Pooled investment funds are financial vehicles that combine capital from different entities and then deploy that capital to projects/initiatives. These entities can be public, private, and/or not-for-profit. The entities can offer the investment fund different forms of capital, including grants, equity, or loans.
Often, when public finance is combined with private finance, the resulting pool of resources is referred to as a blended finance investment fund. Usually, these types of funds have specific development or sectoral objectives and will only invest in projects that align with those objectives.
Given the inclusion of public capital in blended finance investment funds, the returns that the investment fund seeks when making an investment can be lower. This allows those structuring the project or initiative financing to use this blended finance to lower the risk/return trade-off for other co-investors in the project or initiative. In many cases, this de-risking is intended to attract private sector capital to a project or initiative that otherwise would not have received commercial capital.
Pooled investment funds for adaptation are in and of themselves unlikely to emerge given the difficulties in generating consistent revenue streams from these types of projects. However, climate investment funds can pair adaptation projects with revenue-generating mitigation projects to alleviate this constraint. Moreover, the greater the proportion of public finance included in an investment, the greater the influence that this finance could have on ensuring that projects are developed/implemented in a manner that accounts for projected physical climate hazards and risks.
Current or potential adaptation-relevant sector applications:
- crop and food production – including agroforestry; livestock production; fisheries (marine, freshwater, and aquaculture); irrigation;
- ecological services and management – forest management (including afforestation and reforestation); wetlands; ecosystem and biodiversity protection, conservation, and enhancement;
- water supply (infrastructure) – water storage; water harvesting; water management;
- coastal and riverine protection and management – coastal defences or flood protection barriers; river flood protection measures;
- disaster risk reduction – early warning and observation systems;
- energy infrastructure – energy generation (including renewables);
- transport infrastructure;
- other built environment and infrastructure – urban development;
- social infrastructure – education; health facilities; and
- industry and manufacturing.
Additional insights:
- This is a mature instrument, although funds focused on climate adaptation have only emerged in the 2020s.
Considerations for using pooled investments:
- The project/initiative should generate an acceptable return on investment for investors.
- Different projects/initiatives will require different mixes of finance (grants, equity, loans) based on the projected risk/return trade-off.
- Building a portfolio of adaptation projects requires adequate data to inform investment opportunities.
Adapted from the following sources:
Convergence. (2023). State of blended finance 2023: Climate edition. https://www.convergence.finance/resource/state-of-blended-finance-2023/view
Gozzi, J. C., & Schmukler, S. (2015, October 23). Public credit guarantees and access to finance. European Economy. https://european-economy.eu/leading-articles/public-credit-guarantees-and-access-to-finance/
Organisation for Economic Co-operation and Development. (n.d.). Blended finance. https://www.oecd.org/dac/financing-sustainable-development/blended-finance-principles/