10 November 2023

Unlocking the potential of catalytic capital

Catalytic capital can be transformative in supporting private investors to deploy capital at scale for a just transition to net zero, writes Kieron Boyle

Sustainability and inclusion are global concerns, with ramifications that do not stop at national borders. And both are needed for our economies to be successful in the 21st century.

Kieron BoyleIt's for that reason that achieving the transition to net zero, and doing so fairly, is the great challenge of our era. That's especially true in emerging and frontier markets where public and private finance flows remain limited. These markets serve 6 billion people — that's 85 out of every 100 people in the world — all of whom have needs and aspirations which must be met.

So, how do we achieve this transformational shift? In emerging markets, we see great potential in three interlocking themes: the growth in impact investing, the application of just transition thinking, and the effective use of catalytic capital.

Just Transition investments are those that simultaneously address climate and environmental action, socio-economic distribution and equity, and community voice. It's an increasingly mainstream lens on capital allocation deployed by investors around the world.

Catalytic capital is distinct from conventional investment. It is patient, risk-tolerant, concessionary, and flexible. These characteristics make it transformative in supporting private investors to deploy capital at scale.

"Catalytic capital is distinct from conventional investment. It is patient, risk-tolerant, concessionary, and flexible"

Combined, the two are incredibly powerful. For example, the South Africa-based fund manager Inspired Evolution has been able to invest in opportunities with deep impact that would typically not be on other investors' maps. Combining capital from catalytic providers and private investors, it has invested in the first grid-connected solar photovoltaic project development by an independent power producer in Burundi. This represents the largest international private investment in Burundi's electricity sector in nearly 30 years.

It's for that reason development finance institutions, multilateral development banks, governments, philanthropies, and others have begun to deploy catalytic capital with the explicit aim of mobilising private capital investment for a just transition. These investments have ranged widely — in areas such as renewable energy projects, agricultural development, microfinance and financial inclusion, healthcare initiatives, education and skills development, and infrastructure projects. But, while encouraging, we need to see more. Global finance flows are currently less than 20% of the $3.8 trillion required annually for the transition to net zero.

The promise of catalytic capital goes beyond mobilising more private investment. It can play a crucial role in ensuring that whatever capital is mobilised is deployed effectively — not least by adapting to local market needs, and ensuring local actors are equal participants in the transition. These actors are best positioned to develop financing solutions that align with local priorities.

There are many great examples of how to do this successfully. KawiSafi Ventures, a venture capital fund based in Nairobi, manages a $67 million fund that tackles energy poverty as a way to avert the long-term climate crisis. The fund benefits from concessionary financing from the Green Climate Fund and private investment from AXA Investment Managers. This combination of international capital with local expertise allows the fund to invest in off-grid clean energy enterprises to accelerate access for underserved populations across East Africa. It aims to deliver clean, affordable energy to more than 10 million people, at least half of whom are low-income, and displace more than a million tons of carbon.

We need to see more examples like this. In the run-up to COP28, there have been more and more calls and initiatives to support a net zero that enables, and does not hinder, local development priorities for countries in the Global South. And it's clear that unless we achieve a just transition in these countries, we simply won't achieve the transition that's needed globally.

Catalytic capital is one of the most effective tools we have in this fight. The challenge, of course, is that there is no time to lose in deploying it.

Kieron Boyle is the CEO of the Impact Investing Institute, an independent non-profit, set up to connect capital to impact. The Institute acts as a bridge between new economic ideas and mainstream capital markets. In November 2023, it published a guide on using catalytic capital for a global transition.

This is the first in a series of monthly columns Boyle will write for Environmental Finance.

Kieron Boyle