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.

Harald Walkate

Robert W. van Zwieten

Simon Gupta

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 – 

 – 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?

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.

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.

If in fact asset owners come to the conclusion that they need blended finance to live up to their impact and SDG commitments, 

, 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.”

Most projects and activities that are needed to achieve the SDGs are not profitable, or 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:

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

ESG Professionals: 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.

Asset Managers: Blended Finance is Like Music

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.

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 – 

 – 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

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 

 main driver – that brought you to this space is a desire to, through finance and investments, 

 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 

 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 

 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:

Decarbonizing portfolios, making them Paris-aligned, measuring emissions

Classifying your funds as article 8 or 9 and making SFDR disclosures

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); 

 some of it also works for generating better 

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 

 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.

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 

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.

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:

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.

In this article, the fourth in our series*, we talk about another group that can play a very important role in the blended finance symphony: development banks. There’s a multitude of actors under this header, with different terms applied: multilateral development banks, international financial institutions, development finance institutions. Some of what we say below applies to all, while other points only apply to select members of this group.

In this article, the fourth in our series*, we talk about another group that can play a very important role in the blended finance symphony: development banks. There's a multitude of actors under this header, with different terms applied: multilateral development banks, international financial institutions, development finance institutions. Some of what we say below applies to all, while other points only apply to select members of this group.

To put the role of development banks into further perspective, we want to introduce another analogy besides music – one about the storage vs. the moving business. Because one of many adages in the finance world is that some banks (investment banks) are in the “moving business” – they make money trading assets for clients as an agent, advising clients on transactions, or trading for their own account as a principal – while others (commercial banks) are in the “storage business” – they make money by holding loans and bonds on their balance sheets.

 assistant secretary at the U.S. Treasury, said recently: “Private investors want to move away from fossil fuel investments, but they have to move into something. And that’s where the excitement is — how do we find the real economic opportunities for investments in clean energy.” To enable this 

 for private investors, we argue here that development banks should transition principally from the storage business into the moving business. Their balance sheet and capital base are finite, so their storage capacity will always be limited. “Demonstration effects” can only go so far, and with COP27 and the G20 the expectations placed on development banks are rising fast: they can point the way to that “something” private investors can move into, and they can even supply the vehicles and tools – not moving trucks and lifts but concessional financing and funds – to do the actual relocation.

For development banks to play this moving role effectively, we have four main ideas.

1. Use your rating and balance sheet to do more

Boosting MDBs’ investing capacity - An Independent Review of Multilateral Development Banks’

”, just published last July and presented by the taskforce’s chairwoman 

 to the G20, offers a number of excellent recommendations. There has already been some debate on the key recommendation: redefining risk tolerance. While we agree with this recommendation and think it is deserving of further consideration, we also want to highlight some of the less eye-catching recommendations, that can do at least as much to generate more blended finance.

Give more recognition to “callable capital” – effectively the capital that signifies the commitment of the development banks’ shareholders (governments) to stand behind them. It should be fully taken into account in assessing development bank’s capital adequacy, as it already is in some credit rating agency methodologies. This should create opportunities for more lending, including the concessional kind.

Pick up the rate of financial innovations – so that the development banks can do more with their current capital base and, again, free up room for additional lending. In doing so, development banks should take some pages out of the playbook of Wall Street and haute finance.

Increase access to data & analysis – private sector investors have capital and are increasingly keen to move it into sustainable purposes in emerging markets. However, they desperately need access to relevant data to assess the risk & reward. You, development banks, have much of it – you should find ways to get it out into the open.

2. Implement a credible private capital mobilization strategy

The famous pop singer Sting, after his success with the Police, wanted to make a solo record with “a jazz feel”. So what does he do? He goes out and hires 

 musicians – most notably Branford Marsalis, world-famous in jazz circles, virtually unknown outside it. This approach was practically unheard of – until Sting came along, the worlds of pop and jazz were strictly separated.

Development banks should do the same. If you want to raise private capital for transactions, you won’t succeed if you don’t have a strong grasp of, and connections with, the world of private sector institutional capital. This requires an intentional capital mobilization strategy – developing relationships, convening, organizing events, hiring investment bankers or consultants who can help you design structures that meet private sector requirements. Better yet, up your game in attracting talent: doing deals with the private sector works best with staff who 

 the private sector. And keep in mind, strategy is 10% planning and 90% implementation. Making promises is a nice prelude but will not deliver the whole symphony.

