Leticia Ferreras Astorqui & Nadia Nikolova: Blended Finance, accelerating the energy transition in emerging markets

Apr 24, 2025

 

What challenges do emerging and frontier markets face with regard to sustainability and climate transition?

Leticia Ferreras Astorqui: ‘In short, if the proposed climate solutions don’t include taking action in emerging markets, we will lose the battle against climate change. No matter how hard the Western world might try, it will not be enough. Despite this reality, unfortunately, these economies face many challenges when looking to implement climate transition plans – the main one is a lack of capital. The big question is how we enable a sustainable transition in those regions. The simple answer is providing them with access to large scale amounts of capital to finance projects and companies that will support a just climate transition. However, that raises a follow-up question: should that capital come from developed countries – either those less affected by the climate crisis or even largely responsible for it?’

Nadia Nikolova: ‘Today, emerging markets emit more CO₂ than OECD countries. While emissions in OECD nations are declining, those in emerging markets continue to rise. If this trend persists, GDP-adjusted mortality rates – especially in North Africa and Southwest Asia – are expected to reach dangerously high levels by the end of the century, creating serious global challenges such as increased migration and heightened development aid needs. For frontier markets aiming to industrialise, fossil fuels remain the cheapest and most accessible option, so competitive cleaner alternatives and sufficient support need to be provided. The key question: how do we ensure that the climate transition is a ‘just’ one?

Raising awareness about the need for climate transition within emerging markets is also a challenge. Understandably, for people struggling economically, climate concerns are not a top priority. To avoid conflict between developed and emerging nations, the most effective solution is to make clean energy cheaper than fossil alternatives. This is already happening in some markets, though battery storage remains a bottleneck.’

Does the new US administration’s reduced focus on climate pose an additional challenge?

Nikolova: ‘Yes, US agencies are likely to scale back climate investments. However, the multilateral and European bilateral development banks we primarily work with, remain strongly committed. In fact, we’re seeing some of them double down in response – taking even more ambitious steps, including at multilateral institutions where the US is a major shareholder. That said, there’s growing global competition for capital, especially public sector funding. For example, we have seen development budgets being cut in favour of defence spending. This makes it even more critical to deploy available capital as efficiently as possible. Fortunately, capital efficiency has improved in recent years. The combination of public and private finance is becoming essential. As governments face competing fiscal pressures, private investors must step up. Encouragingly, many are doing so – whether to decarbonise their portfolios or to manage climate-related physical risks. Blended Finance can positively contribute towards these efforts. More private capital will also drive greater innovation.

There’s a clear ‘finance gap’. How large is it, and how can it be closed?

Nikolova: ‘Broadly speaking, the finance gap stands at $ 4.2 trillion annually. While the figure is significant, when put in context, it represents just 1.5% of global assets, according to a United Nations Report from April 2024. Given the amount of capital available globally, one might wonder: why is this so difficult to overcome? Unfortunately, this gap persists as a result of regulatory barriers, lack of incentives, perception of risk and aversion to the unknown. Mobilising capital through public capital markets is not enough to address this gap. This is because many countries in need of support don’t have well developed capital markets. As a result, capital fails to reach many of the places that need it the most.

On the other hand, capital channelled through private credit markets solutions have generally been led by public sector institutions such as development finance institutions (DFIs) – including multilateral, bilateral, and national development banks, as well as microfinance institutions. However, mobilisation has been limited to around $ 50 billion per year. That’s a mere drop in the ocean. The real challenge, therefore, lies in combining the necessary expertise of the public and private sector investors, and in transforming investments in emerging markets into an attractive investment proposition for institutional and, possibly, retail investors.’

Ferreras Astorqui: ‘Blended Finance does exactly that – it brings together private and public sector institutions to create investment strategies that mobilise capital towards emerging markets. It is therefore a promising approach, especially if large-scale investors are incentivised through supervision and regulation. Regulation is a barrier not only in developed countries – given the strong bias towards investment-grade assets – but also in emerging markets. Even there, the growing pension, insurance, and banking sectors are often restricted from investing locally and are instead pushed towards holding European government bonds. When it comes to attracting private sector investors towards blended finance strategies, reliable data on the performance of private debt investments– and Blended Finance strategies in particular– is crucial to mitigate investors’ perception of high risk in emerging markets. Fortunately, the data landscape is improving. We now have more transparency as to historical performance of emerging markets and thus greater clarity for investors on the risk they are taking. The key question now is: how can Blended Finance funds be structured to effectively address the priorities of all stakeholders involved?’

What exactly are ‘Blended Finance ecosystems’, and how do they support the climate transition?

Ferreras Astorqui: ‘Blended Finance ecosystems involve collaborative financing structures where both public (or semi-public) and private capital providers work together. Each party brings its own expertise and perspective. As a result, we’re seeing increasingly innovative and efficient partnerships emerging.

