The typical employee within a non-governmental organization doesn’t talk a lot to commercial banks, pension funds and insurance companies. But like everyone else, NGOs are beginning to realize that public and philanthropic money alone won’t be sufficient to achieve the Sustainable Development Goals.
To achieve impact at scale, NGOs need to engage with the private sector – but how?
People working at NGOs possess valuable social and environmental expertise but rarely have backgrounds in banking and finance. Financial terms such as “concessional equity” and “internal rate of return” can therefore be daunting to professionals at NGOs. But both sides have much to gain from working together.
Blended finance is one way for NGOs to engage with the private sector and bring in additional sources of capital – whether for their own operations or for the people and companies on the receiving end of the transaction. Blended finance is a structuring approach that uses catalytic capital from public or philanthropic sources to increase private sector investment in sustainable development.
Many NGOs are already active in blended finance. Fifteen percent of all blended finance transactions involve at least one non-profit organization, according to Convergence. That is only the tip of the iceberg.
At Convergence, we count many NGOs as our members, such as Aqua for All, World Wildlife Fund and SOS Children’s Villages. But Convergence’s dataset does not capture, for example, NGOs contracted to conduct impact validation for a blended fund.
The social, environmental and impact expertise NGOs bring to the table is a key ingredient in a blended finance transaction. With boots on the ground, NGOs have a more realistic picture of what the target beneficiaries need and understand how to measure effectively. As a result, they play a critical role throughout the process – from design to implementation to evaluation.
Take gender equality as an example. Any blended fund that wants to invest in women empowerment needs an expert NGO to advise on mainstreaming gender equality across the fund’s operations.
One case in point is the CARE-SheTrades Impact Fund, a blended fund aiming to invest in growth-stage companies that champion gender equality in South and Southeast Asia. The fund brings together NGO CARE, asset manager Bamboo Capital Partners, and the UN agency International Trade Centre (ITC). In this case, CARE brings its expertise in building gender-just businesses, ensuring that the outcomes the Fund supports are indeed gender-transformational.
“When an NGO partners up with an investor, the NGO often acts as an impact amplifier,” says Mauricio Rincon of Opportunity International. “Ultimately, the investor gets higher value for money – not just in financial terms but also in terms of impact.”
In sectors where NGOs are naturally well represented, they are also well positioned to co-lead the design and implementation of blended finance solutions – in partnership with an institution with financial expertise. This co-creation process can be time consuming for those involved, but experience shows it can be worthwhile.
The International Committee of the Red Cross (ICRC) Humanitarian Impact Bond for Physical Rehabilitation is an example in the humanitarian aid space. With this impact bond, ICRC leveraged funding from institutional investors to deliver physical rehabilitation services in conflict and post-conflict countries in Africa.
Nine private investors, coordinated by Lombard Odier, provided the up-front capital that ICRC’s physical rehabilitation programme needed to build new physical rehabilitation centres and provide rehabilitation services. The outcome funders (including the governments of Belgium, Switzerland, and La Caixa Foundation, among others) will pay the investors back based on the achievement of pre-determined results. This Development Impact Bond launched in July 2017 and will conclude in July 2022. In 2020, an interim evaluation concluded that the program was on track to deliver against its overall timeline – despite some Covid-related delays.
Conservation is another area where NGOs possess invaluable expertise that can underpin a blended finance transaction. The Nature Conservancy (TNC), for example, is spearheading blue bonds for conservation. TNC worked with the Government of Belize on a $364 million financial transaction that will enable the country to reduce its debt burden and generate an estimated $180 million for marine conservation. In this debt conversion, Credit Suisse acted as the structurer and arranger of the financing, while the U.S. Development Finance Corporation (DFC) provided political risk insurance.
To realize the SDGs, public, philanthropic, and private investors will need to come together in blended finance deals, and this includes NGOs. NGOs contribute valuable on the ground expertise, whether as designers of blended solutions, advisors to asset managers, or lead implementers.
We encourage more NGOs to bring their expertise to the table and partner up with private sector investors. NGOs can initiate blended deals and secure a more active partnership role. Don’t let the financial jargon stop you.
Regina Rossmann is a senior associate at Convergence Blended Finance.