To deliver the rapid decarbonisation and conservation we need, and to enable communities to grow in a sustainable way, we have to catalyse new finance for good — and we need to maximise that impact, so we know how much good is achieved and how we can improve.
Blended finance is a structuring of concessional (“first loss”) public or philanthropic capital, designed to support sustainable development, with the expectation of lower rates of return compared to conventional private capital.
It can be especially powerful in emerging economies, where execution risk may be higher than what is acceptable to conventional finance sources alone. Public and private capital can be combined in different ways in "special purpose vehicles." It may include a purely philanthropic grant, or a loan component added to blended equity investments, to provide technical assistance for enhancing the bankability of projects and investments.
Real impact or just a safety net for investors?
One of the main critiques of blended finance is that it provides subsidies to business with little transparency on what has been achieved.
It is important to address this — in particular, by assessing how effectively blended finance vehicles drive real change that would not otherwise happen, resulting in meaningful contributions to sustainable development. In other words, are people's lives improved or ecosystems restored because of these vehicles in ways that could not be accomplished with conventional finance alone? Or is it simply a means for private investors to de-risk investments and increase returns?
It is clear that there are indeed cases where blended finance vehicles may have simply provided that additional protection without driving any meaningful change. According to Joan Larrea, chief executive of Convergence, “There are cases where straight-up aid should remain straight-up aid; and also, many cases where private sector investors don't need any encouragement to do something because it already is lucrative enough to roll the dice and take the risk on whatever they're staring at.”
Yet, blended finance has also been proven to prompt private investors to channel their capital where they otherwise would not, resulting in tangible benefits for social good.
For instance, The Africa Agriculture Fund (AAF) is a private equity fund created in response to the food security challenge across the African continent. It had a technical assistance facility whose mandate was to increase economic and physical access to food for low-income Africans by providing technical assistance to the portfolio companies.
The AAF was structured as a ‘blended finance’ fund, mobilising private capital through an anchor group of development finance partners. It reached first close at US$135 million in November 2010 and the fundraising team concluded final close in mid-2013, with US$246 million backed by multinational limited partners. This partnership made a positive difference in Africa’s food security; and it is widely recognized as a success of blended finance.
This is just a start. We can — and must — do even better. To deliver the rapid decarbonisation and conservation we need, and to enable communities to grow in a sustainable way, we have to catalyse new finance for good — and we need to maximise that impact, so we know how much good is actually achieved and how we can improve next time.
The next frontier for blended finance: A case study
The Subnational Climate Finance (SCF) initiative does this by using best practice standards to ensure accountability and transparency about the sustainable impacts of its investments. It is an innovative consortium that brings together Pegasus Capital Advisors and its blended finance investors with civil society leaders Gold Standard, R20 and the International Union for Conservation of Nature (IUCN). SCF is designed to direct finance where it is most needed, manage unforeseen negative impacts in a transparent way, and deliver genuine sustainability impact that is both measured and independently verified.
The SCF initiative integrates an investment fund of mid-sized infrastructure projects (SCF Fund) and a grant-funded dedicated to technical assistance facility (SCF Technical Assistance).
The SCF Fund, managed by Pegasus Capital Advisors, will invest in a global portfolio of mid-sized infrastructure projects in sustainable energy, waste and sanitation, regenerative agriculture and nature-based solutions in developing countries. The Green Climate Fund (GCF) serves as an anchor investor and has already committed a first-loss tranche of up to $US150 million, which is intended to mitigate risk at the fund level, thereby bridging the gap between public and private investors.
The grant-funded dedicated technical assistance facility is managed by IUCN with a target size of $US28 million, of which $18.5 million has already been committed by the GCF. Through this facility, IUCN — with R20 and Gold Standard — will provide technical assistance in identifying suitable projects for the fund to invest in. It will train implementers to ensure projects are feasible, and can deliver environmental and social benefits in addition to financial performance. Gold Standard enables the measurement and independent certification of the Fund, as well as the impact it achieves toward climate security and sustainable development.
To date, the SCF project pipeline has received more than 70 projects. Of those, six have received TA to fund pre-feasibility studies in Brazil, Chile, Ecuador, Indonesia and Jamaica. Two legal and market studies are completed — one for waste management plants in Chile, and the other on solar energy in the commercial and industrial markets in Brazil.
On top of that, the SCF Technical Assistance team organized four regional webinars to present the project submission platform. And two in-person workshops will take place in the second half of year to gather key actors from sub-national governments, project developers and financial institutions to build capacity on project development in key themes and share experiences on sustainable finance in the region. The next meeting will be in Quito, Ecuador in September.
In this way, SCF can ensure that blended finance delivers on its promise to invest in genuine sustainable development that mitigates the climate emergency, creates natural and built infrastructure that allows us to live within the limits of our planetary boundaries, and improves lives of people and their communities around the world.
For further information, please do contact us at: [email protected].