background image

Blended finance. Naturally.

author imageauthor imageauthor image

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

· 8 min read

In 2022, Robert van Zwieten, Harald Walkate, and Simon Gupta authored six articles under the header “Blended Finance is Like Music” – comparing blended finance investing to symphony orchestras: many different ‘musicians’ are needed, with different skills and capabilities, and there needs to be a producer and a conductor to make it all happen.

In a new series of articles, Robert and Harald, who have since then also founded the blended finance advisory firm Route17 to put their ideas into practice, continue to explore what is needed to further develop the global infrastructure to enable more blended financing. They have observed that in blended finance discussions, it is often said that “more parties should come to the table”.

However, what is often not clear is exactly where this “table” is. And what happens at that table once the necessary people come to it? Also, which people are required to sit at that table – and for how long – and what is discussed at that table? And what “cutlery”, or instruments, are on that table that can be used by those sitting there?

In a next series of articles, they explore these themes, each time working with a guest co-author who brings relevant expertise. For this first article in the series, our guest is Adhiti Gupta who is a sustainable finance expert with a focus on natural capital, climate action, and gender equality. Her clients include UNEP, World Bank, and Climate Policy Initiative. She has previously led a market accelerator at Convergence Blended Finance and advised impact investors at RPCK.

Our species continues to live it up like there is no tomorrow and as if planetary boundaries do not exist. Nonetheless, there have been some promising developments of late, suggesting that we may be turning the corner. Or, at least, approaching the intersection.

In the last few years, there has finally been prominent mainstream attention for sustainable land use, fishery, and forestry; for conservation of marine protected areas (MPAs); and for protection of mangrove forests, to name a few examples. Debt-for-nature swaps, around since the 1980s, are coming into their own, with much larger transactions happening (Belize, Barbados) or on the drawing board (Sri Lanka and Gabon).

The 15th Conference to the Parties (COP 15) to the UN Convention on Biological Diversity (CBD) in Montreal in December 2022 was another such bright spot. It saw record levels of participation from the private sector and business. Participants agreed to the Kunming-Montreal Global Biodiversity Framework to safeguard nature and reverse biodiversity loss, putting nature on a path to recovery by 2050.

Yet another hopeful step forward was the Intergovernmental Conference on Marine Biodiversity of Areas Beyond National Jurisdiction, resulting in the UN High Seas Treaty last month. This historic agreement seeks to protect two-thirds of the ocean that lies outside national boundaries. It enforces the “30-by-30” pledge made by countries at COP15 – to protect a third of sea and land by 2030 – and offers a legal mechanism to set up marine protected areas on the high seas.

These achievements in quick succession were arguably the “Paris moment” for biodiversity finance. And like the Paris climate agreement, the Global Biodiversity Framework points to the need for “leveraging private finance”. Yet, however encouraging this might be, we note that the private sector alone cannot solve the biodiversity crisis – effective partnerships with the public sector are critical. 

This is why we are pleased to see that the Global Biodiversity Framework explicitly references “promoting blended finance”: it highlights the importance of harnessing the combined financial strengths of the private sector, philanthropic, and public sector actors, which can be readily achieved through blended finance.

Also, in other news, a recent academic paper that compares privately financed and blended finance biodiversity deals points out that while the returns on the blended deals are lower, the risk is also lower, the project size is larger, and – clearly, most importantly – the biodiversity impact is significantly higher.

In other words, it is now clearly documented that, as we move towards the implementation of these collective global biodiversity aspirations, and as we consider which tools should be on our table, the answer that presents itself is “blended finance, naturally”.

But now, for the heavy lifting: what are the four things you actually need to think about when considering blended finance transactions for nature?

1. Identify credible revenue streams

A necessary component of any investment, whether or not structured through blended finance, is a revenue stream. If you’re trying to fund a project that doesn’t generate revenues (yet), you should be thinking more about public finance, philanthropy, or traditional aid than about private sector investments. And if you can achieve multiple revenue streams, that’s even better – they can make a business model less reliant on one revenue stream and therefore more financially viable. For example, financing sustainable land use becomes possible when sustainably managed forests generate timber revenues; sustainably harvested forest products are sold to off-takers; and there is also eco-tourism. But sometimes it may be the avoidance of a loss, rather than a revenue stream, that makes the blending work – an insurance company may wish to invest in the conservation of flood-preventing mangrove forests now, rather than possibly having to pay out large amounts on account of flood damage claims later on. 

2. Engage with government, indigenous peoples, and local communities (especially women) 

Governments typically have a huge role in natural resource protection and public budgets have also played an outsized role in financing nature. Most blended finance transactions will therefore need to involve the government, perhaps even multiple agencies or levels of government, not only to obtain subsidies or concessional capital, but also to gain access to protected areas, or to obtain permits. Having local teams that know how to engage effectively with the appropriate authorities is critical. Similarly, it is important to involve indigenous peoples and local communities, who are often – as stewards of their lands – frontrunners of local conservation efforts, in particular women who in many communities are the “natural resource managers”. Recognizing the gender dimension of nature and biodiversity and integrating it into your financing approach becomes imperative.

3. Confront the added complexity 

Investing in nature and biodiversity, especially mitigation approaches is arguably even more complex than climate-related blended finance. Thus, creativity is required in structuring the deal and collaborating with diverse stakeholders. Why are they complex? There’s usually no single impact target (such as “net zero” or “carbon neutral”) to rally behind and transactions need to be tailored to the specific natural landscapes, to government requirements, and to the interests of local communities. Often, bespoke and previously untested business models need to be designed to create financially viable transactions. This also explains why there appears to be more innovation in structuring transactions for nature than elsewhere. For example, designing parametric insurance products led to the creation of coral reef insurance products that are now being scaled across geographies.

4. Optimize interconnectedness of climate and nature finance

Although science tells us that climate and nature are inextricably linked, they are often addressed separately in structuring projects, without considering synergies and efficiencies, which can lead to increased risks and missed opportunities. When sustainable land-use transactions don’t realize opportunities to build climate resilience, the deal may fall onto itself as climate change wreaks havoc.

We will soon hear a lot more about blended finance transactions for nature, as the world moves to implement the treaties and frameworks referenced above. As long as sufficient revenues can be generated that derive value from nature, blended finance can help create a return on risk capital. To be successful, parties need to be ready to engage governments and local communities (especially women); confront the added complexity with creativity and innovation; and, finally, heed the interconnectedness of climate and nature in our transaction structuring.

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.

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.

Did you enjoy this illuminem voice? Support us by sharing this article!
author photo

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.

author photo

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.

author photo

Adhiti Gupta is an independent consultant in impact investing & blended finance with a focus on climate, nature, & gender equality. Her clients include the UN, World Bank and Climate Policy Initiative. Adhiti has previously led a market accelerator at Convergence and advised impact investors at RPCK. Adhiti started her career advising on international trade, cross-border M&A, and PE/VC transactions in India. She holds a master’s degree from Columbia Law School and a law degree from the National Law School of India University.

Other illuminem Voices

Related Posts

You cannot miss it!

Weekly. Free. Your Top 10 Sustainability & Energy Posts.

You can unsubscribe at any time (read our privacy policy)