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Foundations: blended finance is like music

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

· 5 min read

This is number three 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 and asset owners – 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.

In this third article of our series, we talk about another group that can play a valuable role in the blended finance symphony: philanthropic foundations. Many foundations have been active in the impact investing scene for years. One might say “surely they have figured out how to play their blended finance part?” Well, yes and no.

1. No one can whistle a symphony

"No one can whistle a symphony. It takes a whole orchestra to play it," said H.E. Luccock. Many foundations are involved in impact investing but have developed a habit of going solo. That’s good as far as it goes – there’s a lot of great work being done. And the impact of these projects can be attributed to you – and to you only. But you can do more if you would use the magic of leverage. For all of your wealth and scale, your initiatives could reach even greater scale if pension funds, insurance companies, banks and sovereign wealth funds would join you. You can have much more impact if you invest in ways that allow them to come in. Yes, you’ll have to share some of the credit with others but you’ll get credit for a little part of a much bigger thing and for bringing in the other musicians.

2. The biggest risk is not taking any risk

Next in our series, we’ll talk about development banks, many of whom have pledged to mobilize private capital by taking risks off the table for others. However, in practice sometimes development banks aren’t actually doing that, or doing enough of that – instead, they’re often doing ‘safe’ deals. You, foundations, have leeway in the degree and type of risk you can accept and you can use it to crowd in others – your acceptance of risk can be the sparkplug needed to build a larger engine.

You can provide the financing and technical support to get projects to the stage where development banks and commercial private investors will be able to deploy much larger amounts of capital. But you can also take risk off the table by working with developing country governments to address regulatory and institutional weaknesses that have scared off investors.

In doing so, keep an open mind. Many governments, investors and development banks would love to work with you. But they don’t know you well. Advertise your wares. We get it, you’re wealthy people and organizations, and you probably get bombarded with requests for money. So, a little privacy and discretion is desirable. But this is too much of a good thing. In other articles, we’re telling governments, asset owners and others to proactively reach out to other musicians needed in the blended finance orchestra. You should do the same.

3. Be the speedboat

One of your magic powers is speed. No one else in the blended finance orchestra has this magic power – other actors are often burdened by significant formality in decision-making procedures. You can make investment decisions much faster than those others; this means you can do the upfront legwork for projects, giving the big guns the time to go through all their required decision-making.

Also, many of you have the Rolodex – let’s face it, if you call the prime minister of the UK or the president of the World Bank, they’ll probably take your call. You can pull strings, grease the tracks.

In sum, we love what you’re doing today. But we’d like to see you go from playing solo in the subway halls to joining the orchestra in the concert halls. Use the magic of leverage, take risk off the table for other actors, and be the speedboat of blended finance and we have full confidence that you will get there.

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 two articles we wrote comparing blended finance to music. The basic idea is that to play a symphony you need lots of different musicians, playing the parts only they can play – and 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! The first two articles talked about the role of governments and asset owners.

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: Stijn Kuiper 2022 / with permission.

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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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