Ravi Menon: Blended finance for the net-zero transition
Opening remarks by Mr Ravi Menon, Managing Director of the Monetary Authority of
Singapore, at the "Transition Finance towards Net Zero" conference, Singapore, 4
October 2022.
* * *
Good morning and welcome to the inaugural Transition Finance towards Net Zero
conference.
COP27 will be held in Sharm El-Sheikh, Egypt, in a little over a month. We are
privileged to have with us Dr Rania Al-Mahsat, Egypt's Minister for International
Cooperation, who will set out the Egyptian COP27 Presidency's priorities to turn climate
ambition into climate action.
Why are we gathered here? Let me briefly lay out the problem statements and then set
out how this conference hopes to contribute in specific ways to help the situation.
First, the world is currently not on a trajectory to achieve net zero emissions by
And we know this is what is required to prevent or avoid catastrophic climate
2050.
change. To reach Net Zero by 2050, the world needs to reduce greenhouse gas
emissions by 45% by 2030, relative to 2010 baseline levels. But emissions today are
still rising, not falling. And according to the UN Emissions Gap report 2021, based on
our current policies in place, the world is 55% short of the emissions reduction target for
2030.
Second, the world is investing nowhere near what is required to get to net zero
by 2050. According to McKinsey, net zero by 2050 would require about US$9.2 trillion
of investment per year but only about US$5.7 trillion per year is being invested
today. We are more than 35% short of the annual investment required for net-zero.
Let's keep these two numbers in our minds throughout our discussions today: we are
55% below the emissions reduction required by 2030 and 35% below the investments
required for net zero by 2050.
Filling these two gaps will require a concerted and collaborative effort across the
ecosystem. And it needs to be done now. Climate change is already happening and
beginning to devastate lives and livelihoods. Just ask the people in Pakistan. There is
no collective human endeavour more urgent than climate action. Delaying mitigation
efforts to avoid short-term costs will incur a much larger economic and human loss in
future.
This conference will focus on three key dimensions: Transition, Asia, Collaboration. Let
me elaborate.
Transition - to reach net zero by 2050 we need effective and inclusive transition
strategies.
Effective transition is about greening the entire economy not just growing the
green economy. Investing in green technologies and renewable energy is important.
But such pure green activities are estimated to make up less than 8% of the global
economy. To move the needle towards net zero, we must progressively decarbonise
across all sectors of the economy, including hard-to-abate ones like steel, cement, and
maritime transport. This means green finance alone is not enough. The world needs
transition finance - to provide the funding support for businesses and sectors that are
not so green, to adopt cleaner technologies, increase energy efficiency, and become
greener over time.
Inclusive transition is about decarbonising without compromising social and
economic development. Hundreds of millions of people across Asia, Africa, and Latin
America still do not have access to electricity, modern sanitation, and drinking
water. Economic development will drive demand for fossil fuels, which is still the
cheapest way to generate electricity and power mobility in many parts of the world. The
switch to cleaner energy cannot be made in one leap. We need to shift the energy mix
progressively, first to relatively less emissions-intensive fuels like natural gas, and then
to renewables. Finance can be a powerful enabler for such a transition.
Second, Asia - this is where the battle against climate change will be won or lost.
Asia accounts for half of the world's greenhouse gas emissions and is home to about
60% of the global population. The issues of transition are most acute in Asia, with
growing affluence and rapid urbanisation alongside the urgent needs of poverty
alleviation. About 85% of the energy consumed in Asia comes from fossil fuels and
Asia's demand for energy is projected to double in 2030. Asia is also most vulnerable
to climate change, with large populations living close to locations prone to drought,
floods, and rising sea levels. Finally, Asia is diverse - across stages of economic
development, and across a variety of climate related risks and transition challenges. If
we can successfully help Asia transition to net zero, it will go a long way in getting the
world to net zero.
Third, Collaboration - effective transition finance needs close partnership among
the public, private, and people sectors. This will be the focus of our conference -
scaling blended finance to accelerate the net-zero transition.
Blended finance synergises public and private capital to mobilise financing for
projects that are marginally bankable. It is also about combining financing with
capacity building, technology transfer, and institutional support, to reduce risk and
enhance bankability. In short, it is about taking an ecosystem approach to solving a
problem of the global commons.
Blended finance is not new but catalysing and scaling it requires a fresh
approach. The use of public funds and development guarantees to reduce risks and
encourage participation by private capital has been around for many decades. But
such programmes are too few and too small. Globally, annual flows of blended finance
have averaged less than US$10 billion since 2015. We need a more systematic and
coordinated approach to mainstream blended finance.
