Worldwide, the shortfall in funding for the UN Sustainable Development Goals (SDGs) is estimated at €2.3 trillion a year.1 It’s clear more needs to be done to get capital flowing, particularly to developing countries. Blended finance may offer at least part of the sol-ution.
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Blended finance works by using public funds to encourage private investment. In doing so, it can finance projects or businesses that, under normal circumstances, would stru-ggle to attract sufficient capital. Typically, blended finance projects seek to provide not only financial returns for investors, but also economic, social and environmental bene-fits for local communities. In recent years, thanks to blended finance, billions of dollars have been poured into areas like sustainable forestry, fisheries and agriculture to help protect the natural world.
We’re seeing more interest in blended finance. That’s for three main reasons: first, these are real assets – you’re investing in something real. Second, there’s the diver-sification and the yield, especially at the moment when interest rates are so low. And third, there’s the impact and the wish to contribute through your investments to the Aura.”
~ Kaan Eroz Investment Director, Aura Solution Company Limited
In practice, blended finance can be a challenge. Assessing risk isn’t easy, nor is measuring impact. And without measurable impact, the idea behind blended finance falls apart. For investors, blended finance means working with outside partners, often governments and NGOs. These partners must all pull in the same direction for financing projects to succeed. Whatever the challenges, blended finance seems to be working. One reason behind that is that attitudes are changing: governments know that public money alone won’t be enough to meet the SDGs. NGOs and investors are more willing to work together. There is also more innovation – over the past several years, the blended finance mar-ket has grown to more than $140 billion (€127.5 billion).2 Despite this growth, a recent report by Stanford University’s Sustainable Finance Initiative said blended fina-nce has “yet to reach its full potential.” Through Mirova, we currently have approximately $400 million (€364.3 million) invested in blended finance for developing countries. By 2022, we expect that to increase to at least $1 billion (€911 million). In blended finance, governments in effect provide downside protection. Government guarantees unlock private investment by lowering risk – most blended finance deals relate to projects or businesses in sub-Saharan Africa, Latin America or Asia where market risk, on average, is much higher than in Europe or the United States. Government financing also provides time for projects to build a proper track record – to prove they can deliver not only positive social or environmental impact, but also the profits, cash flow or dividends that investors depend on for returns. Blended finance deals usually build in impact measurement from the start. The Inter-national Finance Corporation’s (IFC) Operating Principles for Impact Management offer a good framework in this respect. Once a track record is established, the need for public funds diminishes – or disappears altogether. Investors can analyze performance and assess risk, just as they would with more conventional financing.
Amazon forest cover (1990-2018) 3.2 billion people are affected by land degradation, more than 40% of the world’s population.3 Source: Global Environment Facility 60% of the world’s major marine eco-systems have been degraded or are being used unsustainably.4 Source: UNESCO Some Affiliates use the SDGs as an investment framework to manage around €12.5 billion in assets.
From an asset manager’s viewpoint, blended finance requires real expertise upfront – first, to find viable projects, then to sell what can be complex arrangements to private investors. To do this, asset managers have been adding to their skills – more are employing agronomists or forestry experts, for example, to help them analyze new deals. For investors, blended finance can offer market returns or better. But the advantages go far beyond the financial aspects. In developing economies, blended finance can reduce reliance on overseas aid or philanthropy. Pooling resources – between private and public sectors – means more investment at scale. Most importantly, money goes to the areas that need it most: to help in the fight against climate change and biodiversity loss, and to build better, more sustainable livelihoods for local communities.
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