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Asset managers: blended finance is like music

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By Harald Walkate, Robert W. van Zwieten, Simon Gupta

· 7 min read

This is number six, and the last, in our series of articles applying the analogies of music and orchestras to the world of blended finance. In the previous articles we have analyzed what role the different stakeholders – governments, asset owners, development banks, foundations and ESG professionals – can play in order to generate more blended finance and scale it, such that it makes a real dent in mobilizing capital. Capital needed to address the world’s environmental, social and governance challenges.

We could have gone on to describe the role of sovereign wealth funds, investment banks, private banks, investment consultants, high net-worth individuals and of course entrepreneurs and organizations looking for financing (and perhaps we may still, next year…!). But in wrapping up the series, for now, there’s one important group of actors that we feel deserves coverage: asset managers.

That’s because you, asset managers, are in many ways like the conductor of the orchestra: perhaps you didn’t produce the concert, you’re likely not playing one of the instruments, and maybe you didn’t even decide what music was going to be played today.

But there is one crucial thing that you do decide: how the music will be played. You set the tempo, you decide exactly when the violins come in, you cue the trumpets when they need to play a more powerful role; in other words, it’s your role to turn music notes printed on the page into a fully-fledged performance that, through dynamics, phrasing and articulation, brings the written music to life and is appreciated and enjoyed by the audience.

So what are the three things asset managers could do to play this conducting role more effectively?

1. Educate staff and clients

One of the main challenges in blended finance is bringing institutional asset owners to the table. They, after all, have the deep pockets that can bring the scale needed, while they also, as fiduciaries, need to carefully watch their investment criteria to make sure they invest in keeping with their clients’ and beneficiaries’ interests and wishes.

Of all actors in the blended finance eco-system, asset managers have the closest relationships with asset owners, with investment consultants a close second. Asset managers already invest the bulk of asset owners’ assets and so they regularly meet with them, periodically report on the performance of the assets under management, and advise on how to allocate or re-allocate assets going forward.

Asset managers should educate their staff on blended finance, and SDG-related investment more generally, so that they in turn can advise asset owners: what is blended finance? What are the types of blended finance vehicles that already exist and that might match investment criteria? Which new vehicles can we co-create and tailor to your precise requirements? Ultimately, it is about being an SDG-finance guide for the asset owners interested in taking responsibility for people and planet.

We had a chat with a head of responsible investment at a large asset management firm recently. He told us, “I think of blended finance in the context of fiduciary duty, it means doing the best for clients. Blended finance is something that is coming to the agenda more and more frequently, so we have an obligation to advise our clients on what this type of investment can mean for them.”

In doing so, it is very important to help asset owners understand the difference between an impact-aligned strategy (investing in impact that is already happening or that would happen regardless of the investment) and impact-generation (where the investments cause or enable the real-world change).

In addition, education of asset owners requires that asset managers should not overstate the contribution they are making to impact goals today through traditional investment methods, including sustainable finance approaches such as ESG integration, active ownership, or public markets impact funds. Doing so risks creating a placebo effect: the collective illusion that asset owners and asset managers are doing something about societal problems when in reality… we aren’t.

2. Embrace emerging markets

Many of the societal challenges that we are collectively aiming to address have a common denominator: they are mostly playing out in emerging markets and require solutions, at scale, to be deployed on the ground. This is certainly also true for investments needed for climate mitigation and adaptation. The text of the UN Resolution on the Sustainable Development Goals mentions the words “developing countries” no less than 69 times.

At the same time, many asset managers do not proactively follow, or allocate to, emerging markets. This is remarkable because nearly half of global GDP is generated in emerging markets and about 83% of the world population lives in these markets. Not investing there means investors miss out on the highest growth countries and companies, and on a considerable chunk of largely un-correlated returns. Yes, there are many reasons why investing in emerging markets is harder and riskier, but aren’t you, asset managers, compensated to figure out where the best risk-returns are to be had?

This attitude toward emerging markets is also somewhat paradoxical considering how many asset owners and asset managers have made commitments to ‘impact investing’ and ‘SDG investing’. But what’s even more paradoxical is that institutional investors, today, may even be retreating from emerging markets due to ESG considerations: there is some anecdotal evidence suggesting the climate-related decarbonization targets companies set encourage them to avoid those markets.

