What the world could learn from Asia's experience with climate finance

The desert country of the United Arab Emirates — located in one of the driest regions in the world — was recently pummeled with rains so intense it submerged airport tarmacs and left major roads impassable. Extreme weather like this is becoming the new norm for the world’s population as climate change wreaks havoc on weather systems. The UAE also held the world’s largest annual gathering that aims to galvanize the world on climate action only five months ago. It’s against this backdrop that over 1,500 investors, philanthropists, the private sector, and government representatives from around Asia met to discuss leveraging more private capital to address growing development challenges including climate change. This was for AVPN’s flagship conference, which is the largest network of social investors in Asia, held for the first time in the Middle East. Conference participants noted that Asia hosts 60% of the world’s population, bore the brunt of climate-related disasters last year, and is heating up faster than the global average. It’s also the fastest-growing region economically while still facing significant challenges around inequality. Asia requires $1.1 trillion annually for its adaptation and mitigation needs, but only receives $333 billion — mostly from debt instruments like green bonds. Public sources contribute more than half of this. It’s also a region that has seen a steady growth in the use of blended finance structures for climate, and has a healthier mix than other regions when it comes to financing for mitigation and adaptation. But still, more is needed, and getting climate projects financed and up and running is a slow endeavor. “We have no time and we have limited financing. We really need to do a much better job at connecting the dots,” said Razan Al Mubarak, managing director of the Mohamed bin Zayed Species Conservation Fund. Asia’s opportunities Blended finance structures strategically use different types of finance instruments to de-risk investments. This helps ensure projects that traditional financial institutions might not fund do receive that funding. It is seen as a key way to bring private capital into climate change projects. “This is a structuring approach that has the potential to unlock vast pools of capital, where traditional philanthropy and government aid alone cannot address,” said Vikas Arora, chief of impact investing at AVPN. A few years ago there was a global peak period where around $68 billion flowed into climate finance using blended finance structures, said Leah Pedersen, senior director of market acceleration and design innovation at Convergence. But there was a sharp decline over the past two years — which is now rebuilding globally. However, Asia has experienced steady growth in this area, she said. About 20% to 30% of overall blended finance transactions in Asia are geared toward closing the climate finance gap, she said. “Asia is a very promising place for blended finance that combines public and private resources strategically,” said Qing Gu, a senior program officer at the Ford Foundation. Philanthropic capital plays a key role in this equation because financial returns aren’t prioritized, the capital is risk-tolerant, and not constrained to tight deadlines, said Tristan Ace, chief program officer at AVPN. For example, this could be a set-up where philanthropic capital is funneled into technical assistance. One way could be by training bank staff on how to engage with women-led small and medium enterprises that focus on climate solutions. This makes projects less risky for financial institutions to move forward with lending at favorable interest rates, he said. “We have no time and we have limited financing. We really need to do a much better job at connecting the dots.” --— Razan Al Mubarak, managing director, Mohamed bin Zayed Species Conservation Fund “We don't want stagnant pools of capital sitting around. We want it blended, moving, making an impact, and building markets,” Pedersen said. In addition to the growth of blended finance in the region, there’s also a healthier mix of financing for mitigation — efforts to reduce carbon emissions, and adaptation — efforts to help communities deal with the changes. And this is greatly needed in Asia, which experienced 79 water-related hazards, such as floods and storms, last year, resulting in over 2,000 fatalities and affecting 9 million people. Global climate finance is heavily skewed towards mitigation. But that’s less so in Asia. In 2021 through 2022, about 45% of global adaptation finance flows went to East Asia and the Pacific, and 10% to South Asia. And private finance accounts for 55% of adaptation finance in South and East Asia and 52% in the Pacific. In comparison, the private sector contributed only 12% in Africa. Asian climate financial transactions generally represent both mitigation and adaptation — along with investments that are a hybrid of the two, Pedersen said. There’s also an opportunity in Asia to unlock more philanthropic funds as intergenerational wealth changes hands. While first-generation entrepreneurs are still in control of the majority of Asia’s wealth, in the coming decades there will be a massive transfer of intergenerational wealth — and this next generation may have different ideas about where to direct their wealth. For example, more than 3,000 philanthropic family offices have been created in Singapore, said AVPN’s Arora. “I guess that's really driven by the second generation wanting to make their investment philosophy a lot more directed towards impact,” he said. Another more immediate opportunity in the region is the desire of investors to diversify their portfolios. Oana Picincu, manager of sustainable finance at the Abu Dhabi Global Market, said that a lot of the global investors they meet want to enter new markets and new sectors. “They are looking at quite a lot of climate solutions as well, but also impact investing platforms,” she said. “Some of them don't care so much about maximizing profits — they just want to really tap into different sectors or markets.” Expedite it Despite these positive trends, a lot must be done to increase climate finance in Asia and globally. The 2023 United Nations Climate Change Conference, or COP 28, held in Dubai was seen as a successful meeting, compared to others held in the past — about $85 billion was committed. But even so, there’s a shortfall. “Five times more capital is needed than we currently raise,” said Varad Pande, a Singapore-based director at the Boston Consulting Group. And five months after COP 28, much of that committed finance has yet to hit the ground. “In many cases, not a penny has been deployed yet,” Abu Dhabi Global Market’s Picincu said. One reason could include concern about risks, such as entering a territory with unstable politics. “I think the private sector is just not doing as much as they say, and going in, investing in those territories” that could be considered risky, she said, adding that risks can often be buffered through contracts, partnerships, and insurance. And when it comes to sustainable investing, she said, an investor cannot evaluate the risk and return the same way they would in areas such as high-frequency trading. Another issue is investors are on the lookout for bankable projects — but there is often a dearth of projects that are ready to run with that capital. Many projects need thoughtful guidance to get to the stage where they are investable, said Sophia Cheng, chair of the Asia Investor Group on Climate Change. They need mentoring on what sources of money they should pursue at different stages of their development. For example, it doesn’t always make sense for a company to seek lending from a bank — angel or venture capital may be more appropriate at certain stages. And another challenge slowing down blended finance arrangements is their complexity, conference speakers said. They bring together investors with different risk appetites and expectations — leading to a lot of back-and-forth on design. There is a need for templates to help reduce these delays, speakers said. And there’s a need for an increase in match-making — bringing the right partners together, AVPN’s Ace said. "It's just people willing to roll their sleeves up and really, kind of figure out how to coordinate all these different actors,” he said. And a need to ensure that efforts are inclusive. For example, while green financing in China is developing fast, there are also gaps, said Duoguang Bei, secretary-general of the International Forum for China Impact Investing. The current government policy around green finance covers major industries, but small and medium enterprises aren’t reaping the benefits. And in Asia one of the challenges is the region is composed of either large countries or very small countries, Pedersen said. “That creates a bit of a challenge for investors looking for diversified baskets, diversified pools,” she said. “I would encourage Asia to take the next step forward and think about regional bond issuance, regional capital markets, something that will draw in investors across multiple countries.” Editor's note: AVPN facilitated Devex’s travel and logistics for this reporting. Devex retains full editorial independence and control of the content.