NGFS publishes Conceptual Note for the Blended Finance Handbook

The NGFS has released a conceptual note outlining the key points for scaling up blended finance for climate adaptation and mitigation in EMDEs. The note emphasizes the role of climate blended finance in greening the global financial system and addresses the challenges faced in financing climate change initiatives.
Global investments required to achieve the Paris Agreement goals range from US$3 trillion to US$6 trillion annually until 2050. However, current global climate finance falls short of this amount, particularly in EMDEs. These economies, responsible for two-thirds of global carbon emissions, face cyclical and structural challenges and are vulnerable to climate hazards. Factors like high inflation, tightening global monetary policy, geopolitical tensions, and debt distress further hinder climate financing in EMDEs.
Private capital plays a vital role in financing climate adaptation and mitigation efforts, especially in EMDEs where fiscal policy space is limited. To attract private investors, a conducive investment environment is crucial, including appropriate climate policies, suitable tools, and financial regulations. Measures such as carbon pricing, subsidies, public investment, improved climate information architecture, and favorable lending policies can foster a favorable investment environment.
The note highlights challenges in both the demand for and supply of private climate financing. On the demand side, challenges include insufficient capacity and expertise in project selection, lack of ambitious and aligned projects, shortage of bankable projects, and limited access to private capital. On the supply side, barriers include long time-horizons for infrastructure projects, project risks, poor governance, lack of scale vehicles, unattractive risk-return profiles, and limited involvement of MDBs.
To address these challenges, a mature ecosystem supportive of climate adaptation and mitigation financing needs to be built in EMDEs. Central banks and regulators can play a catalytic role by appropriately pricing risks, enhancing information architecture, and improving capital market structures. Designing financial instruments and vehicles that align incentives in the public and private sectors and attract private capital with varying risk appetites is essential. Adequate institutional and policy structures, along with a pipeline of bankable projects, are crucial for attracting investment flows.