Blended finance structures can make marginally bankable sustainable projects bankable, which will open doors to investors that might have concerns over the risk/return of these investments, said speakers at the Financing Asia's Transition Conference 2024 on April 17.
The conference was jointly organized by BlackRock, the Monetary Authority of Singapore and Temasek. It formed part of the Temasek-founded Ecosperity Week 2024, held in Singapore from April 15-17.
Most banks involved in sustainable finance select projects that have a sustainable financing proposition and are bankable, said Dilhan Pillay Sandrasegara, executive director and chief executive officer of Temasek, Singapore, which had S$382 billion ($287.5 billion) in assets as of March 31, 2023.
As a result, the marginally bankable projects are sometimes neglected. But a blended finance approach can make these projects more attractive, panelists said.
Blended finance structures — which involve two or more organizations with different expectations and targets investing together — alleviate concerns over risk and return as one party usually absorbs some of the risks.
For instance, Temasek partnered with HSBC Holdings to create Pentagreen Capital, a debt financing platform that aims to invest up to $150 million of equity to fund loans to sustainable projects, which could expand to $1 billion within five years.
In September, Pentagreen committed an initial tranche of $30 million to Citicore Solar Energy Corporation, a Philippines-based integrated renewable energy platform, for a portfolio of six solar power projects with a gross capacity of 490 megawatts in Luzon island in the Philippines.
This initial deployment could “catalyze” another $300 million or so in financing, said Sandrasegara. If more institutions focus on finance structures like this, part of the sustainable financing gap in Asia could be bridged through the funding of marginal bankable projects, he said.
BlackRock has also been looking at how blended finance can expand the number of investors in the sustainable investing space, Michael Dennis, managing director and head of alternatives strategy and capital markets for Asia-Pacific, said at the event.
The $10.5 trillion fund manager launched a blended finance fund structure called the Climate Finance Partnership alongside the governments of France, Germany and Japan, and several other impact organizations.
The investment vehicle has a 20% first-loss risk reduction funded by philanthropic and catalytic sovereign capital, said Philipp Hildebrand, vice chair of BlackRock.
Solutions like these are working on a small scale at the moment, and the next step is to find ways to scale up by using public money, he said.
“If we want capital markets to come at scale to fill this gap ... to a large extent, these are pension assets one way or another. In order for pension assets to go to these places, we're going to need to have risk reduction. We need to find ways to bring the risk levels down to something like OECD risk. Otherwise, you've locked out a major part of the global capital markets ... and we simply can't afford to do that,” he said.
Structures like that are appealing to fund managers like Permodalan Nasional Berhad, Kuala Lumpur, said Rick Ramli, acting president and group chief executive, and chief investment officer of private and strategic investments at the firm.
PNB is a government-owned fund manager that invests savings on behalf of Malaysians. It had 341.6 billion ringgit ($77.4 billion) in assets as of Dec. 31, 2022.
“I've seen recent structures where a sovereign invests into a structure, they take a first loss, and the upside is capped. And they do it because they want to be seen doing something in the transition space. And then for us, we like that, because if we were to invest in the fund, it really enhances our return,” he said.
“So yes, I'm being selfish in how I look at it, but where we are in our journey we still need to generate a return. But eventually, when we're comfortable in the space, we can then start taking sharper risk-return,” he added.
