As blended finance is increasingly adopted as a tool amongst the development community to help realize the Sustainable Development Goals (SDGs), important questions are being raised regarding the need for increased transparency and availability of impact outcomes from blended finance structures.
On July 16th, Convergence, The IMPACT Programme and the Organisation for Economic Co-operation and Development (OECD) co-hosted an online event on “Leveraging Blended Finance for Development Impact” for non-profits, non-governmental organizations (NGOs) and other civil society organizations, with support from the UK Department for International Development (DFID), to discuss the role of blended finance in driving development impact, alongside important policy developments in the field. Below are some of the key questions and perspectives:
1. What impact does blended finance achieve, and how is it measured?
As Convergence has previously stated, blended finance creates impact, broadly, on two levels: i) the impact of development activities financed by a blended finance structure, and ii) the impact of deploying a blended finance approach. Key metrics to assess the latter include i) mobilization (e.g., amount of financing unlocked for the SDGs), ii) sustainability (e.g., reducing the share of concessional capital over time, iii) replication (e.g., demonstrating viability of new markets), and iv) financial additionality (e.g., providing new sources of financing where investments are not yet available).
Based on Convergence’s earlier analysis on leverage ratios, blended finance funds or fund-like structures have attracted US $4 of commercial capital for every US $1 of concessional capital (i.e., priced below market rate). While understanding the effectiveness and efficiency of a blended finance approach are key, the first consideration is crucial, particularly for the donor community:
2. When it comes to blended finance, who benefits, how, and when?
While blended finance is not a panacea for achieving the SDGs, it can be used to support a broad range of development activities. According to Convergence’s analysis, to date, blended finance has focused on financial inclusion (46% of transactions), small and medium-sized enterprise (SME) growth (44% of transactions), with other common objectives including clean energy, sustainable agriculture, and land-use. The most common direct beneficiaries have been entrepreneurs and SMEs (45% of transactions), while the majority (73%) of end-beneficiaries reflect the base of the pyramid (BOP) populations – the poorest socio-economic group. This suggests that blended finance is a reasonable approach in financing development projects reaching low-income and vulnerable populations.
Efforts to standardize impact and improve transparency of blended finance are underway
Currently, the lack of transparency in development impact outcomes can make it more challenging for some policymakers and development practitioners to fully endorse the use of blended finance.
The good news is blended finance is gaining traction as an alternative financing approach to achieve development at scale, as is the focus to improve the impact measurement and transparency of these transactions. To this end, the OECD has been leading policy efforts in the blended finance market.
First, the OECD is currently preparing its Development Assistance Committee (DAC) Blended Finance Principles Guidance Notes, which provide practical guidance on implementing the OECD DAC Blended Finance Principles. Adopted in 2017, the OECD DAC Blended Finance Principles a policy tool for all providers of development finance - donor governments, development co-operation agencies, philanthropies and other concerned stakeholders. The OCED DAC Blended Finance provide a five-point checklist to ensure blended finance meets accepted standards and achieves impact promoted by DAC members, including Principle 5 “Monitor blended finance for transparency and results.” The guidance notes build on extensive consultations with donors, Development Finance Institutions, private investors, partner countries, and the DAC-CSO Reference Group, and is an important step in moving from principles to practice.
In addition, the OECD is also leading efforts to support greater transparency and impact measurement in blended finance through the Tri Hita Karana (THK) Roadmap on Blended Finance. The THK seeks to foster a common language and collective action to deliver financing to support the SDGs, and is composed of five actions areas, including i) promoting transparency (see draft report by Transparency Working Group here), and ii) impact (see report on Assessing Impact for the Poor by Impact Working Group here). To read more on the THK Agenda and its specific action areas, please visit the THK Knowledge Hub, hosted by Convergence, with support from the Swedish International Development Cooperation Agency (Sida).
Lastly, the OECD also shared updates on its current work on the Impact Standards for Financing Sustainable Development (referred to as IS-FSD), a set of standards for impact management to help public donors keep a high level of accountability on development impact when working through development finance institutions and private fund managers. The standards are currently undergoing a consultation process, and the latest version will be presented to the DAC In September.
Blended finance can be a tool for humanitarian action
With guest Juan Luis Coderque Galligo, Head of New Finance Models (NFM) and Innovative Finance at the International Committee of the Red Cross (ICRC), participants learned how this international humanitarian aid organization is exploring new financing models to complement traditional sources of financing for humanitarian action, recognizing the growing gap between the landscape of need and available funding.
In 2017, the ICRC created the world’s first HIB (“humanitarian impact bond”), which raises funds to build and run three new physical rehabilitation centre in conflict and post-conflict countries, namely Nigeria, Mali and the Democratic Republic of Congo. The ICRC has raised CHF (Swiss Franc) 26 million in upfront funding from impact investors, including New Re (part of Munich Re Group), who will be reimbursed by outcome funders, including the governments of Belgium, Switzerland, Italy, the UK, and La Caixa Foundation, following the achievement of agreed results.
The ICRC is currently working on other financing projects, including a public-private infrastructure project in Goma, to implement and design a water-supply project. The ICRC aims to generate at least 5% of its income from NFM by 2030.