Public sector participants may include development agencies, multilaterals, and philanthropic foundations. Private sector investors, understandably, are concerned about emerging market risks – such as recovery rates, governance, and regulatory changes. These risks can be mitigated through the local knowledge and deal-sourcing capabilities of public partners. Such partnerships typically take the form of closed-end investment funds that finance infrastructure, renewable energy, battery storage, sustainable agriculture, and local financing for small entrepreneurs. These funds vary in structure and investment diversity. A notable example is the SDG Loan Fund, which we co-launched with FMO and the MacArthur Foundation. The fund raised approximately $ 1 billion from institutional investors, with FMO taking the first-loss position. The MacArthur Foundation added a $ 25 million guarantee – making it the largest Blended Finance fund to date. Funds like these are structured in tiers, with different risk-return profiles, from senior to junior tranches. Institutional investors generally take a senior position in the vehicles and therefore benefit from the first loss protection provided by junior investors. This protection enables their risk profile to be akin to investment grade while generating an attractive risk-adjusted return.’

What kind of risk-return profile does Blended Finance offer for investors, and how are risks mitigated?

Nikolova: ‘Blended Finance returns are in line with other emerging market debt (EMD) propositions with similar risk levels – often with a yield pickup due to the illiquidity premium. Commercial returns are paired with impact outcomes – they are inseparable in this space.

There are, of course, risks: credit, political, legal, and countryspecific. But our partner institutions, especially development banks, have deep local presence and insights, which significantly reduce these risks. Due diligence in these markets is exceptionally thorough. Governance structures must be rigorously designed, and corruption-related reputation risks are taken very seriously. Importantly, there is no currency risk at the vehicle level where investors contribute in USD and loans are issued in USD. If needed, EURhedged share classes can be incorporated into the vehicles. The performance of these private debt investments in emerging markets has historically been very robust, so credit risks are often overestimated. In fact, recovery rates in Blended Finance are sometimes higher than those in developed markets. A major part of our mission is to educate investors and build their confidence through hands-on experience and track records. Unfortunately, most investors have yet to allocate to Blended Finance. But we aim to change that by offering a compelling value proposition that combines attractive yields (including yield pickup), diversification, and impact relative to comparable investments.’

How do you define ‘impact’, and what role does ‘additionality’ play?

Ferreras Astorqui: ‘Regulation has made the term ‘impact’ a bit tricky to use, but for us, it means making a positive contribution in our target markets. We consider Blended Finance a form of impact investing. To be clear: simply investing in emerging markets does not qualify as impact. For an investment to be impactful, it must not do any significant harm and has to have positive measurable outcomes tracked through key performance indicators (KPIs) over time.’

Nikolova: ‘We often align with impact taxonomies – such as those based on the UN SDGs – that our clients use. Some of our clients, particularly Dutch institutional investors, go to great lengths to apply these frameworks.

There are two dimensions to ‘additionality’: one is at the enterprise level (such as the positive change created by the companies themselves), the other is investor-driven – mobilising investor funding towards capital scarced countries and sectors. Investing in emerging markets requires more nuanced trade-offs than in developed ones. A frequent dilemma is balancing poverty reduction with environmental concerns. Sometimes, alleviating poverty must take precedence over reducing emissions, and vice versa.’

How can we close the ‘knowledge gap’ and increase institutional investor interest?

Ferreras Astorqui: ‘The best way is through dialogue and collaboration. What helps most is transparency – on performance data, risk mitigation, and impact metrics – across economic cycles. Explanations of local governance, legal, supervisory, and regulatory frameworks are also key. It’s equally valuable to introduce investors to DFIs. Many are positively surprised by their professionalism and capabilities.’

Nikolova: ‘Getting top management at major institutions on board is another success factor. Their interest tends to cascade downwards. Consultants also play a vital role – they’re often perceived as a more neutral party and can influence the broader market. Finally, we need more ‘vintages’ in this asset class. That maturity will come with time and experience.’

 

Leticia Ferreras Astorqui Leticia Ferreras Astorqui is a Senior Portfolio Manager in the Allianz Global Investors’ Development Finance team. She joined AllianzGI in 2020, where she has been focusing on expanding AllianzGI’s private credit offering across emerging markets. Prior to that, she worked at Macquarie Capital, focusing on equity investments in Latin America.

 

Nadia Nikolova Nadia Nikolova has 16 years of experience in development finance, infrastructure financing, and structured finance. Since 2016, she has expanded AllianzGI’s presence in emerging markets, leading key initiatives such as the IFC partnership and the SDG Loan Fund. She serves on all AllianzGI emerging markets investment committees and has held non-executive director roles at IPFA and LTIIA. She is also on the board of the Swiss Platfom for Impact Investing.

 

Attachments

• FI-2 - 2025 - Coverinterview Leticia Ferreras Astorqui & Nadia Nikolova.pdf