, while simultaneously de-risking the balance sheets of regional and local banks and freeing up capital. Blended finance plays a key role here as philanthropies and DFIs can be the investors in the riskiest parts of these structures.
In addition, a number of taxonomies have been developed in the region, such as the Singapore-Asia Taxonomy for Sustainable Finance and the Asean Taxonomy, which can be used to evaluate the projects in the portfolio to ensure that the proceeds are being used for sustainable purposes.
Greenwashing has been one of the key impediments to developing scale in sustainable finance. Hence at a firm level, it is important for borrowers to determine key performance indicators (KPIs) and ensure their independent monitoring.
While large corporations in the region have extensive resources to design appropriate KPIs and engage external assurance firms to independently verify their performance, particularly around Scope 1, 2 or 3 emissions, it is much harder for small and medium-sized enterprises to do the same. Hence third-party advisory firms, which help companies conduct assessments and set relevant targets, are growing in importance.
Some organisations, such as LowCarbonSG from Singapore, are also developing digital tools that help companies measure their emissions and thus monitor their performance.
Scaling up these resources across the region will also help lenders, particularly local and regional banks, to significantly grow their sustainability-linked lending portfolios, and correspondingly create more assets that can be securitised to achieve the scale needed for interest from institutional investors.
The benefits of blended finance have been well documented, but the critique around scale cannot be ignored. While the participation of DFIs and philanthropies is indeed critical to ensure viability of many projects, these efforts must translate to meaningful impact on the environment in order to achieve the Paris Agreement goals.
As Asia has seen a sharp uptick in extreme weather events and their consequences, the region's economies must come together and create an enabling environment to attract the institutional investments that can make a difference.
The writer is a financial sector professional who has worked in Singapore, Hong Kong and India. He has a keen interest in following current trends in sustainable finance.

Try Our AI Features

Explore what Daily8 AI can do for you:

