Public-private partnerships and blended finance for climate action

Public-private partnerships and blended finance facilities can be important tools for accelerating and scaling up climate action

Public-private partnerships (PPPs) and blended finance facilities can be important tools for accelerating and scaling up climate action, particularly in resource-constrained developing countries. These financial frameworks mobilise funds from both public and private sectors to support projects aimed at climate change mitigation, adaptation, and resilience-building.

PPPs involve collaboration between government entities and the private sector to implement projects with environmental and social benefits that wouldn’t attract sufficient investment or be financially viable without shared efforts. Typically, they operate under long-term contracts where the private sector not only finances but also builds and operates a project, while the public sector partners create an enabling environment—for example, through regulations, allocation of land, or fiscal incentives—and ensure the project’s alignment with national goals for climate action, environmental protection, and socioeconomic development.

Partnerships between the public and private sector as well as public-private-people partnerships can act as catalysts to unlock investment as well as other means of implementation, such as technology. There is a need to transform financial systems and identify innovative financial instruments as well as partnership models for climate action, sustainability, and resilience-building. This need for transformation is increasingly being recognised at the global level as well, including in the context of the multilateral climate negotiations under the United Nations Framework Convention on Climate Change (UNFCCC) or through the various reform proposals for the global financial architecture that were put forward in recent years.

Blended finance facilities

Blended finance revolves around combining concessional finance from public, multilateral, or philanthropic sources with funding from private investors. Blended finance facilities aim to enhance the contributions from financial institutions and other private sector entities for green investments and climate action while reducing risk exposure and enhancing the risk-return profile of these investments. It aims to utilise available public funding to leverage much higher overall funding amounts, acting as a catalyst to maximise the positive impact of every dollar spent and develop or stabilise key economic sectors or the overall market, especially in developing countries.

Blended finance often uses tools like guarantees, first-loss capital, and subsidised funding to mitigate investment risks for private investors. For example, a development bank might offer partial credit guarantees to private lenders, reducing the perceived risk and thereby enhancing the credit rating of a project. Through this, blended finance facilities can encourage private investment in regions or sectors seen by investors as too high-risk or low-return to otherwise attract sufficient private sector funding. Facilities like this can encompass diverse sources of finance and invest in sustainable, climate-smart, and resilient projects across sectors such as agriculture, transportation, tourism, and energy, for example, through grant funding for enterprise development, loans at reduced interest rates, or concessional financing tied to achieving project milestones. Furthermore, blended finance often includes provisions for technical assistance and capacity-building, particularly in contexts where there are gaps in local capacities or expertise. Through this, blended finance can not only mobilise funding but also help to build the skills and knowledge necessary for project implementation or even regulatory and policy changes. By demonstrating the viability and impact of innovative financing models, they can influence policy decisions and regulatory frameworks, leading towards a more conducive environment for investment.

Key questions and challenges

Effective regulatory and policy frameworks are crucial for the success of PPPs and blended finance. Governments must establish clear, transparent, and stable policies that define the roles and responsibilities of all involved parties and include mechanisms for dispute resolution as well as impact monitoring, evaluation, and reporting.

To mobilise finance at scale, it is also crucial to understand what makes projects bankable and attractive for both public and private investors. This could not only characteristics related to feasibility, scalability, and sustainability but also a project’s short- and long-term impact for climate change mitigation, adaptation, and green growth and an economic or non-economic return of investment.

At a recent thematic dialogue on public-private partnerships for optimising sustainable financing in the agriculture sector, which was co-hosted by the Sustainable Development Council of Sri Lanka and the non-profit think tank SLYCAN Trust, participants highlighted several important considerations. These include, among others, the importance of overcoming legal, tax, regulatory, and socio-cultural barriers (such as complex contract negotiations, the danger of prioritising financial returns, or the low risk appetite of private sector partners); understanding the roles of different actors including government bodies, private sector, industry associations, or chambers of commerce; the need to build financial literacy at all levels; leveraging innovative financial instruments as well as financial and non-financial support programmes; and enhancing value chain integration and systematic approaches that manage risks and build project pipelines across key sectors.

The way forward

Looking ahead, the role of PPPs and blended finance for climate action is increasingly becoming an important area of international discussion and negotiations. The urgency and scale of funding to effectively address climate change requires innovative solutions that can leverage the strengths of both the public and private sector while retaining safeguards and aligning with the UNFCCC and the Paris Agreement, including the obligations of developed country Parties to provide support and means of implementation.

By effectively leveraging these partnerships and facilities, a significant contribution could be made to developing and deploying the necessary infrastructure and technologies to transition to a low-carbon and climate-resilient world, maintaining a balanced focus on both financial viability and national and global goals for urgent climate action.

(The writer works as Director: Research and Knowledge Management at SLYCAN Trust, a non-profit think tank based in Sri Lanka. His work focuses on climate change, adaptation, resilience, ecosystem conservation, just transition, human mobility, and a range of related issues. He holds a Master’s degree in Education from the University of Cologne, Germany and is a regular contributor to several international and local media outlets.)