First, we need to build a pipeline of shovel-ready transition projects. There is
insufficient capacity and expertise to prepare projects that are attractive to the private
sector. This is specially so in emerging markets, where regulatory and political risks
heighten the likelihood of default, transaction lead times are long, projects require
prohibitively large amounts of start-up capital, and there is limited access to expertise in
project development and financing.
Second, we need to reduce the risks in marginally bankable transition projects to
attract private capital. The return profile on many such projects is not commensurate
with the risks facing private financiers or investors. To reduce overall risk and improve
bankability, we need more catalytic and concessional funding from the public sector,
multilateral development banks, and philanthropic sources. Such funding can be in the
form of grants, risk-sharing arrangements, debt at below-market rates, technical
assistance, and structuring advice. They can help crowd in additional multiples of
private sector funding. But while public capital can potentially do more to mitigate risk,
private capital must still bear a fair share of project risk and exercise the appropriate
due diligence on project viability and performance.
Third, we need to make the financial ecosystem work more synergistically. Banks
play a key role as lead managers for financing sustainability projects. However, with
limited balance sheets and regulatory capital and liquidity requirements, banks need to
offload these loans to institutional investors who have more absorptive capacity. But
institutional investors prefer larger deal sizes with a diversified pool of assets to reduce
concentration risk. We need to shift towards a portfolio approach to blended finance
deals, through the structuring and securitisation of typically illiquid green and transition
assets.
There are some promising global developments that may help to address some
of these challenges.
The United Nations has convened a high-level advisory board on effective
multilateralism which will explore reforms to the global financial architecture to
help channel more public and private capital to developing countries. This is
timely work. If we are to finance the sustainable infrastructure that the world needs,
especially through blended finance, we will need to reform how development finance is
implemented and consider adjustments to the mandates and incentive structures of
multilateral development banks.
The Network of Central Banks and Supervisors for Greening the Financial System
is launching an initiative to raise awareness on blended finance including
potential regulatory and practical barriers. We can look forward to more details at
COP 27 but suffice to say the NGFS will focus on practical guidance from past case
studies and demonstrative projects to explore what is possible.
The GFANZ Asia-Pacific Network will launch an initiative to develop guidance for
financial institutions on how they can facilitate the managed phase-out of coal
power generation in the Asia Pacific. MAS and the Asian Development Bank will
participate in this initiative. There are about 5,500 operational coal plants in Asia,
responsible for over 4.5 gigatonnes of carbon emissions per year. Asia's coal plants are
far younger than the coal fleets in the US and Europe, with the majority having decades
left to operate. The GFANZ initiative will help to address the challenges involved in
responsibly decommissioning these plants, including the fiduciary and reputation risks
that financial institutions may face from the initial spike in financed emissions as a result
of investing in such early phase-out projects.
Singapore has been doing its part to complement these global and regional
efforts to promote transition and blended finance.
Infrastructure Asia, launched by MAS and Enterprise Singapore, provides
technical assistance to enhance project bankability, thereby helping to attract
It provides expertise in project scoping, shares best practices in project
financing.
development, and facilitates infrastructure financing deals in the region. Infrastructure
Asia is facilitating a number of sustainable infrastructure projects, including in waste
management and waste-to-energy.
Clifford Capital, whose borrowings are guaranteed by the Singapore Government,
provides debt financing to crowd in equity participation for infrastructure
projects. Bayfront Infrastructure Management, established by Clifford Capital,
mobilises institutional capital for project and infrastructure finance through the issuance
of infrastructure asset-backed securities. To-date, it has catalysed a total of US$330m
for sustainable infrastructure from institutional investors.
MAS will inject seed capital into an Asia Climate Solutions Design Grant hosted
by Convergence. The scheme will provide funding for feasibility studies and proof of
concept work on innovative blended finance solutions in target sectors that are
significantly under-capitalised in Asia, such as early-stage climate adaptation and
mitigation technology, clean energy access, sustainable transport, and nature-based
solutions. This will help to build a pipeline of investible projects for investment. Leah
Pedersen, Senior Director at Convergence, will share more details later today.
We have our work cut out for us. We have the right people in the room - leaders from
the financial industry, public sector, multilateral agencies, philanthropic organisations,
and global networks of expertise. Let us share our experiences and perspectives, and
brainstorm ideas that we can pilot and learn from.
Of course, our work will not be done in a day. We hope this conference will grow into a
multi-year effort and be a convening platform for practical solutions and concrete
projects to mobilise the financing required for an effective and inclusive transition to net
zero and a more sustainable planet.
Thank you and I wish everyone fruitful deliberations.