The State of Blended Finance

Convergence and the Business & Sustainable Development Commission

Achieving the Sustainable Development Goals (SDGs) would create a world that is comprehensively sustainable: socially fair; environmentally secure; economically prosperous; and more inclusive. But this ambitious set of 17 goals and 169 targets will require a new level of global cooperation. The United Nations estimates that the annual funding required to achieve the SDGs is USD 3.9 trillion, but current levels of official development assistance (ODA) and international investment towards the SDGs will leave an annual funding gap of USD 2.5 trillion. To help close the funding gap, the international development community must tap additional sources of capital, including from the private sector. Blended finance – the strategic use of public and/or philanthropic funding to catalyze private sector investment in SDG-related investments in developing countries – holds much promise.

The State of Blended Finance aims to expand the evidence-base around the potential of blended finance to help close the SDG funding gap by summarizing blended finance deal trends and identifying ongoing blended finance-related efforts of key actors in the space. This working paper (report) has been jointly produced by the Blended Finance Breakthrough Taskforce (BFBT) convened by the Business & Sustainable Development Commission, and Convergence. This report will inform the recommendations the BFBT intends to deliver to unlock systemic barriers in the blended finance ecosystem that are currently preventing the flow of mainstream capital into blended finance transactions at scale.

To validate the promise of blended finance, Convergence has collected extensive data on past blended finance transactions. In total, these transactions have mobilized USD 51.2 billion towards sustainable development. While Sub-Saharan Africa is the focus region of approximately 40% of blended finance transactions, the median deal size is relatively small compared to other regions and Sub-Saharan Africa only accounts for 16% of total capital mobilized by blended finance. Financial services, clean energy, and climate finance account for half of blended finance deals. The majority, 73%, of blended finance deals leverage either i) junior/subordinate capital, ii) a technical assistance facility, or iii) both junior/subordinate capital and a technical assistance facility. Half of blended finance deals are those associated with a technical assistance facility. The International Finance Corporation (IFC) and the European Commission (EC) are the largest public funders of blended finance. The EC largely operates through the European Development Finance Institutions (DFIs). Private investors in blended finance could include commercial banks, insurance companies, and institutional investors. These investors in blended finance are more fragmented, and few take prominent roles across blended finance transactions.

There is a substantial amount of activity in blended finance, with hundreds of active organizations. There are several activities that merit particular note. The Organization for Economic Cooperation and Development (OECD) is in the process of establishing blended finance principles to guide the blended finance activities of aid agencies and donors. In addition, the OECD is developing a new measure called Total Official Support for Sustainable Development, a metric that will capture development aid flows beyond ODA, like blended finance. The World Bank Group is one of the largest channels of blended finance funds from multilateral and bilateral donors and recently approved the International Development Association (IDA) Private Sector Window (PSW). Through the PSW, IDA donors have agreed to provide USD 2.5 billion of blended finance funds to be implemented under four facilities by the IFC and Multilateral Investment Guarantee Agency. The EC’s new External Investment Plan (EIP) will promote investment in developing countries, with a focus on Africa and the EU Neighbourhood. The EIP makes provision for significantly more blended finance through the European Fund for Sustainable Development, including a EUR 75 million guarantee facility and a EUR 2.6 billion blended facility. While private sector investors have participated in select deals, there has been no significant momentum in attracting these investors to blended finance at scale.

This report concludes with several insights based on the trends analysis and activity mapping. First, blended finance activities are fragmented and there is a lack of scale. There is a need to ensure that blended finance initiatives remain aligned and complementary. Further, stakeholders are encouraged where possible to invest in existing solutions that have the potential to scale, as opposed to creating new solutions. Second, current investment opportunities in developing countries do not have an attractive risk-return profile for private sector investors. For private investors to participate, absolute risk must be acceptable, the risk-return profile of investments must be at market prices or better, and diversification through the pooling of assets and projects across countries and sectors is required. Third, donors require better enabling conditions to participate in blended finance. Donor organizations need a proper understanding of blended finance and the capacity to invest in blended finance transactions, as well as effective metrics for evaluating additionality, value-for-money, and leverage. Finally, MDBs and DFIs should allocate more capital to higher-risk activities, including targeting low-income countries, participating more in subordinated positions, and providing more risk participation products.

    Date
    26 July, 2017
    Type
    Policy and Research Reports
    Region Focus
    Global
    Sector Focus
    General