2024 predictions: Blended finance to grow bigger in Asia
This is a four-part series of thematic predictions for 2024. This is the fourth story.
Blended finance is poised to gain a lot more traction in Asia as a means of driving private investment toward sustainable development goals, if key challenges around awareness, policy incentives, and aggregating deals to mobilise capital at scale can be addressed.
Pictect Wealth Management
In Asia, where blended finance is still a relatively new approach for philanthropic capital, Pictet Wealth Management’s Asia head of philanthropy services, Anthony Gao, expects to see more adoption in proof-of-concept pilots and in the project-preparation stage.
“Public sector funding will continue to play a significant role in shaping and driving the adoption,” Gao told AsianInvestor.
Over the past few years, Asia has seen some adoption by philanthropic capital not only in the climate space, but also on social topics like education and health, especially in South Asia and Southeast Asia, said Gao.
There has also been a large uptick in the number of development finance institutions convening to focus on the topic, and strong interest among key stakeholders such as philanthropists, family offices, and commercial financial institutions.
“Asia has the highest concentrations of middle-income countries, where significant social and environment impact can be achieved with a manageable level of risk, and we should be able to see much more upside in the region with the right support and incentives,” said Gao.
With the ability to channel and coordinate efforts to address key challenges, blended finance has the potential to grow exponentially in Asia to meet the region’s substantial sustainable development funding needs, he said.
AWARENESS AND INCENTIVES
Unlocking blended finance’s potential at scale requires new levels of collaboration between public, private and philanthropic partners.
With rapid growth in the number of impact-focused investors, Gao sees education and policy barriers as key obstacles to tapping the massive potential of blended finance. The role of governments in key economies will also be critical to the model’s success.
“We need to raise awareness, through more education and sharing of best practices,” said Gao. “Governments must also introduce targeted incentives enabling blended finance and remove obstacles in order to allow participants to make return-generating financial investments.”
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Fragmented deals and instruments remain a barrier to large-scale institutional investment.
“Development finance institutions and the commercial ones should do more aggregating of blended finance projects, to address the challenges of attracting investment capital due to the size,” said Gao.
NO STANDARD SOLUTIONS
Blended finance solutions must correspond to local investor types, policy environments, time horizons and asset classes, according to Ou Yong Xuan Sheng, an ESG and green bond analyst at BNP Paribas Asset Management, who believes one-size-fits-all approaches are unlikely to succeed.
In Asia, the main challenge addressed by blended finance is the high cost of capital for projects in the emerging and frontier markets, he said.
BNPPAM
“We can think about Vietnam, Laos, Cambodia as examples of markets where cost of capital is prohibitive for projects. These markets are also in great need for sustainable infrastructure as these markets grow and develop to avoid locking in polluting infrastructure,” Ou Yong told AsianInvestor.
Blended finance could also help finance the early decommissioning of coal related assets, where capital is required to fund both the opportunity cost of early retirement and the operation of the assets until they are offline.
“Opportunity costs are usually a thought exercise but in early retirement, it becomes actual costs to existing investors of the assets who now have to cut short the investment payback timeline,” said Ou Yong.
“We don’t think there is any standard framework for risk-sharing instruments because it will have to be crafted and designed for individual situations—types of existing investors, types of public capital available, timeframes, type of assets, etc. In other words, it can be difficult to scale blended finance as a standard product or vehicle.”
MEASURING SUCCESS
Gao asserted that the true measure of blended finance's efficacy hinges on leverage, additionality, and sustainability.
"Leverage refers to the ability to catalyse a multiplier effect by drawing in commercial investment," he explained. "Additionality is about remedying market shortcomings or introducing financial instruments that have been scarce. Sustainability entails producing significant risk-adjusted returns in order to maintain the flow of investment capital."
While Gao acknowledged the common metrics for assessing impact, such as the reduction of greenhouse gas emissions and job creation, he advocated for a more region-specific approach.
“It will be helpful for Asian stakeholders to refine and adopt clearer taxonomy and standards based on Asian context,” he said.