Last week the Organization for Economic Cooperation & Development (OECD) held its annual Private Finance for Sustainable Development (PF4SD) week, which brought together over 600 participants, including policy makers, investors, and development finance institutions. As we enter the “Decade of Delivery”, the focus of this year’s edition was on the imperative to align finance with the 2030 Agenda.
Blended finance emerged as an important theme, with several dedicated sessions, including one co-hosted by Convergence and Moody’s on risk mitigation approaches to mobilize investment in developing countries.
Three blended finance takeaways emerged from the week that are worth highlighting:
The role of pension funds in financing sustainable development
A recurring topic at PF4SD was the role of pension funds in achieving the Sustainable Development Goals (SDGs). Pension funds invest pension payments from policy holders to pay for future retirement benefits. This fiduciary responsibility means pension funds face stringent restrictions on riskier asset classes. One way pension funds could support the SDGs, is to invest in renewable/non-renewable infrastructure in developing countries. Such assets have low correlations with existing assets, provide inflation adjusted cash flows, have enhanced yields and have a longer tenor that better matches the liability structure of pension funds. However, pension fund representatives at PF4SD cited that an inadequate understanding of alternatives and their risk profiles limited their activities in developing markets.
Blended finance can play an enabling role by introducing pension funds to new asset classes and opportunities and helping them build robust portfolios structured to minimize their risk exposure.
The Danish Climate Investment Fund is a great example of using blended finance to attract pension funds to SDG aligned investments in developing countries. The Fund applied a preferred return structure where the pension fund investors receive a preferential return of up to 6% per annum, without exposing public money to disproportionate downside losses. It’s managed by the Danish Investment Fund for Developing Countries (IFU), the Danish development finance institution, and has mobilized ~$133 million from leading Danish pension funds including PensionDanmark, Pensionskassernes Administration (PKA), and Paedagogernes Pension (PBU). Building on the fundraising success of this blended finance structure, IFU has applied the same structure to raise the Danish SDG Investment Fund, which has seen participation from a wider group of pension fund investors, who have contributed a total of ~$350 million towards the capitalization of the fund. Open and regular communications between the Danish state (concessional capital provider) and Danish pension funds have helped create a strong foundation for identifying mutually beneficial opportunities and co-financing an investment vehicle.
Bridging the gap between real and perceived risk of investing in emerging markets is another way to engage pension fund investors. USAID’s Mobilizing Institutional Investors to Develop Africa’s Infrastructure (MiDA) program was cited as a good example to this end. This initiative, managed out of USAID’s Office of Private Capital & Microenterprise, works with the pension fund community in the United States to expand global partnerships, facilitate co-investment opportunities, and provide transaction support, with a focus on African countries.
Finally, it is also critical to engage domestic pension funds in financing the SDGs. These organizations have an important role in generating long-term financial resources and facilitating the growth of capital markets. Any discussion on the role of pension funds in financing the SDGs must take this local context into account.
Development impact of blended finance funds & facilities
Every year, the OECD releases updated data from their Survey on Blended Finance Funds & Facilities, which consolidates evidence of the latest blended finance market trends. In addition to market trends, it is also important to explore how the development impact of these funds and facilities is being tracked and evaluated. This was the focus of an OECD working paper released during PF4SD.
Key findings from the working paper include:
- Over half of the 180 respondent blended finance vehicles anchor their investment strategies to one or more of the SDGs. More than 70% of the vehicles target No Poverty (SDG 1) and Decent Work & Economic Growth (SDG 8), while Life below Water (SDG 14) and Peace, Justice and Strong Institutions (SDG 16) are amongst the least targeted SDGs.
- 63% of blended finance vehicles (funds particularly) adopt quantitative targets to monitor progress towards their development objectives, which are most frequently economic, followed by environmental. 37% of respondents did not adopt any quantitative target.
Community of practice on private finance for sustainable development
During her closing remarks at the PF4SD conference, Susanna Moorehead, Chair of OECD’s Development Assistance Committee (DAC), announced the formation of a Community of Practice on Private Finance for Sustainable Development with a specific emphasis on blended finance. The Community will bring together DAC members, private sector representatives and other key stakeholders around issues related to blended finance. Additional information around activities and next steps still to come.