In late 2021, Global Affairs Canada and Convergence launched a new Design Funding window to award grants to design and launch blended finance solutions that target the climate-gender nexus in developing countries. Since its launch, the Window has completed two application cycles and attracted around 70 proposals from the blended finance ecosystem. These proposals came from a diverse set of institutions from around the world, including asset managers, commercial banks, non-governmental organizations (NGOs), advisory firms, project developers, and social enterprises based in both developed and developing markets. Some organizations were veterans of blended finance, while others were seeking a way to enter the space for the first time.
Beyond a direct link between climate and gender, the key things we looked for in proposals to this Window were scalability, replicability, additionality, likelihood to reach financial close or launch, demonstration effect, and institutional track record. We often get asked why certain vehicles are awarded funding while others aren’t, and how one can stand out from the crowd and put in more competitive applications. So we’ve put together a list of our top three takeaways, which we hope will help potential applicants interested in applying to the Window:
1. Integrate gender firmly into a vehicle’s design and go beyond traditional KPIs
New blended finance solutions commonly center on output-focused gender metrics or KPIs, such as counting the number of women in leadership roles, employed, or served as customers. Although important, we want the solutions we support to look beyond these metrics. What’s often lacking is intentionality when it comes to gender in a vehicle’s design, where gender isn’t just a “bolt-on feature” or afterthought. There are dimensions to gender that are often overlooked, such as integrating it throughout a transaction’s lifecycle, which includes deal sourcing, screening, due diligence, and investment decision-making. Additionally, other areas for consideration include creating an equitable workplace for female employees at both the firm and portfolio company levels and ensuring an active mandate to get more women into the supply chain.
Let’s take the clean energy sector as an example. There’s a lot of focus on investing in women-owned/led businesses, but the reality is, very few exist, especially in places like Sub-Saharan Africa. Thus, integrating gender into other dimensions becomes key. This is what Mirova SunFunder, our first grantee supported under the Window, has set out to do with the design of the Gigaton Empowerment Fund, a $500 million blended fund targeting investments in distributed energy and off-grid projects in emerging markets. The Fund will adopt a gender lens across the firm (leadership, governance, staff), investment lifecycle, and its investees. For instance, gender will be built into deal screening and due diligence criteria, and a conscious effort will be made to ensure adequate women’s representation exists among staff and key investment decision-making bodies, such as the Investment Committee. To complement these efforts, the team will also support investees to adopt a gender-lens approach to their businesses through a technical assistance facility.
2. Climate adaptation vehicles are emerging, but still lag behind climate mitigation vehicles in both volume and quality
Mobilizing private capital toward climate adaptation is challenging. This is because blended finance is best suited for sectors that have a clear revenue line, such as clean energy. There are still many opportunities for blended finance in adaptation, however, the revenue pathways are less obvious in sectors and sub-sectors aligned with climate adaptation, such as sustainable agriculture, disaster resilience, and nature-based solutions. The Window aims to address this by supporting the design and launch of gender-responsive climate adaptation solutions, and in doing so, build the business case for them. Currently, over 40% of the solutions we see specify both climate mitigation and adaptation as focus areas, while only 19% specified climate adaptation as its primary focus.
Another observation is that these proposals are typically driven by NGOs, who lack the financial structuring expertise required to design commercially viable blended finance vehicles. As a result, these proposals are often not as advanced in their design and thinking, particularly when it comes to their path to scale and ability to attract private capital over the long-run, relative to proposals we see focused on climate mitigation. A potential way to address this is by teaming up with a private sector partner, such as an experienced asset manager or financial advisory firm, to fill in any gaps in expertise or track record. Proposals from a group of complementary partners are typically more compelling because they build our confidence in the team’s ability to successfully design and execute new financial vehicles.
3. Fund vehicles are tried and true structures, so we’ve set the bar higher in our evaluations
We’re not averse to funds and have supported them in our portfolio, but it can be harder to stand out. About 32% of blended finance solutions in the market are fund structures, according to Convergence’s historical database of over 800 blended finance transactions. Funds are the most common blended finance archetype. This is also reflected in the proposals received under the Window, where about 38% focus on the design and launch of new funds. We encourage other types of solutions to apply, such as bonds and notes, facilities, projects, platforms, and private companies.
Should an applicant decide to propose a fund, we will look for ways the fund offers additionality to the targeted market and what makes it innovative from a structuring perspective. For example, we’re supporting our grantee Beyond Finance to design the Beyond Finance Asia-Pacific Facility, an $80 million blended debt fund with a unique capital structure. The junior tranche is expected to be capitalized by micro-levy donations based on the sale of water bottles at large grocery retailers. Corporates and retailers are an untapped investor segment in the blended finance ecosystem. By supporting the Beyond Finance Asia-Pacific Facility, we hope the Facility will offer an opportunity for a new set of investors to participate in blended finance.
The Window is currently accepting concept notes until March 31, 2023. For more information, visit our website here. To see what Convergence has supported to date, review our Design Funding grantee portfolio here.