Asset owners: blended finance is like music
Asset owners can do a lot to advance blended finance. Here are the three most important things – they should deliver on this proactively.
In our first article in this series about blended finance, we used the analogy of a symphony: a drumbeat does not suffice, we also need horns, woodwinds, violins – every instrument making a unique contribution. Blended finance also requires an ‘orchestra’ with different people making contributions only they can make and there we also need more ‘musicians’ to get up on the bandstand and join in the playing.
In that first article, we discussed governments’ role in blended finance. Another key group of ‘musicians’ that need to get up is the asset owners – pension funds, insurers and sovereign wealth funds. Mobilizing finance to address societal challenges requires involvement of asset owners, because it’s the only way to reach the necessary scale.
While many asset owners want to invest in a way that contributes to solving societal problems, they also have specific investment requirements that need to be met. This is where blended finance comes in – it can derisk investments, or enhance their return, or both at the same time. It ensures asset owners invest in sustainable outcomes and meet investment criteria at the same time. It makes the uninvestable investable.
In our first article, we said governments should take the lead in blended finance. Does that mean asset owners can sit back and relax? No. Here are three things asset owners can do to play a proactive role in enlarging the blended finance universe.
1. Open up the circle of stakeholders / revisit your investment beliefs & mandates
Don’t listen only to NGOs who talk about “urgency” but don’t have “agency” – they may be right to create awareness about societal problems but usually they don’t have the means to solve them, and certainly divestment isn’t going to do the trick. And don’t listen only to ESG people who might tell you ESG integration and Net Zero commitments have an impact on the world; we are learning that most of these initiatives in fact have extremely little real world impact.
Instead, talk to the regulators; it is often because of scrupulous adherence to their requirement to be “in control” that blended finance deals – that can have lots of impact – don’t get done. They’re considered too risky, too alien, too difficult to explain to the regulator. Work on this.
Also, revisit your investment beliefs and mandates: often blended finance investments are automatically considered to be in the EM or Alternatives categories, and your mandate may not allow allocation to those buckets. However, much of blended finance is backed by European governments’ guarantees, first losses, or co-investments and can perhaps be considered to be AAA sovereign debt investments. Often simple rules and labels are inadvertently preventing blended finance from happening.
Finally, be more proactive in speaking with government representatives. Governments often talk about wanting to mobilize private sector capital and are willing to put real money behind this, but don’t know how, or don’t know who to talk to. You can help them. Don’t wait for them to call - take the initiative.
2. Ask your people to develop expertise, build relationships, and experiment
You often say you want to contribute to the SDGs, and that you want to work with governments and DFIs, but these things don’t happen by magic. Communicate to your staff that building relationships is encouraged or – better yet – set up fellowship or secondment programs that allow more networking and collaboration with other organizations, such as development banks.
If you get invited to the blended finance party – events, conferences or courses where blended finance investing is a topic – make sure you’re represented, if for no other reason than for learning. Send your people to blended finance courses. Getting your people out there and having them collaborate with governments, development banks and others will also contribute to more professionalism and higher standards in blended finance.
3. Instruct asset managers
Many of your investments are outsourced to asset managers. Don’t tell them you want “article 9” or “impact” – many things they will offer in fact don’t generate impact, even with these labels on them. Tell them you want blended finance. If you don’t, they won’t offer it to you. It’s much easier for them to call an existing product Article 9, even if it has no ‘additionality’ whatsoever, than to create a new product that does.
Work through partnerships like the Net Zero Asset Owner Alliance allowing standardization and scaling. Or, set up partnerships with the asset managers that are most advanced and allow blended finance structures to be set up and tailored specifically for you.
“The true beauty of music is that it connects people. It carries a message and we, the musicians, are the messengers,” said Roy Ayers, the jazz vibraphonist.
Well, you – asset owners – can become messengers too, connecting people and carrying the message of blended finance.
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: Beethoven for The Rohingya at Carnegie Hall on January 28, 2019. Credit: Photo; Chris Lee 2019/ with permission.
About the authors
Harald Walkate is the founding partner of Route17, an independent blended finance advisory. He is also founder of Finding Ways Ahead, an ESG and sustainable finance advisory, and a Senior Fellow at the University of Zurich Center for Sustainable Finance and Private Wealth (CSP). 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.
Robert W. van Zwieten is the founding partner of Route17, an independent blended finance advisory firm. Amongst other engagements, he is also affiliated as an Adjunct Professor in Finance with the Asian Institute of Management. He formerly worked in senior positions at EMPEA, Asian Development Bank, Singapore Exchange, General Electric and ABN AMRO Bank.
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.