Learn with AIFact CheckingText to SpeechAI Summary

Related Articles

Straits Times

8 hours ago

• Straits Times

Tesla expected to launch long-discussed robotaxi service

The long-awaited launch follows the dramatic meltdown earlier this month in relations between Mr Musk and Mr Trump, which saw a cascade of bitter attacks from both men. PHOTO: REUTERS NEW YORK - Tesla is expected to begin offering robotaxi service on June 22 in Austin, an initial step that Mr Elon Musk's backers believe could lead to the company's next growth wave. The launch – which comes as Mr Musk refocuses on his business ventures following a controversial stint in Mr Donald Trump's administration – will employ the Model Y sport utility vehicle rather than Tesla's much-touted Cybercab, which is still under development. The long-awaited launch follows the dramatic meltdown earlier this month in relations between Mr Musk and Mr Trump, which saw a cascade of bitter attacks from both men. Since then, Mr Musk has publicly expressed regret for some of his statements, while his company's Texas operation has readied the Austin push – part of a major drive on autonomous technology and artificial intelligence that Tesla bulls believe will yield huge profits. This group includes Wedbush analyst Daniel Ives, who said autonomous technology could be a catalyst for potentially US$1 trillion (S$1.29 trillion) in additional market value or more. 'There are countless skeptics of the Tesla robotaxi vision with many bears thinking this day would never come,' said Mr Ives, who predicted that Trump's administration would clear roadblocks for Tesla and pivot from the recent 'soap opera'. 'The golden era of autonomous for Tesla officially kicks off on Sunday in Austin,' Mr Ives said in a note on June 20 . Business-friendly Texas But the unveiling in the Texas state capital comes amid questions about how Tesla will try to overcome criticism of Mr Musk's activities for Mr Trump. Tesla saw profits plunge 71 per cent in the first quarter following poor sales in several markets. In picking Austin for the debut of the autonomous vehicle (AV) service, Mr Musk is opting for a US state known for its company-friendly approach to regulation. 'Texas law allows for AV testing and operations on Texas roadways as long as they meet the same safety and insurance requirements as every other vehicle on the road,' the Texas Department of Transportation told AFP. An Austin website listed six autonomous vehicle companies at various stages of operation: ADMT (Volkswagen), AVRide, Tesla, Zoox (Amazon), Motional (Hyundai) and Waymo (Alphabet/Google). But the Texas legislature this year enacted a new bill that requires prior authorisation from the state's Department of Motor Vehicles before companies can operate on a public street without human drivers, a group of seven Democratic lawmakers said in a June 18 letter to Tesla. Citing the enhanced system, the lawmakers asked Tesla to delay testing until after the law takes effect September 1. If Tesla proceeds with the launch this weekend, 'we request that you respond to this letter with detailed information demonstrating that Tesla will be compliant with the new law,' the letter said. Starting slow Mr Musk had initially planned the launch for June 12, before pushing back, saying he was being 'super paranoid' about safety. 'We want to deliberately take it slow,' Mr Musk said in a May 20 interview on CNBC, telling the network that Tesla would probably only operate 10 autonomous vehicles the first week. But that number will rise to perhaps 1,000 'within a few months', Mr Musk told CNBC. 'And then we will expand to other cities.... San Francisco, Los Angeles, San Antonio.' The service will be offered from 6am until midnight and will be available to 'early access' users on an invitation-only basis in a geo-fenced area, Tesla owner Sawyer Merritt said on June 20 on Mr Musk's X platform, adding that Tesla had given him permission to release the information. Mr Musk last fall unveiled the Cybercab, which has no steering wheel or pedals. But production is not expected to begin on the vehicle until 2026. Tesla's robotaxi launch comes well after Waymo's offering of commercial robotaxi service, with more US cities gradually added. The US National Highway Traffic Safety Administration (NHTSA) in October 2024 opened a probe into Tesla's Full Self-Driving software after receiving four reports of crashes. The NHTSA on May 8 asked Tesla for additional information on its technology in light of the Austin launch. But the NHTSA does not 'pre-approve' new technologies, the agency told AFP. 'Rather, manufacturers certify that each vehicle meets NHTSA's rigorous safety standards, and the agency investigates incidents involving potential safety defects,' the NHTSA said. AFP Join ST's Telegram channel and get the latest breaking news delivered to you.

