Climate financing vehicles

Blending public and private capital

Jennifer de Nijs, special adviser for sustainable finance at Luxembourg’s finance ministry. Photo: Ministry of Finance

Jennifer de Nijs, special adviser for sustainable finance at Luxembourg’s finance ministry. Photo: Ministry of Finance

Luxembourg likes to innovate, and its blended finance activities (which de-risk investment into un-bankable projects) aim to dramatically increase private investment in sustainable finance. We catch up with the ministry of finance’s Jennifer de Nijs.

The ministry of finance in Luxembourg is increasingly using public money to transform climate projects into an attractive investment proposition.

“The goal is to help accelerate and scale investments that contribute to the transition to carbon-neutral, resilient and sustainable economies,” said Jennifer de Nijs, who works as a special adviser for sustainable finance at the ministry of finance. 

“Our flagship activities in blended finance are the Luxembourg-European Investment Bank Climate Finance Platform, together with the ministry of the environment, climate, and sustainable development, launched in 2017; the innovative Forestry and Climate Change Fund, launched in 2017; and an upcoming vehicle with asset manager Schroders and impact investment manager BlueOrchard.”

Of the last vehicle, de Nijs explained “We are setting up the new impact strategy vehicle to support sustainable growth in emerging markets, with a focus on climate mitigation, climate adaptation, and the protection of water and biodiversity.”

The importance of blended finance

Blending public finance with private investment encourages investment in climate finance in a number of ways. “Many of the most impactful climate finance projects are ‘un-bankable’, as they take place in locations with a perceived high-risk rating,” said de Nijs.

“This is exactly where blended finance helps: it uses public capital to lower the risks for other investors, or to increase their returns. By assuming first losses (de-risking), or foregoing returns (more return for others), public funding mobilises private capital to make the investments more attractive and the projects ‘bankable’.”

Climate projects often have a limited track record. With blended finance, these projects can build this track record, so that blended finance is no longer necessary in the future, pointed out de Nijs.

“This can already be seen with renewable energy projects such as solar, which are much easier to finance now than 20 years ago. In other areas, such as climate adaptation, we are still at the very beginning.”

Focusing on carbon-neutral and resilient economies

“Emerging markets and developing countries are severely impacted by climate change and at the same time struggle to attract private capital where it is most needed,” said de Nijs.

The World Bank estimates that lower- and middle-income countries will need to invest at least 4.5% of their GDP in developing and maintaining key infrastructure if they are to meet the 2030 sustainable development goals by mid-century, noted de Nijs.

“The public sector cannot finance this alone,” she said.

“By targeting emerging countries, we have the biggest impact on improving the environment.”

The role of de-risking investments in climate finance

Given the limits of public capital and the climate crisis, scaling as much capital as possible into climate finance projects is crucial, says de Nijs.

“De-risking investments in climate finance can scale up private investments and close the climate finance funding gap. This means that with a relatively ‘small’ public investment, we can have a very large impact on the overall size of the investment and project financing.”

The ministry of finance is not yet disclosing the target size of its new vehicle. However, it plans to do so “as soon as possible,” said de Nijs.

This article originally appeared in Delano magazine’s October 2022 print edition