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ESG professionals: blended finance is like music

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

· 8 min read

This is number five in our series of articles applying the analogies of music and orchestras to the world of blended finance. In each article we analyze what role the different stakeholders – governments, asset owners, development banks, foundations – can play in order to generate more blended finance and, in doing so, mobilize capital to address the world’s environmental, social and governance challenges.

And if there’s one group of stakeholders out there that cares about environmental, social and governance challenges, it must be you: ESG Professionals.

Since the introduction of the term “ESG” in the early 2000s, this new professional discipline has ballooned from a handful of people who devoted much or all of their professional time to what we now call “ESG”, to some 349,000 people who have “ESG” in their title or job description, according to LinkedIn. We expect that the number has not peaked yet, and many more are yet to come.

So, what are the three pieces of blended finance advice we have for you?

1. Do soul searching – is your motivation to make a difference?

We don’t want to wade into the debate of what exactly is “ESG”, whether we should start calling it “responsible investment” again, or how it’s different from “impact investment” and “sustainable finance”.

However, we would argue that for most, if not all of you who identify with the “ESG” label, one of the main drivers – if not the main driver – that brought you to this space is a desire to, through finance and investments, make a better world, generate impact, enable change, move the needle, contribute to the SDGs. In sum: making a difference in the world.

You will detect in these verbs a definitive sense of instrumentality, or agency – you want to be the “means” to a certain “end”; you are aiming for “cause and effect” or “additionality”. You know, the idea that if you or the company you work for had not undertaken some action, that positive change would not have happened.

OK, so then think about how much of what you’re currently doing has additionality, or actually causes positive change. And just to give you a bit of help here, academic research suggests that the following activities, that many ESG professionals spend most of their time on, have very little to no additionality – they don’t make much, or any, difference in the world:

  • Exclusions / divestment
  • Decarbonizing portfolios, making them Paris-aligned, measuring emissions
  • Net zero commitments
  • Writing PRI / TCFD reports
  • Classifying your funds as article 8 or 9 and making SFDR disclosures
  • Carbon footprinting
  • ESG integration
  • SDG-aligned investing

To be sure, some of these things may work for values-alignment (i.e., your or your clients’ “warm glow”); a number of them might work for risk management (ESG used to be principally a risk management framework, after all); maybe some of it also works for generating better financial outcomes. But do they change the world? Reduce poverty, fix climate change, eliminate hunger? We think you know the answer.

So this would be our first bit of advice: do some soul searching, ask yourself: “Why am I in this role, what brought me here? Is it to have impact?” And then ask yourself, “am I currently making this positive contribution?”

2. Do the impact math – do “returns and impact go hand-in-hand”?

We suspect that the answers to these questions above, for the vast majority of you – if you’re ruthlessly honest with yourself – are “yes” and “no”.

So then our next recommendation would be to do the math on “impact investing”, and especially to challenge the notion that has become quite popular in impact circles, which is: “impact and return go hand-in-hand”. Because, while this may be true in a small number of cases, projects and companies where impact and return in fact go hand-in-hand should not have much difficulty in raising capital.

But in the vast majority of cases, as we argue in our sidebar Why Blended Finance is Critical, projects that are needed to reach the SDGs are small, are not profitable (yet), are risky and are in developing countries. In other words, projects where impact and return certainly do not go hand-in-hand. At the same time that’s where we need to direct those trillions of dollars.

In other words, if you want to make these investments AND leverage the deep pockets of the world’s largest asset owners – pension funds, insurers, etc. – you will need some kind of tool or aid that makes the investment possible, because it allows the risk-return profile to start making sense for those asset owners. This is what blended finance does.

The only alternative to this is to hope that pension fund boards somehow start making investments that don’t meet their investment criteria, which we believe is exceedingly unlikely. They cannot ignore their fiduciary duty to their beneficiaries.

So, recommendation #2 is: do the impact math, read up on blended finance, sign up for a blended finance course.

3. “Change ESG” – think like miles

Once you’ve completed the thinking on our first two recommendations, you’ll realize that you will have to make blended finance part of your toolkit.

But our advice is to go further than that – we recommend you do everything in your power to “change ESG”, for all of us (349,000 strong and counting) in order to redirect our collective focus from all those ESG activities conducted today that are perceived as “normal” but are largely ineffective, to those investments that actually have impact on the ground, that cause positive change.

And to go back to our music analogy, consider the case of Miles Davis, the jazz trumpeter who is generally credited with “changing music”. Not just once, mind you, but as often as 5 or 6 times. How did Miles do this? At several stages in his career, he burned his bridges, and surrounded himself with young, innovative and creative musicians, who brought new ideas and skills to what Miles was trying to achieve with music. What happened? He didn’t only change “Miles Davis music”, he changed the entire scene, influencing how everyone was playing, and listening to, music.

You can do the same. As Miles said: “when you do anything too long, you either wear it out or lose interest”. So, instead of writing that tired old PRI or sustainability report, instead of agonizing over that article 8 vs. article 9 decision, instead of worrying about your NZAMI disclosure, try to understand what solutions are available to achieve the SDGs, and try to understand how you can help finance them. You will see that in many cases this requires blended finance.

Then, surround yourself with new ‘musicians’ – government officials, development bank representatives, emerging markets specialists, philanthropic foundations and so forth – and start playing a new kind of ESG music.

Yes, it will be difficult, it will be messy, this is what change and innovation are about. Like any jazz musician, you’ll have to improvise. A lot. But we think you’ll enjoy this a lot more than what you’re doing today.

Because you’ll know that you are, finally, making a difference in the world.

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 four 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:

Governments​: Blended Finance is Like Music

Foundations: Blended Finance is Like Music

Asset Owners: Blended Finance is Like Music

Development Banks: Blended Finance is Like Music​​

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.

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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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