Business Times

10 hours ago

• Business Times

US investors, Asia's ultra-rich drive growth in Asia-Pacific private credit

[SINGAPORE] A slight uptick in private-credit fundraising in Asia-Pacific (Apac) last year has given market players optimism for a positive 2025, even as investors continue to avoid China. They said deals in India and Australia can fill the gap, while more investors within and outside Apac are allocating capital to private credit in the region. And the key sectors they are looking to lend to are infrastructure such as data centres, and renewable energy. Last year, Apac-focused private credit fundraising hit almost US$5.9 billion across 33 funds, 7.5 per cent higher than the $5.5 billion raised from 32 funds in 2023, according to Preqin Pro data. 'Given the success of private credit strategies in the US and Europe generally, many of the funds from these markets view Asia as the next frontier, both from a capital deployment perspective and a market diversification perspective,' Shaun Langhorne, partner at law firm Clifford Chance, told The Business Times. State Street is seeing more US credit managers looking to diversify into Apac. West Coast-based managers are looking for new growth ideas, according to Eric Chng, senior managing director for global alternatives at State Street. 'They have come to a point where they can only grow US for so much, they're looking for new ideas for growth. Recently, I had two conversations with two managers, each managing more than US$100 billion in private credit. They are asking me, how do I deploy to Asia?' BT in your inbox Start and end each day with the latest news stories and analyses delivered straight to your inbox. Sign Up Sign Up The US remains the biggest market for private credit, which market players estimate is around US$1.7 trillion in global assets under management (AUM) currently. Apac, which Preqin said accounts for 5 per cent of the global market, could grow at an annualised rate of 8 per cent until 2029 to US$160 billion. In a State Street survey of 450 institutional investors over the world – 120 of them from Asia – 31 per cent said they would deploy more capital this year to developed Apac, a subset spanning Singapore, Australia, Japan, Hong Kong and New Zealand. That's up from 29 per cent in 2024. American investors in Apac deals A look at some of the biggest private credit deals in the Asia-Pacific shows the deep involvement of American investors. These include India's biggest deal on record: a US$3.4 billion refinancing for conglomerate Shapoorji Pallonji Group. Investors include American managers such as Ares Management, Cerberus Capital Management, Davidson Kempner Capital Management and Farallon Capital Management. Goldman Sachs Asset Management's hybrid fund – part of its private credit strategy – has also reportedly provided US$600 million to partially finance conglomerate Jubilant Bhartia Group's purchase of a 40 per cent stake in Coca-Cola's Indian bottling unit. Another reason investors are showing more interest in Apac is the higher spreads they can get here, compared to the competitive and mature markets in the West, said Chng. 'Because it's so ultra competitive, the spreads are lower than what you get in Asia, and the outperformance of Asian credit is at the top of mind of a lot of Western fund managers … as a fund manager, if you know that you can get 200 basis-point extra spread on the same structure in Asia, you will find a way to get there.' Spread measures the additional yield that investors demand for holding debt with a higher perceived credit risk than a safer bond, such as a government bond or an investment-grade corporate bond Investor interest globally has been rising in private credit, the financing provided by non-bank lenders to companies. That's as returns have beaten those from private equity (PE) in the past three years, and where PE investors are facing challenges in exiting their current investments due to the volatile deal climate. An Apr 29 report by index provider MSCI shows that private credit funds generated 6.9 per cent last year, exceeding the PE funds' return of 5.6 per cent. 2024 marked the third straight year of outperformance. For Apac, the returns could be in the range of mid-to-high-teens per cent, said Chng. More family offices getting invested Within Asia itself, more family offices are allocating funds to private credit, as their liquidity needs and investment horizon are aligning closer to those of institutional investors. 'Family offices are now coming into private credit space in a big way, because they have similar needs to the institutional investors,' said Serene Chen, Asia-Pacific head of credit, currency and emerging market sales, and head of Singapore institutional sales at JPMorgan Chase. While family offices comprise less than 10 per cent of the Asian investor base in private credit, interest is growing, Chen said. JPMorgan has also seen increased participation in private credit from Asian institutions, across local sponsors, insurance and pension funds, she added. With the increased interest, market players said private credit managers have no problems securing capital in Apac. These include Ares, which is raising another Asia special situations fund to boost its credit investments in the region. It's reportedly targeting a size no smaller than its previous fund, which hit about US$2.4 billion in 2023. On Jun 12, Chicago-headquartered investment manager Nuveen announced the second close of its Australian commercial property debt fund, raising more than A$650 million. Last month, Singapore-headquartered Granite Asia said it secured over US$250 million from anchor investors for its first private credit fund. Active fund-raising Market players noted that raising capital isn't an issue, especially as lower returns and the challenging exit environment for PE investments are leading investors to turn to private credit. Some note that, with investors still preferring to steer clear of China – traditionally the biggest private credit market in Asia – the danger is borrowers may have the upper hand. With a 'deep pool of capital chasing' limited pool of borrowers, some private credit fund managers could be tempted to impose less stringent terms to ensure deployment, said State Street's Chng. Clifford Chance's Langhorne said it's not a clear-cut case that a deep capital pool would improve the bargaining position of borrowers. Citing the Sharpooji Pallonji deal signed last month, he said: 'Demand was high and they were able to borrow a substantial amount in one transaction. However, given they are unlikely to be able to raise the same amounts of capital from traditional capital providers, the trade-off for the borrower involves meeting the returns the private credit funds seek, as well as accommodating the structure and protections required to deploy the funds.' The loan tenor for that transaction is three years, with the yield on the zero-coupon bond hitting as high as 19.75 per cent. 'There is a lot of capital available for deployment, but that does not mean that capital providers are just throwing money at the borrowers seeking capital. The investment still has to meet their expected returns and risk expectations,' said Langhorne.

