Harnessing Private Investment for Climate Finance

responsAbility Investments AG, a pioneer in impact investing, focuses on climate finance, financial inclusion, and sustainable food systems.

In this interview, Dr. Stephanie Bilo, explains responsAbility’s approach to transition finance, the critical role of blended finance, and the challenges of implementing climate finance strategies in emerging markets.

She also highlights the need for liquid strategies in transition finance, offering insights into how private sector capital can drive climate action.

Patrick Schmucki

Director, Financial Services, Corporate Responsibility Officer

KPMG Switzerland

mail
call

Owen Matthews

Director, Financial Services

KPMG Switzerland

mail
call

Patrick Schmucki: Could you briefly explain your understanding of transition finance and why it is so important?

Dr. Stephanie Bilo: Transition finance plays a critical role in helping industries shift from carbon-intensive processes to more sustainable operations. It specifically focuses on enabling high-emissions sectors to adopt greener practices.

Experts estimate that reaching net-zero by 2050 will require an annual investment of USD 5-7 trillion^[1]. At responsAbility, our mission is to mobilize capital and invest in emerging markets, aiming to achieve financial returns while generating a positive societal and environmental impact. We see climate finance as a broader category that includes transition finance but extends beyond it.

Climate finance also invests in projects that directly mitigate climate change by reducing, avoiding, and saving C0₂ emissions. Additionally, it also supports adaptation efforts, such as making communities more resilient to the impacts of climate change.

This includes financing renewable energy projects, developing and implementing green lending programs with local banks, and investing in energy efficiency projects across many sectors to achieve significant energy savings while adopting climate-friendly solutions.

How does transition finance fit within the broader context of climate finance?

Transition finance is an essential element within this broader framework of climate finance. It focusses on decarbonizing the existing economy across all sectors contributing to greenhouse gas emissions, including the so-called “hard to abate” sectors such as steel, cement, transportation, real estate, and even the energy sector itself.

What role can investors play in climate transition?

As mentioned, enormous amounts of capital are required to achieve our climate goals. Financing this scale of investment is impossible without mobilizing private sector capital, including from pension funds, insurance companies, banks, and their clients.

Both private and public sectors players must collaborate to fund this transition. Their contribution will help shift not only the Swiss economy but also the global economy towards sustainable pathway and achieve the net zero target by 2050.

Blended finance is of particular importance in this context. What does this term mean?

Blended finance is an investment structuring approach that combines capital from public, philanthropic and private sector investors, each with different risk-return objectives. This approach is specifically designed to finance companies aiming to achieve positive social, environmental, and economic impact.

A blended finance model de-risks investments by providing first-loss protection or other concessional terms, making investments more attractive to private sector investors.

Why is blended finance so critical in today’s economic landscape?

Blended finance is essential in emerging markets because it can help address the critical funding gap obstructing the achievement of the Sustainable Development Goals (SDGs) by 2030. Traditional sources of development funding are insufficient to meet these goals, necessitating innovative solutions like blended finance to mobilize private sector capital.

By reducing investment risks and enhancing potential returns, the blended finance approach accelerates progress towards the SDGs. At the same time, it opens new markets and opportunities for investors, demonstrating that financial success can go hand in hand with social and environmental impact.

Could you provide an example of how blended finance has been successfully implemented?

A practical example of this is our involvement in the energy transition initiative in Asia, where we partnered with institutions like KfW, the German state-owned development bank known for financing sustainable development projects worldwide.

By combining public funding with private sector capital, we were able to create attractive investment opportunities in regions that would otherwise be considered too risky. This structure has allowed us to mobilize significant funds and direct them towards impactful projects.

Investors will only invest if the opportunities meet clear risk-return targets, and as the market matures, I believe we will see a growing demand for impact products among retail investors.

Dr. Stephanie Bilo

As a provider of climate finance solutions in the form of blended finance, what are the main challenges you face regarding different stakeholders?

Our stakeholders are diverse. On one side, we have investors, who can be divided into two groups: those seeking to make as large as possible impact with their money – often providing the concessional capital_[2] – and those with fiduciary duties, such as pension funds, that want to contribute to climate action but need a market-based risk-adjusted return.

Then, there are actors like us, who identify viable investments on the ground in emerging markets.

What challenges arise specifically from working with concessional capital providers?

One major challenge is the scarcity of concessional capital, which often comes with specific impact objectives. Providers of concessional capital are frequently keen on investing in new technologies and unproven business models. While these can be highly impactful, they also carry higher risks and can limit an investment universe.

