BlueOrchard is a global impact investment manager and a member of the Schroders Group. It was founded in 2001 as an initiative of the UN to be the world’s first commercial manager of microfinance debt investments. Today, BlueOrchard manages the largest microfinance fund in the world. They have invested with a long-term time horizon in more than 105 emerging and frontier markets through a network of over 700 financial institutions.
BlueOrchard aims to find innovative solutions to deal with the most pressing social and environmental challenges. So unsurprisingly, their core expertise has included blended finance for eighteen years and representing as of today more than USD 1 billion in AUM. They use blended finance for innovative and impactful solutions to pressing social or environmental challenges that require blended capital and/or capacity building to attract investors and mobilize capital.
We spoke to Maria Teresa Zappia, Deputy CEO and Chief Impact and Blended Finance Officer at BlueOrchard, about how they measure the impact of their blended finance activities, how they apply a gender lens, and what they’ve learned from managing blended finance funds.
Whose money does Blue Orchard work with/place and what kind of risk and returns do they need?
BlueOrchard works with a vast array of public and private investors, ranging from Development Finance Institutions (DFIs) and Multilateral Development Banks (MDBs) to private investors such as banks, family offices, insurance companies, and pension funds.
The needs and priorities of public and private investors are different, yet immensely complementary. In our blended finance practice, we have a wide range of means and structures to combine public and private capital. In some cases, public donor capital is subordinated to private capital and at concessional terms. In other words, DFIs and private investors invest pari-passu in mezzanine and senior positions. What really counts is to match the risk-return expectations of different investors, their investment horizons, as well as to deliver on the impact goals set at the start of the strategy.
Can you describe one or two blended finance transactions that BlueOrchard has been involved in? In what capacity did you participate?
We have developed a very innovative climate adaptation strategy after we saw the market gap in which most climate finance funding goes to climate mitigation. Our strategy deploys both private debt and private equity investments, ensuring we can best support the development of climate insurance in emerging markets. The private debt strategy provides loans to financial institutions to grow and/or develop products that provide borrowers with insurance against climate risks. For example, through a loan that is bundled with microinsurance, a farmer would receive financing for growing its crops, and said crops would be insured in case a draught impedes their growth. From a private equity side, the strategy is to invest in the value chain of climate insurance in emerging markets. For example, an investment in an insurance company that then develops index-based insurance for the markets in which it operates. BlueOrchard plays an integral role as the investment manager of this strategy, and is extremely involved in the development and monitoring of technical assistance (TA) projects alongside the TA manager. Our key partners in this strategy are KFW and the German Government and a number of DFIs and private investors. We have just launched a follow-up strategy this month given the success of the first initiative, which as of Q2 2022 had reached more than 40 million beneficiaries.
On another impact theme, BlueOrchard is the investment manager and TA facility manager of an education finance strategy for Sub-Saharan Africa, working on improving access to and quality of education via low-cost affordable schools. The blended component of the strategy is its PPP framework with funding from DFIs and impact minded private investors, in which the initiator of the strategy provided subordinated capital at concessional rates, and several investors provided TA grants. This project is particularly exciting due to BlueOrchard’s developmental role in capacity building for this fund, as both investment manager and as more hands-on TA support.
How do you measure the impact of your blended finance activities? What does that impact look like?
BlueOrchard operates under its proprietary B.Impact Framework, which includes ESG, Impact, and SDG contribution analyses. From an impact perspective, prior to an investment, we consider three aspects of a new project: Intent, Contribution, and Measurement. For intent, we ask what the positive change we are trying to create is. For contribution, we consider what the added value will be to our investees. And for measurement, we define how to track the difference we are making. This analysis is specific to each strategy that we manage, given the different impacts that are achieved by our funds. The B.Impact measurement and management framework allows us to track actual performance versus the set impact goals of each strategy.
Does BlueOrchard apply a gender lens when it comes to its blended finance activities? If yes, could you shed some light on how this is accomplished (metrics tracked and indicators)?
At BlueOrchard we operate with a gender lens throughout our investment process, regardless of the strategy. By the end of 2021, 80% of our end clients being financed were female. This lens forms part of both our ESG and impact analyses, including metrics encompassing female participation in the workforce, management, and other areas of the institutions we finance as well as gender data on the portfolio and specific products for end borrowers. In addition, we manage a strategy that has female financial empowerment as an explicit and primary impact target in Asia. We are currently developing a new strategy focused on gender, diversity, and inclusion in Latin America and Caribbean to focus further on gender. We are particularly enthusiastic about this project because it expands beyond gender into diversity and inclusion. The shift from the more conventional gender-focus promotes more diverse and inclusive institutions and markets.
However, there is untapped potential within the intersectionality of gender-smart investing and blended finance. For example, the 2021 OECD survey on blended finance found that 33% of assets under management do not take gender equality into account in their investment strategies, with 60% of vehicles not reporting impact targets. So, our work is cut out for us. Incorporating a gender lens into our blended finance activities will be key as we develop bespoke blended finance strategies and unlock capital at scale.
As an impact investment manager, what are some interesting or unexpected challenges BlueOrchard has had to navigate in the blended finance space?
While bringing public and private investors together for common goals is clearly a unique opportunity to scale-up innovative strategies and push the boundaries of impact investing, it presents certain challenges, such a reconciling the differences between public and private investors. As a blended structure is being formed, the relationship, processes, and timeline associated with working with private organizations and public institutions differ significantly given the nature of the institutions and their funding. For example, the timeline and approval processes of public investors is naturally longer, and this may pose challenges for having early participation from the private sector.
As an impact investment manager with a blended finance strategy, it is important to engage early with both public and private investors to meet their expectations and tailor processes and product features according to their needs while meeting the objective of the theory of change set for each investment strategy. Specific needs vary depending on investor preferences, and by taking the time to understand our investor base preferences we are able to design better solutions for them. As a result of our strategy, our blended finance team has created a very strong blended finance practice of approximately $1 billion of assets under management and growing.
You have designed and managed a range of blended finance products including Japan ASEAN Women Empowerment Fund (JAWEF) and Regional Education Finance Fund for Africa (REFFA) amongst others. What learnings/reflections have emerged through this process and how will this inform BlueOrchard’s blended finance activities in the future?
JAWEF was successful in attracting private institutional capital from the region for impact in the region. JAWEF’s investors were also at their initial engagements in impact investing and both public and private investors partnered very closely in the definition of their impact and financial goals. We would like to incorporate this regional approach into our future initiatives, such as the Latin America and Caribbean gender and inclusion strategy we are developing.
Part of our idea of Blended Finance 2.0, is to benefit from having local private investors who bring knowledge, connections, and comfort of investing in their own region. This regional approach is a strategy we deem relevant in the design and implementation of our products.