Emerging markets are like an elephant in the impact investing-room. And asset managers can play an important role in acknowledging its presence.

3. Enhance capabilities

If in fact asset owners come to the conclusion that they need blended finance to live up to their impact and SDG commitments, as seems to be happening already, they will come to asset managers seeking solutions. While asset managers are not paid to innovate by their own initiative, responsiveness to client needs is another matter. On this our friend, the head of responsible investment, said, “if clients want this, as seems to be the case, it’s simply our responsibility to develop the necessary capabilities.”

Asset managers developing blended finance capabilities means, inevitably, developing relationships – with government agencies, with development banks, with foundations. Because as Peter Drucker, the famous management guru, once said, “conductors do not know how the oboe does its work, but they know what the oboe should contribute.”

In sum, asset managers have a key role to play in blended finance, as conductors of the orchestra.

But then again, as we’ve argued in the other articles in our series, all actors have key roles to play. That’s the beauty, but also the challenge, of blended finance: like with a symphony, every instrumentalist has a unique contribution to make, and each is needed to deliver the end result.

And should you still be doubtful as to whether we can rally around this cause, or think that blended finance will always remain what’s-most-needed but out-of-reach at the same time, keep in mind Bono’s powerful words: “Music can change the world because it can change people.”

Why Blended Finance is Critical

Most projects and activities that are needed to achieve the SDGs are not profitable, not profitable enough, or not yet profitable. Also, most are small-scale. And most are in emerging markets. At the same time, we need trillions annually (estimates vary) to flow to these activities, much, much more than governments, NGOs and charities have. So, we need institutional investors like pension funds and insurance companies because that’s where the money is. However, they do not invest in small-scale, emerging markets projects that are not profitable. Also, it’s unlikely we can persuade pension fund boards to make impact-first investments at scale – their primary aim is to invest on behalf of pensioners which comes with strict investment criteria. Also, none of the existing ESG activities (labels, ESG funds, green bonds, ESG integration, SFDR, PRI, TCFD, Taxonomy, Net Zero) are achieving any of this. So, if we want to scale this up fast in order to meet the 2030 deadline, we need to start tailoring the needed projects so that they do meet institutional investors’ requirements, and this is what blended finance does: government (or DFI or philanthropic) interventions such as guarantees, first-loss positions, grants, technical assistance, subordinated debt or junior equity, can change the risk/return profile of impactful projects enabling institutional investors to allocate capital to them.

Perhaps you haven’t seen the first five articles we wrote comparing blended finance to music. The basic idea of the analogy is that to play a symphony you need lots of different musicians, playing the parts only they can play – it’s no different in blended finance. In each article in this series, we’re talking about who those different ‘musicians’ are that are needed on the blended finance stage – and how to get them on stage! You can find them here:

illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.

Cover photo: Marin Alsop with OSESP cropped from the original photo by Governo do Estado de São Paulo, Gilberto Marques (CC BY 2.0)

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About the authors

Harald Walkate is a founding partner of Route17, an independent blended finance advisory firm. He is also a Senior Fellow at the University of Zurich Center for Sustainable Finance and Private Wealth (CSP) and a member of the ESG Advisory Committee of the Financial Conduct Authority (UK). Previously he was the Head of ESG and member of the Executive Committee of Natixis Investment Managers, and the Global Head of Responsible Investment at Aegon Asset Management.

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Robert W. van Zwieten is a founding partner of Route17, an independent blended finance advisory firm. He is a Research Fellow of the Transition Investment Lab at NYU Stern School of Business Abu Dhabi, and a former Adjunct Professor in Finance with the Asian Institute of Management. He previously worked in senior executive positions at EMPEA, Asian Development Bank, Singapore Exchange, General Electric and ABN AMRO Bank.

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Simon Gupta is the Founder & Managing Director of Broadpeak, a Swiss-based Advisory Company specializing in Impact Finance. He has 20 years of experience in development finance in Latin America, Africa and Asia. He is also a Partner at investment firm Investment Associate AG, where he leads social and environmental impact investing. Simon has been involved in the set-up of multiple blended finance structures on the LP side as well as the GP side. Before founding Broadpeak, he worked for financial institutions DEG, KfW, and ResponsAbility Investments AG.

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