Meanwhile, be sure to not displace private sector capital, which would defeat the whole point.

We know it is a tall order to suggest development banks become more light-footed, but to successfully deal with the private sector and mobilize capital into the deals that you want to see happen, you will have to at least keep pace with the private sector. Right now, many development banks are too slow and bureaucratic, which does not bode well for implementation of your private capital mobilization strategy. Yes, you work with somebody’s tax dollars, which comes with extra oversight and scrutiny. But to meet increased expectations and live up to your missions, you’ll need to strike a better balance between rigorous processes and real-world timelines. You may consider delegated credit authorities, certain projects with higher risk-tolerance, or fast-tracked dealmaking in sectors with urgency such as food security and energy transition. The liquidity operations during COVID showed us you can pull it off.

To extend the analogy introduced above, the most radical idea is to structure your private sector transactions for placement with institutional investors while keeping a portion on your own balance sheet, offload risk exposure from your balance sheet to investors, or securitize certain eligible assets. Investors always complain that there is enough capital but not enough bankable deals in emerging markets – you can change that. A development bank’s balance sheet and capital base are finite resources and should be used selectively. This would be a very different approach to development banking that would require massive upskilling, reskilling and different talent recruitment and management. It also requires very different underwriting and structuring approaches, and deep knowledge of what sells in the marketplace. The rewards include freeing up lots of your capital and a successful private capital mobilization strategy, and, most importantly, more and faster sustainable development outcomes in your markets.

To bring this all back to our music analogy: blended finance is like a symphony – you need many different musicians, all playing their unique part. Development banks should transition from the storage business to the moving business: you can bring the musicians and their instruments to the concert hall; you can hoist the grand piano onto the stage and you can put the sheet music on the stands that allows the orchestra to move to new and unexpected musical horizons.

This requires using your rating and balance sheet to greater effect – the G20 CAF report can be 

 sheet music – it requires implementation of a credible private capital mobilization strategy, and a transformation into more nimble organizations to at least keep pace with the private sector that you want to involve in the deals you orchestrate.

* Perhaps you haven’t seen the first three 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 

We’ve been following the GFANZ turmoil with interest, as you all surely have as well. We won’t bore you with a lengthy analysis of what happened, what went wrong, and why, and how US banks can be persuaded to stay in. We don’t think you would read it.

Instead, on the eve of COP27, we wanted to offer some thoughts on what GFANZ should have said (or not said) a year ago, in place of the press release that was actually issued. Because perhaps the only way forward for GFANZ is to start all over again. And if it is too late for GFANZ, we hope future initiatives take note and don’t fall into the same traps GFANZ did.

Tom Gosling

We’ve been following the GFANZ turmoil with interest, as you all surely have as well. We won’t bore you with a lengthy analysis of what happened, what went wrong, and why, and how US banks can be persuaded to stay in. We don’t think you would read it.

Instead, on the eve of COP27, we wanted to offer some thoughts on what GFANZ should have said (or not said) a year ago, in place of the 

 that was actually issued. Because perhaps the only way forward for GFANZ is to start all over again. And if it is too late for GFANZ, we hope future initiatives take note and don’t fall into the same traps GFANZ did.

We’ve had a bit of fun with this. Humour is a necessary palliative in difficult times. But that should not disguise our serious intent. The finance industry has an important role to play in supporting the transition. If GFANZ collapses that would be a significant loss in the battle against global warming. But at the moment it isn’t doing what it needs to do, and the contradictions and overstated claims of GFANZ are damaging credibility. We need a new way forward.

PRESS RELEASE – Finance Industry Steps Up to Contribute to Climate Action Through New Initiative

Today, through the Glasgow Financial Alliance for Real-World Additional Action on Net Zero (GFARWAANZ), firms stewarding over $130 trillion of private capital are committed to helping transform the global economy for net zero. These commitments, from over 450 firms across 45 countries, will help the finance sector play its role in supporting governments as they seek to achieve net zero over the next three decades.

GFARWAANZ members will sign up to the following commitment statement.

accelerate progress towards a net zero global economy to the extent and speed possible consistent with our fiduciary duty to clients.

