To achieve the Sustainable Development Goals (SDGs) by 2030, a significant scale-up of financing is required. According to our State of Blended Finance 2019 report, the approximate $15 billion in annual blended finance flows only scratches the surface of its potential to mobilize significant amounts of finance for the SDGs, especially when considering the resources available from global financial markets and capital markets (approximately $350 trillion and $220 trillion, respectively).
In the countdown to 2030, there has never been a more important time to scale blended finance, with plateauing levels of development assistance and a growing appetite from the private sector for sustainability and impact.
Convergence offers several concrete recommendations to concessional capital providers for mobilizing additional private sector investment at scale, with a focus on the short- to medium-term.
1. Focus on portfolio approaches: Portfolio approaches are more effective for mobilizing additional private sector investment at scale because (i) only a small number of stand-alone projects are large enough and (ii) diversification across projects reduces risk for investors. Indicatively, rating agencies often provide a two-notch upgrade for a portfolio of well diversified investments (e.g., a portfolio of “B-” projects is enhanced to a “B+” through diversification).
2. Prioritize vehicles operating at scale: The median blended finance vehicle has been around $60 million in total size, disbursing an estimated $15 million per annum. Instead, development organizations should allocate a healthy portion of catalytic funds (e.g., 50%) earmarked for blended finance to vehicles that have the capacity to disburse at scale, with the remaining blended finance budget allocated to smaller, more targeted interventions.
3. Support solutions that can attract institutional investors: Institutional investors represent the largest potential pool of additional capital for the SDGs, representing approximately $220 trillion in assets under management (AUM). Blended finance solutions that include a senior debt tranche at investment grade (e.g., “BBB”) or strong non-investment grade (e.g., “BB+”) are best able to appeal to the largest universe of prospective investors.
4. Scale proven solutions: To date, the median blended finance vehicle has raised small and inefficient levels of concessional capital (albeit vehicles should be right sized to their target markets). To scale, catalytic capital providers should shift away from creating multiple small solutions and towards scaling up existing solutions that are aligned with the two-fold objective of achieving development impact and mobilizing private sector capital at scale.
5. Identify “ready to scale” SDGs, sectors, and countries: Blended finance is not a panacea for achieving the SDGs, but rather a good development tool for a subset of development activities. Our recent Research Note looked at the scalability of blended finance for each of the SDGs, which was determined through an analysis of historical blended finance trends as well as SDG financing priorities across key stakeholders.
So, which SDGs are ready to scale?
In the Note, we propose four levels of alignment between blended finance and the SDGs in terms of the potential to scale in the short-term:
- SDGs for which blended finance is well-aligned and with proven solutions that are ready to scale,
- SDGs for which blended finance is well-aligned, but need more proven solutions that are ready to scale
- SDGs for which there is potential for additional innovation and/or evidence building around the use of blended finance, and
- SDGs for which blended finance is not well aligned.
Based on our analysis, there are four SDGs that are “ready to scale”: Goals 7 (Affordable & Clean Energy), 8 (Decent Work & Economic Growth), 9 (Industry, Innovation & Infrastructure), and 13 (Climate Action). Importantly, there are an additional four SDGs with high potential to attract blended finance at scale: Goals 1 (No Poverty), 3 (Good Health & Well-Being), 5 (Gender Equality), and 11 (Sustainable Cities).
This assessment of short-term scalability of SDGs is based on two main considerations: (i) the track record of blended finance to date and (ii) the appetite of capital providers. In the first case, we found that blended finance is best poised to scale for Goals 7 (Affordable & Clean Energy), 8 (Decent Work & Economic Growth) and 9 (Industry, Innovation & Infrastructure) given historical trends around size, vehicle, and private sector mobilization. In terms of appetite, we identified that key blended finance stakeholders (e.g., donors, impact investors, institutional investors) had the greatest appetite for Goals 5 (Gender Equality) and Goal 13 (Climate Action).
Across these SDGs, and others, it is critical to focus on scaling, and replicating, existing blended finance solutions as well as tailoring these solutions for lower-income contexts.
By Justice Johnston, former Manager at Convergence