Blending Public And Private Funding For Sustainable Development

As the world moves gradually toward a post-pandemic era, sustainable finance has continued to bloom, despite challenges in measuring and proving non-financial impact. The sector continues to grow, with a recent analysis projecting that ESG assets may hit $53 trillion by 2025, comprising a third of global assets under management. But the public sector’s vital role in global development – and its involvement in regulating sustainable finance – have both become more substantial. First, public authorities have started to regulate the market with legislation and with the active engagement of financial market regulatory authorities. Second, the recovery packages being designed to support the private sector to navigate the impact of the Covid-19 pandemic offer new ammunition for the utilization of public capital for sustainable development.

What Is Blended Finance?

Blended finance, as defined by the OECD, is “the strategic use of development finance for the mobilization of additional finance towards sustainable development in developing countries.” It aims to attract – where possible and meaningful – commercial capital towards projects that contribute to sustainable development while providing financial returns to investors at or below market rates. It features novel and traditional models for financing development that “blend” an initial investment, often from a philanthropic or government entity, with subsequent commercial tranches.

Opportunity For Collaboration

The pre-pandemic trend of sustainable private finance and the post-pandemic trend of increasing government involvement in the economy have created a unique opportunity for collaboration between the public and private sectors. The growth of sustainable financial products has created a new pool of capital that is driven by impact considerations beyond profit, while the resurgence of public interventionism has created new public capital that can be directed towards the creation of inclusive and sustainable economies. Since these objectives are aligned, why not blend the two capital sources? And why not allow this capital to flow to developing countries, where it is needed most?

What Is The U.N. Joint SDG Fund?

The U.N. Joint SDG Fund aims to accelerate progress towards the Sustainable Development Goals (SDGs) by getting the right policies, financial instruments, and incentives in place and taking them to scale as quickly as possible. In 2020, the Fund focused on capitalizing upon these COVID-fueled funding trends by blending private capital with public resources to invest in developing countries. To date, we have funded 101 U.N. programs focused on integrated social protection or SDG financing, stimulating over 1,000 collaborations across the public and private actors. Under the Fund’s catalytic investment workstream, 28 country consortia, selected from 155 submissions from over 100 developing countries, worked closely to develop innovative blended finance solutions focused on their own countries’ needs, funded with U.N. support. The consortia were composed of U.N. agencies, development banks, and private anchor investors and fund managers. They designed 59 financial instruments informed by feasibility studies and other assessments and identified new partners and investors to provide further funding.

U.N. Agencies Can Make A Difference

The business of nurturing an impact-driven pipeline is an area where the U.N. system can support progress. The matching of investors with investees remains challenging due to a combination of reasons. For instance, investors face unique risks when working in markets, geographies, and sectors where they cannot rely on a sufficient track record of transactions and comparable metrics. Some impact ventures are still not ready for commercial investing due to market distortions (e.g., a lack of competitive markets, oligarchic behaviors that prevent market entry, market-distorting public subsidies, etc.). Others are excluded from investment because of non-functioning carbon markets, unproven track records, a lack of supportive legislation, or the perception of higher risks. This is where U.N. agencies can make a difference when they work alongside entrepreneurs, governments, and investors.

Examples

For instance, our funded intervention in Malawi aims to reduce poverty, hunger, and inequality by creating jobs and supporting small businesses in the country’s undercapitalized agricultural sector. The impact fund, managed by Bamboo Capital Partners, will be Malawi’s first blended finance fund. It will invest patient capital to increase agricultural productivity and maximize impact. To locate investable opportunities, it will leverage market development efforts that go back several years under the Malawi Innovation Challenge Fund and other company accelerators. This pool of impact-driven companies constitutes the initial investment pipeline of the impact fund. A technical assistance facility will help to further source the pipeline, assist businesses and reduce associated risks. This program will have an expected financial leverage of U.S. $28 million, with one first-loss tranche open to development finance institutions and donors and one mezzanine tranche open to impact investors and local financial institutions. Local pension funds may also invest.

Similarly, in Fiji, we aim to conserve and protect priceless income-generating natural wonders – such as coral reefs, marine life, and unspoiled coastal ecosystems – while also empowering local communities. A pipeline of blended finance transactions, facilitated by the U.N. and involving local partners, will fund sustainable waste, agriculture, fishery, and ecotourism efforts in the country. And in Indonesia, we’re crafting a new generation of financial products to combat climate change and transition the country to low-impact energy, environmental conservation, and impact-driven businesses. The Government of Indonesia’s first Asian sovereign SDG bond (EUR 500 million), issued in September, is the first offering supported. These products will include more SDG-aligned thematic bonds and sukuk, a commercial impact fund, and SDG-linked loans from commercial banks.

The Joint SDG Fund Looking For Collaboration

We’re leveraging blended finance to incubate new businesses/programs in an additional 12 countries spanning across Asia, Africa, and Latin America. These programs tell a similar story, in which we work together with developing countries to maximize their market-readiness for impact. To be successful, we need visionary entrepreneurs and patient investors with a willingness to collaborate in markets, sectors, and themes that require new, flexible government regulations. Blended finance strategies have the potential to unlock catalytic capital that could change the world. The Joint SDG Fund embraces blended finance and continues to search for those entrepreneurs, investors, and governments to work together in making the world a better place through sustainable development and the SDGs.

The Bottom Line

This article is a guest post written for Mydollarbills from U.N. Joint SDG Fund. What they do is very well described in the text. If you are interested in reading more, check out their website here.