(Bloomberg) -- Deals blending public and private funds reached a five-year high of $15 billion in 2023, as some of the world’s biggest banks and asset managers entered transactions with governments to tackle climate change.

The contributions represent a “directional shift” in the global blended finance market, said Joan Larrea, chief executive of Convergence, a global network of 165 financial institutions that includes Citigroup Inc., Mitsubishi UFJ Financial Group Inc. and Standard Chartered Plc. 

One of the biggest blended finance deals was struck in the final months of last year, when the United Arab Emirates teamed up with BlackRock Inc., Brookfield Asset Management Ltd. and TPG Inc. Under terms of the arrangement, the UAE agreed to cap its own returns on $5 billion of investments and channel excess profits to private investors. 

Without blended finance, the measures needed to address climate change across the globe will likely be unaffordable. But finding structures that the private sector deems financially appealing is often difficult, and blended finance models have historically struggled to achieve the necessary scale. 

There are now signs that’s changing, as commercial banks come up with return structures they can defend to shareholders. Goldman Sachs Group Inc. is among the global banks that have allocated more resources over the past couple of years to finding ways to better partner with the public sector, particularly in emerging markets. MUFG, HSBC Holdings Plc and Macquarie Group Ltd. also have set up dedicated teams or roles to tackle blended finance. 

In exchange for private capital, public or philanthropic entities offer de-risking models such as guarantees to cover first-loss provisions or protections in case of political upheaval.  

Last year, there were fewer but larger deals driving the market, Convergence said in connection with its annual report on the state of blended finance, published on Tuesday. Private sector financing grew 28% from a year earlier to $3.7 billion, while commercial financing by multilateral development banks more than doubled to almost $5 billion, which was “central to the market rebound,” Convergence said. 

Meanwhile, cheaper concessional funding remains “stagnant,” the report found.

Some regulations may impede the ability of private investors to participate in blended finance, according to the Convergence report. Under the final implementation of the Basel framework, banks may be required to hold more capital against blended finance deals than previously, despite the lower risk profile of such arrangements, the report’s authors said. Constraints to data access, including information on emerging market default and recovery rates, add to perceptions of elevated risk, they said.

The energy sector remains the most active segment of the market for blended finance, making up almost one-third of deal activity and roughly half of total capital flows, Convergence said. Over 90% of those transactions were for renewable energy.

In total, climate-focused transactions accounted for about half of the blended finance market by deal count and 57% of aggregate financing, according to Convergence. Last year’s COP28 climate conference in Dubai marked an “unprecedented burst of action,” the network said.

(Updates 9th paragraph with details on regulatory hurdles.)

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