First, we want to point out that nothing in this statement should be construed to mean that the finance sector has the primary responsibility to act on climate change – this responsibility lies squarely with the world’s governments who are, after all, the signatories of the Paris Agreement. Therefore, we will not make the mistake of only including a very brief reference to public policy as a get-out-of-jail-free card at the very end of a long list of bullet points at the bottom of this press release.

 this long list of pledges by committing, first and foremost, to 

provide a forum for strategic coordination among the leadership of institutions from across the finance sector to facilitate conversations with government representatives

 in order to advocate for, and contribute to, evidence-based, sensible government policy that will actually deliver the energy transition. What will this look like?

We think most governments know what they need to do – climate and energy experts as well as engineers and economists seem to have formed a lot of consensus on this: carbon taxes, sector-specific policies and incentives, government-led innovation in new technologies that are too early stage for the private sector to take up, public-private partnerships to finance mitigation and resilience in the developing world. Surely government officials have taken note of this as well.

Nonetheless, only a tiny number of states appears to be on track to meet their Paris commitments. So … perhaps governments need help! Also, the finance sector might have relevant expertise, knowledge, resources or ideas that could be helpful to governments. 

So, we will provide access to the expertise, knowledge, resources and ideas so that governments can leverage all this in their policy-making.

We recognize that the private sector can hinder as well as help government with policy development. The problem of companies advocating their green credentials publicly while privately lobbying against the effective regulation we need is well known. Therefore, as GFARWAANZ signatories we commit to 

prioritizing alignment of lobbying activity to stated climate commitments both in our own firms and in the companies that we finance or invest in.

 We will produce guidance and voting policies to make this a reality.

In the finance sector, we generally don’t have any money of our own. Instead, we act as a fiduciary for the money of our clients. The last thing we want to do is to create the false expectation that we have huge amounts of capital ready and available to deploy to fight climate change.

Strange as this may sound to some, we actually believe that fiduciary duty is pretty important. It is not just a matter of law; it is a fundamental underpinning to a trust-based financial system. Therefore, 

we will always prioritise our fiduciary duty to clients

. We cannot use our clients’ money to pursue our own or society’s objectives, however important we may think those objectives are, unless it is in clients’ financial interest or we have their permission to do so.

Therefore, we will not make the mistake of committing to achieve a societal goal, such as limiting global warming to 1.5

C with limited or no overshoot, that is neither within our control nor obviously the consensus objective of the societies in which we operate.

Our fiduciary duty as financial institutions means we have to acknowledge the possibility of a range different climate scenarios coming about. It’s not smart to pick one particular scenario – that is perhaps the most desired but also the least likely – and base our investment decisions on it. We might like to talk about “the inevitable policy response” but, let’s face it, unfortunately there’s nothing inevitable about it. This means that 

we will make qualitative scenario analysis our preferred climate-risk management tool and we will discuss publicly what we learn from these exercises

The scientific consensus implies that getting to net zero mid-century so as to meet the Paris goal of limiting global warming to 2

C or less is both socially and economically desirable for the world as a whole. We recognize that many of our clients, and their beneficiaries, will share this view, and may even want the world to go further and faster, limiting warming to 1.5

C. They may even be prepared personally to accept lower returns to make this outcome more likely. But we can’t assume that without asking them. 

we commit to making efforts to inform our clients about the implications of different (sustainable) investing strategies both on real-world climate outcomes and portfolio risk and returns

 so that they are able to make decisions that reflect their own balance of financial and non-financial interests. This will require us to bring greater range of expertise to our client discussions than we’ve done so far and likely requires building on techniques of deliberative democracy to ensure informed consent. This will enable us to 

construct products and client mandates so that they genuinely reflect clients’ interest AND genuinely accelerate the path to net zero.

GFARWAANZ will focus at all times on real-word progress towards a net zero global economy

. A growing body of evidence shows that many ESG investing strategies have little if any real-world impact on the trajectory of carbon emissions. Therefore, we will focus our activities on things that are likely to work (active ownership, blended finance, policy engagement, venture finance) rather than things that are ineffective or unrealistic (divestment, portfolio footprinting, net zero plans for financial institutions, Paris-aligned portfolios).

We also commit to avoiding overblown claims about our impact, however good they may make us feel.