Business Times

11 hours ago

• Business Times

World Bank and IMF climate snub ‘worrying', says COP29 presidency

[BONN] The hosts of the most recent UN climate talks are worried international lenders are retreating from their commitments to help boost funding for developing countries' response to global warming. Major development banks have agreed to boost climate spending and are seen as crucial in the effort to dramatically increase finance to help poorer countries build resilience to impacts and invest in renewable energy. But anxiety has grown as the Trump administration has slashed foreign aid and discouraged US-based development lenders such as the World Bank and the International Monetary Fund (IMF) from focusing on climate finance. Developing nations, excluding China, will need an estimated US$1.3 trillion a year by 2035 in financial assistance to transition to renewable energy and climate-proof their economies from increasing weather extremes. Nowhere near this amount has been committed. At last year's UN COP29 summit in Azerbaijan, rich nations agreed to increase climate finance to US$300 billion a year by 2035, an amount decried as woefully inadequate. A NEWSLETTER FOR YOU Friday, 12.30 pm ESG Insights An exclusive weekly report on the latest environmental, social and governance issues. Sign Up Sign Up Azerbaijan and Brazil, which is hosting this year's COP30 conference, have launched an initiative to reduce the shortfall, with the expectation of 'significant' contributions from international lenders. But so far only two – the African Development Bank and the Inter-American Development Bank – have responded to a call to engage the initiative with ideas, said COP29 president Mukhtar Babayev. 'We call on their shareholders to urgently help us to address these concerns,' he told climate negotiators at a high-level summit in the German city of Bonn this week. 'We fear that a complex and volatile global environment is distracting many of those expected to play a big role in bridging the climate finance gap,' he added. A 'worrisome trend' His team travelled to Washington in April for the IMF and World Bank's spring meetings, hoping to find the same enthusiasm for climate lending they had encountered a year earlier. But instea,d they found institutions 'very much reluctant now to talk about climate at all', said Azerbaijan's top climate negotiator Yalchin Rafiyev. This was a 'worrisome trend', he said, given expectations these lenders would extend the finance needed in the absence of other sources. 'They are very much needed,' he said. The World Bank is directing 45 per cent of its total lending to climate, as part of an action plan in place until June 2026, with the public portion of that split 50/50 between emissions reductions and building resilience. The United States, the World Bank's biggest shareholder, has pushed in a different direction. On the sidelines of the April spring meetings, US Treasury Secretary Scott Bessent urged the bank to focus on 'dependable technologies' rather than 'distortionary climate finance targets'. This could mean investing in gas and other fossil fuel-based energy production, he said. Under the Paris Agreement, wealthy developed countries – those most responsible for global warming to date – are obliged to pay climate finance to poorer nations. Other countries, most notably China, make voluntary contributions. Money matters Finance is a source of long-running tensions at UN climate negotiations. Donors have consistently failed to deliver on past finance pledges, and have committed well below what experts agree developing nations need to cope with the climate crisis. The issue flared up again this week in Bonn, with nations at odds over whether to debate financial commitments from rich countries during the formal meetings. European nations have also pared back their foreign aid spending in recent months, raising fears that budgets for climate finance could also face a haircut. At COP29, multilateral development banks (MDBs) led by the World Bank Group estimated they could provide US$120 billion annually in climate financing to low and middle-income countries, and mobilise another US$65 billion from the private sector by 2030. Their estimate for high-income countries was US$50 billion, with another US$65 billion mobilised from the private sector. Rob Moore, of policy think tank E3G, said these lenders are the largest providers of international public finance to developing countries. 'Whilst they are facing difficult political headwinds in some quarters, they would be doing both themselves and their clients a disservice by disengaging on climate change,' he said. The World Bank, in particular, has done 'a huge amount of work' to align its lending with global climate goals. 'If they choose to step back, this would be at their own detriment, and other banks like the regionally based MDBs would likely play a bigger role in shaping the economy of the future,' he said. The World Bank declined to comment on the record. AFP