Blended finance was a hot topic in 2018. From global conferences to research reports, the potential of blended finance was top of mind for development practitioners dedicated to financing the Sustainable Development Goals.
Despite the enthusiasm surrounding blended finance, there remains a growing gap in financing for sustainable development as we enter 2019. If we want to see this gap close, we’ll need to do more and do better. Among other things, that means renewing efforts into scaling up blended finance this year.
While blended finance is not a panacea, it has the potential to crowd-in additional commercial capital where there are near-investment ready opportunities that could generate revenues and repay investors. Blended finance is a flexible approach that can be applied to a variety of sectors and regions, and development practitioners are only beginning to understand its full potential.
Looking ahead to 2019, we are seeing a number of potential trends in blended finance:
Climate finance: Undoubtedly, there is strong momentum behind blended climate finance that will continue well beyond 2019. The majority of blended climate finance solutions to date have focused on climate mitigation, specifically clean energy and energy efficiency. Climate adaptation has remained largely overlooked and underinvested. The Climate Policy Initiative estimates that total adaptation finance from all government sources was only $22 billion from 2015 to 2016. In 2019, we hope to see a greater emphasis on scaling existing solutions that have demonstrated the potential to attract additional sources of financing for climate change mitigation as well as on piloting more solutions focused on climate adaptation.
Conservation finance: The field of conservation finance is continuing to innovate, emerge, and mature. Conservation finance focuses on raising and managing capital to support land, water, and other natural resource. Building on the momentum behind climate finance, there is great potential for more blended conservation finance in 2019. For instance, the Coalition for Private Investment in Conservation (CPIC) just released new conservation finance blueprints and there is some early discussion on leveraging blended finance to mobilize private sector investment in REDD+ projects.
Blending for developed countries: There is a growing appetite for blended finance in developed countries too, and the resulting cross-fertilization of ideas could accelerate advances in the field. In 2018, the Global Impact Investing Network (GIIN) led a working group to support impact investors in better understanding the potential of blended finance structures for domestic and international objectives.
Gender: Gender mainstreaming continues to gain momentum across all realms of development programming. Given the critical role of concessional capital providers in blended finance transactions, there is a real opportunity to embed gender principles and gender performance-based incentives in blended projects. In 2019, the G7’s development finance institutions (DFIs) will need to start implementing projects aligned to the 2X Challenge: Financing for Women agreed upon in Charlevoix, QC in June 2018.
Least Developed Countries (LDCs): In 2018, UNCDF, Convergence and others published a report on blended finance in the LDCs. Though there is a significant financing gap to achieve the SDGs in the LDCs, less than 7 percent of the $5.5 billion of private capital mobilized through blended finance to date was for the LDCs. These numbers reflect the reality that mobilizing greater investment into these countries faces distinct challenges at both the enabling environment and project-specific levels. In the short-term, blended finance may be used to crowd-in primarily more quasi-commercial capital from DFIs, rather than commercially-priced private investments.
Humanitarian Relief: Given the growing levels of vulnerability worldwide, humanitarian agencies are increasingly looking towards innovative funding models to address needs in 2019. While opportunities may exist to engage the private sector in specific activities (e.g., insurance facilities), financing for humanitarian relief faces unique challenges – from frail infrastructure to difficulty anticipating the next crisis – that may discourage private investors, even if de-risking tools and approaches are deployed.
These themes only scratch the surface of the growing landscape of blended finance, which extends to financial inclusion, safe water and sanitation, smallholder finance, and beyond. Innovation in development finance is taking place at a fast pace, with a growing number of potential instruments, but it has yet to achieve its full potential.
Now that blended finance has entered the mainstream, it is time for scale – and also accountability. This involves developing and implementing monitoring and evaluation plans, standardizing impact metrics and frameworks, and reporting results on impact and financial returns. Only then can we attain a thorough understanding of how and where blended finance can be deployed most effectively.
By Justice Johnston, former Manager at Convergence