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15 Jan 20

Seven blended finance trends for 2020

Seven blended finance trends for 2020

Another year — and the dawn of the “decade of action”! As we begin the countdown towards 2030 and the deadline for the Sustainable Development Goals, we need to see an acceleration of sustainable solutions and the mobilization of governments, philanthropies, and businesses towards achieving these common goals.

Since the adoption of the SDGs five years ago, the field of blended finance has transformed. What was once an ill-defined and unmapped field is now a familiar concept, which is drawing in new and ambitious actors and initiatives from across the public, private, and philanthropic sectors.

At the same time, blended finance has not yet reached its full potential. Our 2019 State of Blended Finance report found that the field has grown at about $15 billion per year since 2015 – but this is far from the trillions needed to achieve the SDGs in developing countries by 2030. The Financial Times recently mused whether “2020 might be the year blended finance really takes off.”

Here are some of the key blended finance trends that we are watching for in 2020:

1. Globally, blended finance solutions for climate and conservation are gaining momentum

We are seeing more blended finance solutions in areas where the SDG funding gap is largest, especially in sustainable infrastructure and climate action. Aggregate volume of blended finance in recent years has been greatest for Goal 11 (Sustainable Cities), followed by Goal 7 (Affordable Energy) and Goal 13 (Climate Action). At the same time, the private sector is increasingly recognizing its role in shifting “business-as-usual” into sustainable investments and business practices – with more than 2,400 businesses signing the UN Principles for Responsible Investing (PRI). Convergence has also launched a grant window to support the design of blended finance solutions focused on natural capital in Asia.

2. Institutional investors are beginning to pay attention

Institutional investors are the largest potential pool of additional capital for the SDGs, representing approximately $220 trillion in assets under management (AUM). As more assets are allocated towards impact investing, responsible investing, and sustainable finance globally, there is a huge opportunity to crowd in institutional capital to blended finance solutions. And we are already seeing greater appetite for blended finance from large institutions like BlackRock, Allianz, AXA, and Prudential. As just one example, the world’s largest asset manager, BlackRock, announced its participation in the Climate Finance Partnership (CFP) this past year.

3. Catalytic capital providers are recognizing the importance of scale

To achieve the SDGs by 2030, a significant scale-up of financing is required – and greater coordination between stakeholders is key. Specifically, development organizations should shift away from creating multiple small solutions and towards scaling up existing solutions that achieve both development impact and have the potential to mobilize private sector capital at scale. Initiatives created in 2019 like the Catalytic Capital Consortium and the Tri Hita Karana Roadmap for Blended Finance are key to fostering collaboration and reducing the duplication of efforts.

4. Development financiers must respond to demands for greater transparency

Over the past year, there has been a growing focus on transparency and accountability in blended finance reporting. We have noted in the past that increased transparency is not an end in itself, but an essential step towards improving the coordination, accountability, and effectiveness of blended finance. The availability of more information increases confidence within the private sector; allows concessional capital providers to make evidence-based funding decisions; and facilitates the monitoring of progress towards the SDGs. We anticipate continued demands for greater disclosure and impact reporting practices from all development financiers in 2020.

5. Catalytic capital shifts from traditional grants to instruments like debt, equity, and guarantees

Concessional capital providers are becoming more sophisticated actors in blended finance, adopting new strategic priorities (e.g., U.S. Agency for International Development), financial instruments (e.g., Global Affairs Canada), and internal capacities to more effectively engage the private sector in sustainable development. In this vein, catalytic capital is shifting from more traditional grant-based approaches towards the use of innovative tools and instruments. Most tangibly, we have identified a relative decrease in the use of unconditional, non-returnable grants in blended finance, most often deployed in the form of design-stage funding or technical assistance. Instead, donor governments and foundations are formally participating in financial vehicles in the form of concessional debt, equity, guarantees, and risk insurance.

6. Blended finance solutions can be designed and implemented at the local level

Host country governments and local investors continue to remain largely absent from key blended finance conversations. In 2020, it is imperative that the development community embraces the “localization” of blended finance. This will require greater recognition of local ownership and support for capacity building, engagement with domestic public and private actors, and efforts to build local financial markets to support the long-term sustainability of blended finance solutions. While blended finance holds the potential to unlock more domestic capital, local investors often face additional and unique barriers to investing in blended finance transactions, which need to be better understood and addressed.

7. Will blended finance break ground in additional sectors?

To date, energy and financial services, two commercially oriented sectors, have been the most frequent focus sectors for blended finance. As development organizations become more sophisticated in their strategies and practices in 2020, we believe they will draw private capital into new sectors. We see untapped potential for blended finance in both the agriculture and health sectors. For example, USAID has signalled interest in supporting more blended finance solutions for the health sector, while the International Fund for Agricultural Development (IFAD) has been leading research and coordination around blended finance for the agriculture sector.

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