 We have to be modest about the role the finance sector can play in addressing a systemic issue like climate change. Also, research shows that clients are easily bamboozled into believing that products are ‘sustainable’ when in fact they have no real-world impact. It can even be tempting for financial institutions to charge more for those products, taking advantage of the warm glow they give to clients. Therefore, 

we commit to making sustainability claims for our products only when these can be backed up by credible evidence of real-world impact and we will not charge more for products that deep down we know have no such impact

There is some pretty good evidence that active ownership, including engagement, can be effective at producing change in the companies we finance. Nonetheless, we have to be honest that we can’t force companies to make changes to their operations that make no strategic and financial sense given current or future economic incentives and regulation. We won’t use our clients’ money to buy and mothball fossil fuel assets like some would have us do. Nor will we forgo profitable financing of investment opportunities unless our clients or owners are clear through fund choices or mandates that they want us to do so.

However, the concept of fiduciary duty allows a wide spectrum of reasonable approaches that boards of our investee companies can take to the question of climate change. At the simplest level, the gradual decarbonization of the economy and onwards march of government regulation creates real investment risks and opportunities for those companies. We will 

 take these risk and opportunity factors into account, whatever nonsense is thrown at us by ESG backlashers. But beyond this, companies can choose to be a leader or a follower of change, in both cases consistent with the legal duties of the board. Therefore, 

we commit to using active ownership with investee companies to encourage boards to take proper account of risks and opportunities created by climate change, but beyond that to lean into rather than against the decarbonisation trend.

work to mobilize the trillions of dollars necessary to build a global zero emissions economy and deliver the goals of the Paris Agreement

. However, we have to remember that GFARWAANZ signatories manage money on behalf of third-party clients, and so while we hope the combined AuM in our initiative will end up being an awe-inspiring number, we want to avoid giving anyone the impression that GFARWAANZ signatories are free to allocate these assets to whatever cause they like, for example green technology, without asking clients. This would likely be at odds with our fiduciary duty and this might mean we end up having to withdraw from GFARWAANZ. This would result in a lot of negative publicity, which could end up being counterproductive for climate action, and for this initiative, which would not be good.

Instead, recognizing that if investments needed to achieve Paris goals would have offered attractive returns today they would have been made already, we will work tirelessly to collaborate with governments, development banks, foundations, philanthropists, energy experts, universities and entrepreneurs, AND clients, all so that suitable investment vehicles are developed that will ensure:

we meet our respective investment requirements (and those of our clients) and do not run afoul of fiduciary duty;

we invest in new technology development (e.g. for hydrogen, modular nuclear, carbon capture & storage, direct air capture, etc.) and in deploying at scale existing technologies such as wind & solar; and

we don’t forget about emerging markets which is where all the heavy lifting is.

in other words, manage to actually live up to this earnest and ambitious pledge that is highlighted in bold above, that we could otherwise never make without being ridiculed.

Because blended finance will likely be our preferred tool for much of this mobilisation, and because that is complex and requires the involvement of financial and legal experts, 

we will make available the needed expertise; e.g. chief investment officers, emerging markets portfolio managers, investment bankers, financial engineers, risk managers, actuaries and lawyers

. Because we recognize that this is not a question of participating in the occasional Zoom call, we will look into the possibility of making the necessary people and expertise available through medium and long-term secondments.

Because in this context the concept of “real-world additionality” (allowing things to happen in the real world that otherwise wouldn’t happen) is so crucial, yet poorly understood, we have decided to include it in the GFA

ANZ acronym. We have made it bold here, and underlined it, so that you can see we’re serious about this. And this way we hope it becomes embedded in our regular climate-related dialogue and it keeps us from committing to whatever sounds good without considering if it changes anything.

As GFARWAANZ signatories we will set interim and long-term goals for our contribution to society reaching net zero to the extent and speed possible consistent with our fiduciary duty to clients. These goals will be explicit and measurable, reflecting our organisations’ role in the financial system, and will be consistent with the scientific consensus about what needs to happen for us to achieve net zero over time

. These goals are supplemented by member-determined short-term targets and action plans. In the context of setting goals please note:

Obviously we know that making our portfolios net zero (if we can even agree on what that means or how it is measured) doesn’t equate to making the global economy net zero. And, of course, only that – net zero global economy – can be our true aim.

