Could blended finance unlock the SDG funding gap? - BNP Paribas CIB
 
Thursday 24 October 2019

By de-risking financing with capital from public sources, blended finance could be the key that achieves the UN's SDGs. What is it – and how does it work?


How much would it cost to realise the United Nations Sustainable Development Goals (UN SDGs)? According to the Global Commission on the Economy and Climate, $90 trillion over the next 15 years.

This level of investment would unlock the development of sustainable infrastructures and technologies worldwide in five key economic systems: energy, cities, food and land use, water and industry. This cannot be achieved without mobilising finance at scale.

Risk, risk, go away

However, only a small percentage of the private sector's invested assets currently target projects and regions that could advance sustainable development. For example, why is solar power not thriving in Africa, the sunniest continent in the world?

It is mainly a matter of risk, real or perceived. Political and social instability, corruption, war, and climate risk are just some of the reasons companies do not invest. Moreover, poor infrastructure and lack of local specialists tend to lead to delays and higher costs: poor returns for the risk keep private investment at bay.

The public sector has a decisive role to play in unlocking the power of private finance. While public finance and development finance institutions (DFI) cannot alone meet the SDGs, organisations such as the United Nations (UN), the World Bank and the One Planet Summit (OPS) aim to put in place the necessary commitments and actions to realise the goals of the Paris Agreement on Climate Change. Of the various solutions, which include everything from public-private partnerships to concessions and subsidies, blended finance is one of the most promising approaches to bridging the funding gap.
 

What is blended finance?

Convergence, a global advocate for blended finance, defines it as "the use of catalytic capital from public or philanthropic sources to increase private sector investment in developing countries and sustainable development". Blended finance is a structuring approach based on mixing public and private capital in a common and complementary investment scheme. Its goal being to mitigate early-entrant risks and costs – therefore attracting pioneering investments from the private sector – blended finance sets up investable opportunities in developing countries.

Blended finance transactions have three key objectives:

  • Enhanced impact while contributing to achieving the SDGs by combining the skillsets and resources of public and private sector organisations pursuing blended objectives (a mix of environmental, social, economic and market-rate financial return)
  • Increase capital leverage by de-risking: public and/or philanthropic parties play a "catalytic" role by tranching the debt and isolating the risk to specialist development organisations (such as international agencies, development banks and export finance agencies), then unlocking private investments
  • Bring risk-adjusted returns: yielding positive financial returns, the parties involved in a blended finance structure have different expectations of returns, ranging from concessional to market-rate


A case of blended finance: Tropical Landscape Finance Facility

The Tropical Landscape Finance Facility (TLFF), launched in 2017, was set up as a financing platform and grant fund with the aim of fighting deforestation and stimulating sustainable rural jobs in Indonesia. Bringing together public and private actors, TLFF benefited from blended expertise of the United Nations Environment Programme (UNEP), the World Agroforestry Centre, the Hong Kong-based investment manager ADM Capital and BNP Paribas, and the World Wildlife Fund.

Using the platform, Hong Kong-based ADM Capital made a series of long-term loans to finance projects in agriculture, forest conservation and renewable energy (in IDR and USD), with guarantees from the United States Agency for International Development (USAID). BNP Paribas packaged the loans into securitised multi-tranche medium-term notes, which were sold on to investors that had hitherto not had access to green finance.

Taking advantage of this facility, Michelin, a pioneer in sustainable supply chains, developed a new kind of rubber plantation in locations formerly devastated by rampant deforestation. Sixteen thousand jobs were created through the plantation of sustainable high-yielding rubber trees. At maturity, the plantation will represent 10% of natural global rubber purchased by Michelin.





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