To deliver the rapid decarbonization and conservation we need, and to enable communities to grow sustainably, we need to catalyze new finance for good – and we need to maximize that impact, so we know how much good is achieved and how we can improve.
Blended finance is concessional (“first loss”) public or philanthropic capital structuring, designed to support sustainable development, with the expectation of lower rates of return compared to conventional private capital.
It can be particularly powerful in emerging economies, where execution risk may be higher than is acceptable for conventional sources of funding alone. Public and private capital can be combined in different ways in “special purpose vehicles”. It can be a purely philanthropic grant or a loan component added to blended equity investments, to provide technical assistance to improve the bankability of projects and investments.
Real impact or simple safety net for investors?
One of the main criticisms of blended finance is that it provides grants to companies with little transparency about what has been achieved.
It is important to address this question, in particular by assessing the effectiveness with which blended finance vehicles bring about real change that would not otherwise occur, resulting in meaningful contributions to sustainable development. In other words, are people’s lives improved or ecosystems restored through these vehicles in ways that could not be accomplished with conventional finance alone? Or is it simply a way for private investors to reduce investment risks and increase returns?
It is clear that there are indeed cases where blended finance vehicles may have simply provided this additional protection without leading to significant change. According Joan Larreageneral manager of
Convergence, “There are cases where direct aid must remain direct aid; and also, many cases where private sector investors don’t need encouragement to do something because it’s already lucrative enough to roll the dice and take the risk on whatever they’re looking at.
Yet blended finance has also been proven to incentivize private investors to channel their capital where they otherwise would not, resulting in tangible benefits for social good.
For instance, The African Agriculture Fund (FAA) is a private equity fund created in response to the challenge of food security on the African continent. It had a technical assistance structure whose mandate was to increase economic and physical access to food for low-income Africans by providing technical assistance to portfolio companies.
The AAF was structured as a “blended finance” fund, mobilizing 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 reached final closing in mid-2013, with US$246 million supported by multinational sponsors. This partnership has made a positive difference in Africa’s food security; and it is widely recognized as a blended finance success story.
This is just a start. We can – and must – do even better. To deliver the rapid decarbonization and conservation we need, and to enable communities to grow sustainably, we need to catalyze new finance for good – and we need to maximize that impact, so we know how much good is actually achieved and how we can improve next time.
The Next Frontier of Blended Finance: A Case Study
The Subnational climate finance (FCS) achieves this by using best practice standards to ensure accountability and transparency regarding the lasting 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). The SCF is designed to direct funding to where it is most needed, manage unintended negative impacts transparently, and deliver real sustainability impact that is both independently measured and verified.
The SCF initiative includes an investment fund for medium-sized infrastructure projects (SCF Funds) and a grant dedicated to technical assistance (CFS Technical Support).
The SCF Fund, managed by Pegasus Capital Advisors, will invest in a global portfolio of medium-sized infrastructure projects in the areas of sustainable energy, waste and remediation, regenerative agriculture and solutions based on nature in developing countries. The Green Climate Fund (GCF) serves as an anchor investor and has already committed a first-loss tranche of up to $150 million, intended to mitigate fund-level risk, bridging the gap between public and private investors.
The dedicated grant-funded technical assistance facility is managed by IUCN with a target size of $28 million, of which $18.5 million has already been committed by the GCF. Through this facility, IUCN — with
R20 and gold standard
— provide technical assistance to identify suitable projects in which the fund can invest. It will train implementers to ensure projects are feasible and can deliver environmental and social benefits in addition to financial performance. Gold Standard enables independent measurement and certification of the Fund, as well as the impact it has on climate security and sustainable development.
To date, the CFS project pipeline has received over 70 projects. Of these, six received TA to finance pre-feasibility studies in Brazil, Chile,
Ecuador, Indonesia and Jamaica. Two legal and market studies have been completed, one for waste management plants in Chile and the other on solar energy in commercial and industrial markets in Brazil.
In addition, the SCF technical assistance team organized four regional webinars to introduce the project submission platform. And two in-person workshops will take place in the second half of the year to bring together key players from subnational governments, project developers and financial institutions to build project development capacity in key themes and share insights. experiences on sustainable finance in the region. The next meeting will take place in QuitoEcuador in September.
In this way, SCF can ensure that blended finance delivers on its promise to invest in true sustainable development that alleviates the climate emergency, creates natural and built infrastructure that allows us to live within our planetary boundaries and improves the lives of people and their communities around the world.
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