BNP Paribas is one of the largest banks in the world, operational in over 70 countries, with total assets over €2 trillion. The bank is poised to become one of the key commercial players in blended finance.
BNP Paribas’ first blended finance transaction was back in 2017. They were part of a multi-stakeholder group (UN Environment, World Agroforestry Centre (ICRAF), ADM Capital) that conceptualized the Tropical Landscapes Financing Facility (TLFF), which provides financing for renewable energy and smallholder livelihood projects in Indonesia. In February 2018, TLFF completed its inaugural transaction, a landmark $95 million sustainability bond to finance sustainable natural rubber production across heavily degraded concession areas in the Jambi and East Kalimantan provinces. BNP Paribas was the lead arranger in the deal, leading the financing stage of the project.
Fast forward to today. BNP Paribas is actively marketing blended finance deals to their clients and have 8-10 blended finance projects in the pipeline that target various countries, including Indonesia, Vietnam, India, the Ivory Coast, and countries in Eastern Europe.
We spoke to Pierre Rousseau, Strategic Advisor Sustainable Business at BNP Paribas, about the challenges BNP Paribas encountered with TLFF and what they learned, the value BNP Paribas sees in blended finance, and what he wants to see from public and philanthropic investors.
What challenges did BNP Paribas encounter with the TLFF?
First, these deals are complex. We exchanged over 11,000 emails to make the TLFF a reality. We’re talking about a $100 million project, so this type of transaction at this scale, with this many actors, took a lot of time and effort. We did a proof of concept, funded by Convergence’s Design Funding, but many things we expected to happen in a certain way didn’t, because working in an emerging market there were just more unexpected issues, whether they were political, or physical like storms, or something else. In the end we struggled a bit.
Can you elaborate and also tell us about any important learnings?
One of the first things we learned was that it’s very important when we create a commercial facility like this that we create a grant facility next to it. A grant facility that allows us to get funding from philanthropy or government to finance the technical support, the control of the environmental and social conditions that we have put in place, and to measure the impact. Capital from government and philanthropy is also important when it comes to funding the concept note and pilot, which are critical elements for success that cannot come from the commercial side.
The second thing we learned was the challenge of integrating small holders. If you are in agriculture, 20-30% of the production comes from small holders. So, to integrate the small holders into a blended deal, the financing you provide to your project must also be taken into account either by a microfinance institution or a local bank. That’s very challenging, you need people on the ground to make that happen.
Finally, when we wanted to measure the impact we relied on NGOs, but that wasn’t working because they were doing it manually and were not consistent. We realized that we needed big data. If we want to be serious about launching projects of this size, we need to have all the information in order to measure the impact. On top of that we need data that is correct, clean, not manipulated, which will create trust and transparency, which is critical for blended finance. When you mix private, public, philanthropic money you need to be fully transparent and this is very difficult to achieve.
So, despite these challenges BNP Paribas has decided to pursue more blended finance projects. Why?
We have clients that are investors and on the other side corporates, who want solutions that help them integrate environmental and social aspects into their business. So, we try to meet our client’s needs and blended finance is one of the interesting ways we’ve found to solve their problems. This is where we can satisfy the offtaker, and the investor, and the small holders because we put them out of poverty, so we can check all the boxes. It’s the best solution we have found so far, to achieve what we want to achieve, in terms of climate change, biodiversity, inequality etc. Maybe tomorrow there will be a better solution and I’m more than happy to switch to that, but today this is one of the best solutions to finance the transformation of some of our clients.
Today we have identified 8-10 blended finance projects that we are working on, primarily in energy and agribusiness. We are systematically approaching our clients with the blended finance methodology that we have put in place. And there’s a real appetite for it. We only started a few months ago and we have identified 60 leads with corporates, who are interested in acting as offtakers in a deal. That’s critical because whenever we talk about energy or agribusiness, in the end you always need an offtaker, someone to buy the goods. So, this is what we are pushing now.
Why do you think there is so much interest?
We’re solving a problem for them by facilitating the development of these projects.
Let me clarify who the investors are in deals like TLFF’s sustainability bond. Because we derisk and upgrade the rating through an international agency or public money, our investors in these blended deals are pension funds, insurance companies, sovereign funds, and private banks and specialized banks looking for impact. What attracts them is that there is an offtake agreement, that there’s a big name doing the offtake (Michelin), and that part of the money is guaranteed by public money and the first loss is taken by international agencies. It’s also the fact that the sponsor of the offtaker is also investing in the project. So, we’re aligning their incentives, which makes it very difficult for a client to say no.
Of course, yesterday I had a client tell me this is too complicated, I want something simpler. But this was a private company, which means they have additional means to finance themselves through their own balance sheets. Between listed companies and private companies, it’s easier for the private company to implement the solutions they would like to have into their own balance sheet. But for the rest, if you want to integrate the cost of transforming your business model to one that is more socially and environmentally responsible, you will impact your pricing. So that’s why blended finance is interesting for them, because they can do this transformation without affecting their balance sheet.
Speaking to the development agencies in the world, large foundations, and non-profits that want these projects to happen, what is your advice to them if they want organizations like yours and your clients on the commercial side to participate in these transactions?
What we need is to derisk. We need guarantees. Co-investing is good, it will improve the cost of funding, but it doesn’t derisk the transaction. We‘re currently trying to work with the DFIs, but there are challenges, because they are still too public project-oriented and not private project-oriented enough, so the methodology is not aligned, but we know each other, so I hope we’ll manage to do something together soon.
What would you tell other commercial players who may be interested in entering the blended finance space?
They can join us, under one condition. They need to accept the way we operate, because it took us a long time and much effort to get to where we are. We are one of the largest banks in the world, so we do believe that the way we operate is aligned with regulatory norms and what the society expects from us, so we don’t see any issues. In the future projects, hopefully you’ll see other banks joining us.