Blended finance can play an important role in catalysing more finance and funding into the climate transition. While blended finance has traditionally been used in developing countries, we are exploring how to grow blended finance in Australia as a way of accelerating our own and our region’s climate transition.
Australia requires $7-$ 9 trillion of capital to fund the climate transition (Net Zero Australia). We must continue to reduce GHG emissions across all sectors of the economy and to build resilience in local communities. Australia has the financial resources to manage its transition but the latest Intergovernmental Panel on Climate Change 2023, AR6 Synthesis Report (IPCC Report) highlights the urgent need to keep global warming to at or below 1.5°C to avoid the most serious consequences. Australia’s temperature has already warmed more than 1.4°C. Accelerating the transition to a net zero economy is now urgent.
The IPCC 2023 report highlights that improved availability and access to finance will enable accelerated climate action. IPCC Report, ‘Near Term Responses in a Changing Climate,’ p.111
Blended finance brings varied sources of finance together strategically. It uses catalytic capital from philanthropy, development banks or impact investors to fund projects and start-up enterprises to then attract private capital to grow and, once a track record and adequate scale has been achieved, institutional investment. Projects may also combine catalytic concessional capital with private and institutional capital to make them commercially attractive. The varied sources of finance have different risk appetites, return expectations, flexibility, time horizons and purposes. Ensuring that each source of finance plays its part at appropriate times within a transaction or over the life of an enterprise, can give us another tool to accelerate our climate transition. While the blended finance approach is used extensively in development finance, it can also apply to a developed country such as Australia.
Recently, the Centre for Sustainability & Business at MBS hosted a Roundtable of participants from across the continuum of finance. The Roundtable was conducted using Chatham House rules, which created a great environment for sharing case studies and ideas. It was the first time that such a group had met in Australia. This slide shows what can be called the five buckets of climate finance!
Case studies were shared that covered projects financed through two or more of the sources of finance in areas including clean energy (wind and solar at various scales), regenerative agriculture, green manufacturing, and electrification of transport. The participants were all Australian entities with many already active in blended finance in our region. The Roundtable participants agreed that Australia has many components of a successful blended finance ecosystem, however these components are hard for potential investors to find, we require greater capability in developing and supporting deals, and the ecosystem components need to be connected.
The Opportunities identified during the Roundtable include:
- Through an active application of a blended finance approach, we could build a pipeline of large-scale projects which are attractive to private capital, superannuation funds (pension funds)and other institutional investors.
- We need to create incentives to engage across the finance continuum through blended finance approaches, matching the right finance with the right time i.e. at start up, developing a track record, or using concessional finance to help leverage institutional finance into large scale projects.
- Explore how the Future Made in Australia policy could support this work. Promote the opportunities already available via specialist investment vehicles such as the National Reconstruction Fund and the Clean Energy Finance Corporation.
- Educate investors across the continuum of finance about how to align commercial and philanthropic goals and opportunities. Motivation will vary in relation to impact, leverage, and/or profit, in addition to reducing greenhouse gas emissions and increasing climate resilience.
The Actions recommended are to:
1. Urgently strengthen the Australian Blended Finance Climate Transition Ecosystem
1.1 Increase access to finance and funding through connecting the parts of the system we have and sharing best practice at all stages of the investment journey.
1.2 Upskill investors (at all stages of the investment journey from start up, building and scaling up) and entrepreneurs (project proponents) about blended finance approaches.
2. Champion our use of blended finance in the climate transition
Share blended finance projects that have worked via the media and build the aspiration and understanding of Australians.
3. Power up SME participation in our climate transition
Support the SME sector to play its critical roles (employment, supply chains) in the transition.
The Blended Finance for Climate Initiative webpages are under development and will be available on the Centre for Sustainability and Business MBS website soon. We are also holding follow on roundtables to tackle the issues and opportunities raised in the first Roundtable.
