Record-breaking climate financing transactions reached a staggering US$18.3 billion in 2023, according to a recent report.
In a groundbreaking development, the global market for climate blended finance saw a significant surge in 2023, reaching an all-time high of US$18.3 billion. This growth was driven by the increased involvement of multilateral development banks (MDBs), institutional investors, and the private sector.
MDBs have proven to be critical players in this arena, offering risk mitigation and attracting private capital to climate projects. By using public-backed risk-absorbing instruments such as guarantees, MDBs have de-risked capital-intensive investments, making them more appealing to private investors.
Moreover, MDBs have leveraged blended finance mechanisms to pool resources, enhance the viability of climate projects, and amplify the impact of public funding. This approach has been instrumental in mobilising larger amounts of private investment, a key factor in scaling up climate finance.
Institutional investors have also stepped up their game, with six in ten deals in 2023 focusing on climate initiatives. The World Bank's private sector arm, the International Finance Corporation, leads in the number of climate blended finance deals.
The concentration of climate blended finance deals was observed in a few countries, with India topping the list with 22 transactions, followed by Nigeria, Kenya, Brazil, and Vietnam. Notably, Brazil received the largest aggregate financing for climate blended finance, amounting to US$7.2 billion.
The surge in climate blended finance was also fueled by a 200% increase in private investments into the climate theme last year, reaching a record US$6 billion. Within the climate theme, mitigation deals mobilised the greatest amount of private and commercial financing per transaction, with an average leverage ratio of 3.6.
However, climate adaptation continues to be underfunded, with limited private sector participation. Between 2021 and 2023, there were only 32 adaptation blended finance transactions amounting to US$3.5 billion, less than a quarter of the 132 deals targeting climate mitigation totalling US$26 billion in the same period.
Despite these challenges, Ayesha Bery, manager at Convergence and one of the report's lead authors, stated that the blended finance market is maturing and private investors are investing at unprecedented levels. The total value of blended finance deals reached a five-year high of US$23 billion in 2023, and commercial financing from DFIs and MDBs rose by 60% to hit a six-year high.
One of the standout transactions in 2023 was a US$692 million deal for a 600-megawatt cross-border wind power project in Laos, signed by Mitsubishi Corporation and other project sponsors.
As the world continues to grapple with the challenges of climate change, the growth in climate blended finance offers a glimmer of hope. With MDBs playing a pivotal role in de-risking investments and mobilising private capital, we can expect to see more record-breaking years ahead.
- The rise in global blended finance for climate projects in 2023, reaching $18.3 billion, was primarily driven by the increased engagement of multilateral development banks (MDBs), institutional investors, and the private sector.
- MDBs have been instrumental in de-risking capital-intensive investments by offering risk mitigation and using public-backed risk-absorbing instruments, making them more appealing to private investors.
- In 2023, institutional investors focused six out of ten deals on climate initiatives, with the International Finance Corporation leading in the number of climate blended finance deals.
- Notably, Brazil received the largest aggregate financing for climate blended finance in 2023, amounting to $7.2 billion, while India topped the list with 22 transactions.
- Despite the significant growth in climate blended finance, climate adaptation continues to be underfunded, with limited private sector participation, as there were only 32 adaptation blended finance transactions amounting to $3.5 billion between 2021 and 2023.
- The total value of blended finance deals reached a five-year high of $23 billion in 2023, and commercial financing from DFIs and MDBs rose by 60% to hit a six-year high, indicating a maturing blended finance market with unprecedented levels of private investment.