Balancing this trade-off between impact and risk-return is something we must manage very carefully when designing scalable investment strategies. For example, our investment in CleanEdge (see image), a Singapore-based company specializing in sustainable energy solutions, demonstrates how we have successfully navigated these challenges by aligning innovative, high-impact projects while offering attractive risk return to investors.

What does this process of setting up a blended finance structure look like?

Blended finance is not a “vanilla product”; it requires a more tailored and complex approach. Setting up a new structure typically takes two to three years, primarily due to the extensive discussions with concessional capital providers.

This process involves creating a proposal, aligning the impact strategy with the objectives of the concessional capital providers, and at the same time ensuring that the investment structure meets the requirements of institutional investors, such as return expectations, risk profile but also a certain scale of an investment solution.

Investments for transition finance appears to be much higher in developed countries than in emerging economies. Why do you think that is and what can be done to change things?

Traditionally, there has been a strong allocation to developed markets and much less to emerging markets in institutional portfolios.

This bias is common in asset allocation, investing in less familiar markets requires more effort. However, the potential impact, for example in terms of CO2 emission savings potential, in emerging markets can be much greater.

What are the main obstacles to investing in emerging markets, and how do you overcome them?

The main obstacle is the perceived risk in emerging markets.

For instance, our investment in Ampin Energy (see image), one of India’s largest renewable energy platforms, is a good example of overcoming this challenge. To mitigate risks, we combine in-depth local market knowledge, including country risk and other macro risk factors with rigorous due diligence, ensuring that each project aligns with our risk-return objectives. We also use blended finance structures, where public or concessional capital helps absorb initial risks, making the investment more attractive to private sector investors.

Furthermore, we only invest in the private sector companies and project, often with multi-national off takers, and hence avoid direct emerging market sovereign risk, which mitigates some of these risks but also is very complementary for what institutional investors invest in and hence offers diversification benefits.

There is also an issue in defining transition finance in emerging economies. In Europe we can be guided by the EU taxonomy, for example, but there is no official definition in practice for emerging economies. What are your criteria for transition finance?

In the absence of an official definition for transition finance in emerging economies, it is crucial to establish clear and measurable impact objectives for a climate strategy. For climate mitigation strategies, it’s relatively straightforward to define metrics such as “CO₂ emissions saved, avoided, or reduced” over the course of the project.

At responsAbility, we have been measuring and monitoring more than 90,000 projects over the last decade. These metrics are essential to ensure that our investments are achieving the desired impact.

How do you approach the broader economic impact of your investments?

We take a holistic approach, recognizing that decarbonization must address a wide range of economic sectors.

While we are excited about new emerging business models that could drive the future of sustainability, many of today’s sectors and industrial processes – such as transportation, real estate, and the food value chain – still generate huge CO₂ emissions.

Targeted investments in transition finance can support these established industries in reducing their carbon footprints, helping to drive the overall decarbonization of the economy and contributing to the broader goal of achieving a net-zero future.

While the bulk of the climate finance need in emerging economies is in illiquid assets, there is also a certain need for liquid assets in developed economies?

There is indeed a strong investor demand for liquid strategies, particularly in developed markets. Our investment approach is always impact-led. From the background of our deep direct climate expertise, we developed an approach that focusses on transition towards a net zero pathway for global corporate bonds.

We focus on the most credible companies that are decarbonizing across various sectors, including hard-to-abate sectors. This might involve investing in high emitters that are taking strong measures to reduce their emissions. We exclude fossil fuels, but we do include energy sector utilities that are actively driving the transition.

Many financial institutions lament that there is not yet much demand in the retail sector for impact products. What is your view of how this will develop in the future?

I am optimistic that impact investing in the retail sector will continue to grow. At responsAbility, our vision is a sustainable world with access to opportunities for all, and we believe the retail sector will play an important role in realizing this vision. The entire financial industry is making significant strides in educating customers on how to select sustainable investments.

We are moving forward in leaps and bounds, and it is becoming increasingly clear which strategies are genuinely impactful and which are merely greenwashed. Investors will only invest if the opportunities meet clear risk-return targets, and as the market matures, I believe we will see a growing demand for impact products among retail investors.

What factors do you think will drive this growing demand?

A combination of factors will drive this growing demand. These factors include increased awareness of the environmental and social challenges we face, better transparency and reporting on impact metrics, and the development of products that offer both financial returns and measurable positive outcomes. Financial institutions that can provide credible and transparent impact products will be well-positioned to meet this demand.

_[1]_{Bridging the climate financing gap: seizing the opportunity - European Commission}

_{[2] Concessionary capital consists typically of development funding and originates from public or philanthropic funders}