PI Global Investments

Blended Finance Schemes Are Catalysing Real Impacts in Sustainable Development

To deliver the rapid decarbonisation and conservation we need, and to enable communities to grow in a sustainable way, we have to catalyse new finance for good — and we need to maximise that impact, so we know how much good is achieved and how we can improve.


is a 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.

It can be especially powerful in emerging economies, where execution risk may be
higher than what is acceptable to conventional finance sources alone. Public and
private capital can be combined in different ways in “special purpose vehicles.”
It may include a purely philanthropic grant, or a loan component added to
blended equity investments, to provide technical assistance for enhancing the
bankability of projects and investments.

Real impact or just a safety net for investors?

One of the main critiques of blended finance is that it provides subsidies to
business with little transparency on what has been achieved.

It is important to address this — in particular, by assessing how effectively
blended finance vehicles drive real change that would not otherwise happen,
resulting in meaningful contributions to sustainable development. In other
words, are people’s lives improved or ecosystems restored because of these
vehicles in ways that could not be accomplished with conventional finance alone?
Or is it simply a means for private investors to de-risk investments and
increase returns?

It is clear that there are indeed cases where blended finance vehicles may have
simply provided that additional protection without driving any meaningful
change. According to Joan Larrea, chief executive of
Convergence, “There are cases where
straight-up aid should remain straight-up aid; and also, many cases where
private sector investors don’t need any encouragement to do something because it
already is lucrative enough to roll the dice and take the risk on whatever
they’re staring at.”

Yet, blended finance has also been proven to prompt private investors to channel
their capital where they otherwise would not, resulting in tangible benefits
for social

For instance, The Africa Agriculture Fund (AAF) is a
private equity fund created in response to the food security challenge across
the African continent. It had a technical assistance facility whose mandate was
to increase economic and physical access to food for low-income Africans by
providing technical assistance to the portfolio companies.

The AAF was structured as a ‘blended finance’ fund, mobilising private capital
through an anchor group of development finance partners. It reached first
close at US$135

in November 2010 and the fundraising team concluded final close in mid-2013,
with US$246 million backed by multinational limited partners. This partnership
made a positive difference in Africa’s food security; and it is widely
recognized as a success of blended finance.

This is just a start. We can — and must — do even better. To deliver the rapid
decarbonisation and conservation we need, and to enable communities to grow in a
sustainable way, we have to catalyse new finance for good — and we need to
maximise that impact, so we know how much good is actually

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 about the sustainable 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). SCF is designed
to direct finance where it is most needed, manage unforeseen negative impacts in
a transparent way, and deliver genuine sustainability impact that is both
measured and independently verified.

The SCF initiative integrates an investment fund of mid-sized infrastructure
projects (SCF Fund) and a grant-funded dedicated to technical assistance
facility (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

and nature-based

in developing countries. The Green Climate Fund (GCF) serves as an
anchor investor and has already committed a first-loss tranche of up to $US150
million, which is intended to mitigate risk at the fund level, thereby bridging
the gap between public and private investors.

The grant-funded dedicated technical assistance facility is managed by IUCN with
a target size of $US28 million, of which $18.5 million has already been
committed by the GCF. Through this facility, IUCN — with
R20 and Gold Standard
— will provide technical assistance in identifying suitable projects for the
fund to invest in. It will train implementers to ensure projects are feasible,
and can deliver environmental and social benefits in addition to financial
performance. Gold Standard enables the measurement and independent certification
of the Fund, as well as the impact it achieves toward climate security and
sustainable development.

To date, the SCF project pipeline has received more than 70 projects. Of those,
six have received TA to fund pre-feasibility studies in Brazil, Chile,
Ecuador, Indonesia and Jamaica. Two legal and market studies are
completed — one for waste management plants in Chile, and the other on solar
energy in the commercial and industrial markets in Brazil.

On top of that, the SCF Technical Assistance team organized four regional
webinars to present the project submission platform. And two in-person workshops
will take place in the second half of year to gather key actors from
sub-national governments, project developers and financial institutions to build
capacity on project development in key themes and share experiences on
sustainable finance in the region. The next meeting will be in Quito,
Ecuador in September.

In this way, SCF can ensure that blended finance delivers on its promise to
invest in genuine sustainable development that mitigates the climate emergency,
creates natural and built infrastructure that allows us to live within the
limits of our planetary boundaries, and improves lives of people and their
communities around the world.

For further information, please do contact us at:
[email protected].

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