Publication - Blended Finance Best Practive: Case Studies and Lessons Learned
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Title
Blended Finance Best Practive: Case Studies and Lessons Learned
Publisher
Sustainable Markets Initiative, Investor Leadership Network
Author
Sustainable Markets Initiative, Investor Leadership Network
Published in
November 2024
Abstract
Blended finance has been emerging as a powerful vehicle for closing the global sustainability financing gap but has yet to deliver on its full potential
- Financing gap: There exists a global annual gap of over $4 trillion USD for financing the UN Sustainable Development Goals and the objectives of the Paris Agreement.
- Blended finance to date: Blended finance has the potential to significantly contribute to the bridging of this financing gap. However, the total deal volume unlocked by blended finance over the past decade stands at just over $200 billion-- far short of what is required.
- Barriers to achieving scale: Many of the barriers impeding the deployment of blended finance instruments at the scale required, such as unfavorable risk-return nexus, scarcity of catalytic capital, an inadequate project pipeline, challenges associated with foreign exchange risk, and data limitations, have been previously identified and are subject to on-going discussion and analysis in a number of fora
- Bridging the knowledge gap: A complementary challenge comes about through the lack of a standardized playbook for blended finance, resulting in a lengthy development period for the creation of each new vehicle. Through detailed case studies of 13 leading examples of blended finance and 3 spotlights of related initiatives, this booklet seeks to help fill this knowledge gap.
Successful blended finance vehicles are generally supported by a set of key enablers
- Foundational elements: Alignment of the objectives and purpose of the vehicle amongst different stakeholders; reputation and credibility of the key participants such as the fund manager.
- Risk mitigation: Strategic use of catalytic capital and risk profile improving instruments (first loss capital, insurance, guarantees) to enhance the risk return nexus of the vehicle; leveraging local experience and knowledge to align with local government priorities; understand and manage key challenges that exist or may emerge; and develop a pipeline of impactful projects.
- Timeliness: Timeliness of design, development and ultimate deployment of blended finance vehicles can be achieved when they receive the support of the top-level leadership of their respective organizations; development time can be further accelerated by adhering to as simple a design as possible while maintaining required flexibility.
Blended finance can achieve much higher levels of capital mobilization through a number of key propellers that foster the ecosystem development
- Standardization: Developing a set of templates or archetypes, as well as standardized frameworks for financial returns and impact, could help reduce the incubation period and transaction costs which impede broader, and speedy, deployment of blended finance vehicles.
- Understanding: Better communicating the unique characteristics of blended finance vehicles within institutional investment institutions can support the integration of blended finance within existing asset class investment strategies as well as in overall portfolio management.
- Market-wide accelerators: The creation of consolidated pools of catalytic capital and guarantee mechanisms, along with on-going efforts towards encouraging the multilateral development banks and development finance institutions to prioritize private capital mobilization, could serve as powerful drivers. Such actions would reduce the time-to-market for new blended finance vehicles as well as encourage the entry of new participants into the blended finance market.
- Regulatory and policy support: Fostering an enabling and transparent regulatory and policy environment at the national level and addressing regulatory impediments at the international level could help catalyze far greater levels of investment by existing blended finance practitioners.
Champions of blended finance can serve as Global Ambassadors to disseminate best practices and promote the key propellers for its ecosystem development
- Blended finance ambassadors: Existing champions of blended finance, whether at the individual, institutional or industry-association level, can play an important role through the dissemination of best practices, provide powerful demonstration effects, and further advance the key propellers boosting the development of the blended finance ecosystem.
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