This op-ed was originally published on ImpactAlpha.
This summer the G7 called on blended finance to shoulder the burden for scaling private-sector mobilization of capital for development. It was the latest in a parade of announcements identifying blended structures as a go-to approach for bridging the development finance gap.
But scaling blended finance won’t happen without more and better data on financial and development impact. In short, for blended approaches to become mainstream investment tools, we need more disclosure.
Lack of transparency limits blended finance
The time is ripe. As concessional finance declines, donor policy is increasingly self-centered, and the sustainability investment sector is suffering from disillusionment with its own effectiveness. The sector needs solutions that are simultaneously low-cost and that build trust among increasingly inward-looking development actors.
We believe that better data disclosure and accessibility is the most cost-effective reform to scale blended finance. It is not a question of funding; it is a question of political will, cohesive action and challenging institutional inertia.
Indeed, more disclosure can lower the cost of capital, attracting more private investment and reducing the need to ask donors to contribute more public money. Convergence Blended Finance has analyzed the challenges in transparency across the sector and we have found that lack of transparency is particularly harmful to blended finance because it obscures its fundamental rationale: whether concessional capital is needed to make an investment viable.
Making publicly funded data public
Most importantly, enhanced data disclosure can reduce the overestimation of investment risk in emerging markets and developing economies. At Convergence we hear this repeatedly, including from the more than 30 practitioners we interviewed for our recent report, Blended Finance in a Volatile World.
More data — in more digestible formats — is required to instill confidence among private-sector investors. They need financial performance data including default rates, loss rates and internal rates of return to make informed investment decisions. Lack of data on these metrics keeps investors on the sidelines even when there is a strong investment case. Better data leads to more accurate risk and return assessments, and as a result, more private funding, thereby reducing the amount of concessional finance required and stretching limited public dollars over more projects.
Multilateral development banks, or MDBs, are central development finance actors, but they have an opacity bias: Even their rationale for using blended structures is not publicly disclosed. Nor is detailed information on risk, returns and impact.
The demand for more data is universal. Donors need better impact reporting to determine if public monies are achieving their intended development and climate impacts. Investors need transaction-level risk and return information to make informed investment decisions. This means that many donors are falling short in their governance of the public monies they provide to MDBs. Ultimately, much of the investment and impact data held by the system is answerable to shareholders (taxpayers), and donor governments have the power to share it — if they choose to exercise it.
Gathering momentum
We are seeing some momentum. Some actors and analysts are trying to force the issue by advocating that catalytic money should be withheld until there are commitments to share performance data.
Last October, the Global Emerging Markets Risk Consortium, or GEMs, a joint initiative of 29 multilateral development banks and development finance institutions, released decades of data on private, public and sovereign lending. While still highly aggregated, it is progress.
Rating agencies are also paying attention. Standard & Poor’s has revised its approach to GEMs ratings. It reassessed the risk of MDB sovereign operations and determined that MDB portfolios are less risky than previously assumed. As a result, it subsequently estimated that MDBs possess an extra $600 billion to $800 billion in lending capacity to invest without endangering their ratings. GEMs is not a blended finance initiative, but the response to its disclosure could change the field of blended finance.
According to the Overseas Development Institute, the International Finance Corporation is the clear leader in data transparency, publishing estimated subsidy levels (concessionality) for each transaction and disclosing mobilization targets, holding itself accountable for third-party, private-sector mobilization. The IFC model does not deliver all the transparency that is needed, but it provides a template for IFC peers to emulate and proves that increased disclosure is possible for Development Finance Institutions.
Ultimately, for blended finance to take on more of the private sector mobilization burden, it must prove that it is worthy of scaling. That means disclosing all the relevant data, much of which is still sitting on hard drives. Disclosure is a low-cost reform to unlock investment and build trust. For blended finance, this needs to be the era of disclosure.