Indeed, we’ve come to the conclusion that ‘net zero’ is actually quite an unhelpful term when applied to portfolios and investments – because it allows us to avoid having to talk about the specifics of 

 to get there and instead focus on superficial techniques to create an illusion of carbon reductions. Some climate scientists have even called it a “dangerous trap”. So we reserve the right to at some point remove “NZ” from our acronym, and change it to, for example, Glasgow Financial Alliance for Real-World Additional Action and Effective Policy for Climate Change (GFARWAAEPCC). Clunky, we know! But we want to get it right.

Nor are we going to create a false impression of accountability by tying ourselves to conditions set by external bodies such as Race to Zero because, as should be obvious to everyone, when their requirements conflict with what we see as our fiduciary duty to clients, our clients will win. Every time.

If we do decide to talk about net zero or make net zero commitments, we will, as much as possible, be explicit about what we mean by that. Especially the 

 of these things and the role of carbon offsets in fulfilling such claims (which should generally be small as they frequently don’t stand up to scrutiny).

We will be held accountable on the above through transparent disclosures and will create governance mechanisms for input and deliberation amongst our signatories

 to ensure that we deliver on these earnest commitments, especially the ones in bold, in a way that is aligned with fiduciary duty, evidence-based, consequential and impactful.

We will invite climate scientists, economists, engineers, public policy experts and government representatives into these deliberations so that we can learn from them and adjust our focus and efforts as needed. This is because we will almost certainly get lots of stuff wrong and will need to change direction in order to fulfil our aim of being as supportive as possible of the transition to net zero.

Through these commitments, the finance industry shows that it stands ready to support governments in the fulfilment of the Paris goals to create a better future for us all. We have identified actions that we believe are consistent with our fiduciary duty to clients while having the greatest impact in supporting progress to net zero.

And in so doing, we have tried to design the initiative in a way that it lasts for more than a year.

Mark Carney, UN Special Envoy for Climate Action and Finance and COP26 Private Finance Advisor to PM Johnson said:

“We’re making a few tweaks to the architecture of the global financial system to make it more likely that we can achieve net zero. However, to be clear, we have not suddenly found down the back of the global sofa the $100 trillion of undeployed capital needed over the next three decades for a clean energy future. And so you will not hear me say that we have.”

“The rapid, and large-scale, increase in capital commitment required to make the transition to a 1.5

C world possible has not magically come into being as a result of this initiative. Indeed, the finance industry can only make a modest contribution to climate change, but through GFARWAANZ we’re going to fulfil this role authentically and to the best or our ability in support of government efforts world-wide.”

Rishi Sunak, Chancellor of the Exchequer said:

“I’m proud that under the UK’s leadership, the number of financial firms committed to Net Zero plans has tripled, with the assets now totalling $130 trillion. I recognise that this is not a terribly meaningful figure in the context of the transition finance needed to achieve net zero, which is something else altogether, but I’m encouraged that so many firms are willing to play a leading role in helping me, and other political leaders, to set sensible climate policy regulation that will enable the global economy to get to net zero.”

“In this context I’ve announced the modest step of requiring firms to publish their net zero transition plans. I recognise this won’t make that much difference by itself and that together we still need to find a way to provide the cash the world needs to stop catastrophic climate change. This will not be provided by the private sector alone, but requires the support of governments through blended finance and other mechanisms, which we’re working on with vigour. And should I ever become prime minister in some weird and implausible scenario, then I will not forget about any of the above, especially the last bit.”

For press queries or more information about GFARWAANZ please contact:

Harald Walkate has authored this article in his capacity as a Senior Fellow at the University of Zurich – Center for Sustainable Finance & Private Wealth (CSP).

What GFANZ Should Have Said

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.

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.

"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 

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 risk 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 accepting 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, 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.

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 of the table for other actors, and be the speedboat of blended finance and we have full confidence that you will get there.

*Perhaps you haven’t seen the first two articles we wrote comparing blended finance to music. You can find them 

, and 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:

Cover Photo: Stijn Kuiper 2022 / with permission.

Asset owners can do a lot to advance blended finance. Here are the three most important things – they should deliver on this proactively.

 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 needs 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 

 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 

 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.

You can’t miss it!

Harald Walkate

Harald Walkate

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