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Working Paper | Blended Finance for State-led Decarbonization: How Public Interventions Direct Private Finance towards Green Investments

Esther Choi
Soh Young In
Sustainable Finance Initiative

Blended finance has gained traction in recent years as a promising solution to bridge the funding gap in transitioning to a decarbonized economy. Yet, there exists little guidance and knowledge on the “how,” especially in the specific country contexts. This paper examines the Republic of Korea as a case study and the government’s efforts to trigger the introduction and institutionalization of green finance for decarbonizing its economy. Focusing on the design of incentives and institutions by the public sector to manage risks and catalyze private capital, we draw necessary conditions for successful application of blended finance. First, consensus building between public and private investors can facilitate harmonizing and internalizing the concept and practice of green finance. Second, designating a dedicated coordinating agency for green finance activities can reduce fragmentation and promote the efficient allocation of capital in the economy. Third, instituting stringent reporting standards and monitoring and evaluation framework can ensure climate finance is allocated to impactful projects and sectors. Lastly, climate-related sectors, such as energy, should be structurally conducive to private investment and activities. State-led approach may be rapid in execution, but it should also be accompanied by these measures to direct private finance towards green investments and scale the impact.