Catalytic Capital | October 28, 2021

Blended finance struggles for traction in the ‘decade of action’

Jessica Pothering
ImpactAlpha Editor

Jessica Pothering

ImpactAlpha, October 28 – Blended finance that leverages public or philanthropic capital to increase private investment in sustainable development has unlocked about $160 billion for sustainable and impact investments since 2010, according to “The State of Blended Finance 2021,” from Convergence.

That’s not nearly enough to bridge a multi-trillion gap in financing the 2030 Sustainable Development Goals and avert a climate catastrophe.

Catalytic capital for blended-financing has averaged about $9 billion per year for the past five years; the global pandemic caused a drop, along with foreign direct investment generally, to only $4.5 billion last year. “The field is nowhere at the scale it needs to be,” Convergence’s Joan Larrea said on ImpactAlpha’s Call No. 33 this week.

Usual suspects

Most commercial capital for blended finance deals continues to come from development finance institutions and multilateral banks rather than the private sector.

“We tend to see the same players every year in blended finance,” Convergence’s Ayesha Bery tells ImpactAlpha.

Impact investors including Ceniarth, Calvert Impact Capital, Oikocredit and Soros Economic Development Fund are mainstays, as are foundations including the Shell, Rockefeller and Gates foundations.

Leading by example

BlackRock, the governments of France and Germany, the Hewlett Foundation and Grantham Environmental Trust raised $250 million for the Climate Finance Partnership blended-finance fund, which invests in emerging markets climate infrastructure.

On a smaller level, Mexico-based Sistema Bio has relied on blended finance to drive adoption of waste-to-fuel biogas technology among emerging market farmers. Oxygen Hub is using a blended-finance model to build a franchise network of local oxygen producers to fill Africa’s medical oxygen supply gap.

Too few investors are willing to adjust their risk appetites to unlock additional capital. What’s needed: increased government engagement, particularly in emerging markets, to unlock private capital via multi-lateral banks and development finance institutions and domestic institutional investor consortia; donors with proactive private sector capital mobilization strategies; and more concessional, catalytic capital coming from a wider base of investors.

“We need to see the development banks putting a little bit more risk capital,” says Bery. Needed:  “Real concessional capital coming from donor governments, development agencies and foundations.”