To deliver the rapid decarbonisation and conservation we need, and to enable communities to grow sustainably, we need to catalyze new finance forever – and we need to maximize that impact, so we know how much good has been achieved and how we can improve.
Blended financing is the 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.
This can be particularly powerful in developing economies, where execution risk may be greater than is acceptable for conventional sources of finance alone. Public and private capital can be combined in various ways into “special purpose vehicles”. It may include a purely philanthropic grant, or a loan component added to the combined equity investments, to provide technical assistance to increase the profitability of projects and investments.
Real impact or just a safety net for investors?
One of the main criticisms of blended finance is that it provides subsidies to businesses with little transparency about what has been achieved.
It is important to address this — in particular, by assessing how effectively combined financial instruments drive real change that would not otherwise occur, resulting in a significant contribution to sustainable development. In other words, are people’s lives improved or ecosystems restored because of these vehicles in ways that cannot be achieved with conventional financing alone? Or is it simply a means for private investors to de-risk investments and increase returns?
Clearly, there are indeed cases where blended finance instruments may have simply provided additional protection without any significant change. According to Joan LarreaExecutive Director
Convergence, “There are cases where direct aid should remain direct aid; and also many cases where private sector investors don’t need any incentive to do something because it’s already lucrative enough to roll the dice and take a risk on whatever they’re looking at.”
However, blended finance has been proven to encourage private investors to channel their capital where they would not otherwise, resulting in tangible benefits for social good.
For example, African Agricultural Fund (AAF) is a private equity fund created in response to the challenge of food security across the African continent. It had technical assistance whose mandate was to increase economic and physical access to food for low-income Africans by providing technical assistance to portfolio companies.
AAF was structured as a ‘mixed finance’ fund, which mobilized private capital through a group of development finance partners. It arrived first close at $135 million
in November 2010, and the fundraising team concluded a final close in mid-2013, with US$246 million backed by multinational limited partners. This partnership has made a positive difference to food security in Africa; and is widely recognized as a success of blended finance.
This is just the beginning. We can – and must – do even better. To deliver the rapid decarbonisation and conservation we need, and to enable communities to grow sustainably, we need to forever catalyze new finance – and we need to maximize that impact, so we know how much good has actually been 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 regarding the sustainable impacts of its investments. It is an innovative consortium that brings together Pegasus Capital Advisors and its combined financial investors with civil society leaders Gold Standard, R20 and
International Union for the Protection of Nature (IUCN). The SCF is designed to direct finance where it is most needed, manage unforeseen negative impacts in a transparent manner and deliver a true sustainability impact that is measured and independently verified.
The SCF initiative integrates an investment fund of medium-sized infrastructure projects (SCF fund) and grants intended for technical assistance (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 the anchor investor and has already committed a first loss tranche of up to $150 million, which is intended to mitigate risk at the fund level, bridging the gap between public and private investors.
Funds for grant-funded technical assistance are managed by IUCN with a target size of US$28 million, of which GCF has already committed US$18.5 million. Through this facility, IUCN — with
R20 and The gold standard
— will provide technical assistance in identifying suitable projects in which the fund can invest. They will train implementers to ensure that projects are feasible and can deliver environmental and social benefits in addition to financial performance. The gold standard enables measurement and independent certification of the Fund, as well as the impact it has on climate security and sustainable development.
To date, the SCF project pipeline has received more than 70 projects. Of these, six received technical assistance to finance pre-feasibility studies Brazil, Chile,
Ecuador, Indonesia and Jamaica. Two legal and market studies have been completed — one on waste management facilities in Chile and the other on solar energy in commercial and industrial markets in Brazil.
In addition, SCF’s technical assistance team organized four regional webinars to introduce the project submission platform. And two personal workshops will be held in the second half of the year to bring together key actors from lower governments, project creators and financial institutions to build capacities for project development in key topics and share experiences on sustainable finance in the region. The next meeting will be in progress QuitoEcuador in September.
In this way, SCF can ensure that blended finance delivers on its promise to invest in truly sustainable development that mitigates climate risks, creates the natural and built infrastructure that enables us to live within the limits of our planetary boundaries, and improves the lives of people and their communities around the world.
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