An effective climate strategy requires to cover all the bases: policy and regulation, science and technology, education and awareness, finance and investment. It needs to adopt a holistic view and account for the interrelated aspects of climate change, to foster collaboration across regions, sectors, and industries, integrating diverse perspectives and encouraging joint efforts.
To add to the complexity, the transition has to happen in both developed and emerging countries. If there is no transition in the South, there will be no global transition. Emissions don’t consider borders. This will require hundreds of billions of dollars of investment annually from the advanced to the emerging economies. But, as Lawrence H Summers and NK Singh pointedly reminded us during the Spring Meetings of the World Bank and IMF earlier this year, in spite of the increased financing from the international financial institutions, developing countries in 2023 experienced net private outflows of $68 billion due to rising interest rates and bond and loan repayments to private creditors. We need to reverse this trend so that the lowest-income countries receive more financial help than they are paying out. Quickly.
From my vantage point, the heart of the challenge lies with ensuring an adequate risk-return profile that can meet the fiduciary obligations of institutional investors such as CDPQ. The pools of capital under our collective management dwarf those of the multilateral development banks and related development finance institutions by orders of magnitude. But we cannot do it alone. We need willing partners to co-invest with us.
One such method is through the intelligent use of public or philanthropic funds to attract private capital. This can be done in a number of ways, such as providing junior or mezzanine financing at the base of a capital stack, investing in first-loss equity, or providing full or partial interest and principal guarantees. Such ‘blended finance’ approaches can leverage private capital by ratios of 3, 5 or even 10 to 1, thereby helping to unlock billions of dollars for green projects that would otherwise be ignored or underfunded by conventional sources.
To be clear, blended finance is not a magic bullet, nor a replacement for public funding or policy reforms. But it is a complementary and catalytic mechanism that can leverage the strengths and align the interests of different actors while also creating positive spillovers, such as enhancing the enabling environment, building local capacities, and proving the feasibility of new markets and business models.And we have a growing body of evidence to prove it. To use an example from my own backyard, it was an effective public-private partnership between CDPQ, the governments of Quebec and Canada that enabled us to go forward with the design, construction and operation of a 67-km light rail system across greater Montreal, the largest public transportation project in the province of Quebec in over 50 years. I believe such examples can serve as models globally, in advanced and emerging economies alike.Indeed, I am encouraged to see blended finance gaining traction in developing markets such as India, where it has supported renewable energy, green infrastructure, and social impact projects. This is a positive sign that shows the potential of innovative financing models to accelerate the transition.
That’s how we need to think about blended finance: partnering differently, working collaboratively, and looking at opportunities in a more innovative way. Because we’ve never done this before: taking an entire planet and transitioning it.
(The author is Executive Vice-President and Head of CDPQ Global and Global Head of Sustainability. He will be speaking at The Economic Times World Leaders Forum in New Delhi on August 31, 2024. Register at etworldleadersforum.com.)