In response to rising global challenges and dwindling humanitarian aid, philanthropy is shifting towards blended finance - a strategic approach combining public, private, and philanthropic funds to address pressing issues like poverty and climate change. Despite complexities and challenges, blended finance has proven effective in mobilising capital and catalysing positive impact, offering hope for a future where finance is a force for sustainable development
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Against a backdrop of the highest number of violent conflicts since the Second World War, with dwindling efforts in leveraging peaceful resolutions, the world is witnessing a new form of resource scarcity - humanitarian funds. With limited relief aid available to cope with these unfolding crises, alongside perpetually evolving global challenges such as climate change, the landscape of philanthropy is shifting [1]. Non-profits now recognise the need to seek support beyond donations, encouraging the use of emerging financial mechanisms like blended finance to achieve their goals [1]. So what is blended finance? And what does this mean for the future of social impact investment?
Blended Finance: A New Approach to Global Development
Blended Finance refers to a strategic approach that combines public, private, and philanthropic funds to mobilise capital for development projects, particularly in emerging markets and developing countries [3]. This innovative financing mechanism is considered a key approach to global development co-operation, that in which recognises the pivotal role that private capital plays in achieving the United Nations Sustainable Development Goals (SDGs). In this way, blended finance aims to leverage the strengths of different sources of capital to address pressing global challenges, such as poverty alleviation, infrastructure development, and climate change mitigation [3].
In blended finance structures, public sector entities, such as governments or multilateral development banks, provide concessional funding or guarantees to reduce associated risks and attract greater private sector investment [3]. In doing so, blended finance acts to catalyse commercial investment towards projects with high socio-economic impact, that in which may be overlooked by mainstream markets due to its lack of immediate returns. This strategy allows for a more diverse range of organisations to invest together to meet specific goals. These goals can range from increasing financial returns, to optimising social, economic and environmental impact, or both [5].
As a result, blended finance endeavours to maximise positive change, foster sustainable development, and create scalable solutions that might not be achievable through traditional financing mechanisms alone.
Recent Trends in Social Impact Investment
In the past decade, blended finance has seen a significant uptick in private sector engagement and innovation, with over 200b USD having been mobilised towards sustainable development initiatives across developing countries [5]. This trend has been driven by a growing recognition of the potential for leveraging capital to address complex global challenges. One notable trend is the increasing involvement of impact investors and development finance institutions in projects with a thematic focus on areas such as renewable energy, sustainable agriculture, and healthcare [5]. In turn, there has been a surge in climate blended finance deals across Asia, due to not only their fossil fuel dependence but their subsequent impact on global emission levels. For example, the Indonesian government launched the Sarulla Geothermal Power Project in North Sumatra, hoping to reduce the country’s dependence on crude oil and encourage the production of alternative forms of energy. The project leveraged a risk guarantee from the Japan Bank for International Cooperation and a 20-year Business Viability Guarantee Letter from the Indonesian government to help crowd-in commercial funding [6]. Most remarkably, this project is estimated to save 1.3 million metric tons of carbon dioxide as well as positively impact the local community through job creation [6]. Whilst these deals have decreased recently due to alternative macroeconomic challenges such as inflation and geopolitical instability, climate change initiatives have remained central to the Asian blended finance market, with expectations for continual growth in coming years [5].
Another notable trend is that of technological advancement. In particular, key advancements in fintech and blockchain technology have played a crucial role in enhancing transparency, efficiency, and accessibility in blended finance transactions [2]. These technological advancements in blended finance have revolutionised the landscape. For example, fintech solutions such as digital payment platforms and crowdfunding websites have democratised access to finance, enabling smaller investors to participate in blended finance initiatives, improving the diversity and resilience of the financial ecosystem. On the other hand, the utilisation of blockchain technology has allowed for the keeping of immutable and transparent records of transactions, not only reducing the risk of fraud but enhancing trust amongst stakeholders [2].
Blended Finance: Is it effective?
Despite its potential benefits, blended finance faces several challenges and limitations. One key concern is the complexity of structuring blended finance transactions, that in which involve navigating diverse stakeholder interests, complex legal frameworks, and varying risk appetites [3]. For example, the interference of stakeholder interest can be observed in blended finance projects aimed at infrastructure development in developing countries. In such projects, the many diverse stakeholders, such as governments, international development agencies, and environment organisations often have conflicting priorities and concerns. Whilst the government and private investors prioritise economic growth and job creation, environmental organisations are more concerned about the potential displacement of people and/or the destruction of surrounding natural habitats. This conflict often leads to delays, disputes and even project cancellations [3].
In addition, the implementation of blended finance initiatives often lays risk to a ‘mission drift’, where the pursuit of financial returns begin to outweigh the social or environmental objectives of the project [4]. This often happens when private sector actors start to prioritise profitability over positive impact. Similarly, measuring and evaluating the effectiveness of blended finance initiatives can be incredibly challenging. Traditional financial metrics often have the inability to capture the full extent of social and environmental outcomes [2]. This can reduce private investment interest and stakeholder engagement, as potential returns become increasingly less visible.
Next Steps?
Throughout history, philanthropy has continued to evolve, taking a leading role in solving some of the world’s largest socio-economic challenges, and despite its limitations, blended finance has demonstrated incredible effectiveness in mobilising capital to solve these challenges [4]. For example, the Blue Alliance, an NGO that carries out marine conservation in the Philippines, has commended the capability of early stage blended capital in helping to protect and regenerate coral reefs, increase marine biodiversity, all while working toward a self-sustainable revenue model [4]. The effectiveness of blended finance stands as a beacon of hope in the pursuit of sustainable development. Through its innovative fusion of public, private, and philanthropic resources, blended finance has showcased its prowess in unlocking capital, catalysing impact, and fostering resilience in the face of global challenges. Whilst its journey is not without hurdles, in this dynamic landscape blended finance continues to evolve, adapt, and inspire, heralding a future where finance is not merely a tool for profit, but a force for positive change.
References
[1] Broussard, G., Rubenstein, S. L., Robinson, C., Maziak, W., Gilbert, Z. S., & DeCamp, M. (2019). Challenges to ethical obligations and humanitarian principles in conflict settings: a systematic review. Journal of International Humanitarian Action, 4(15), 2-13. https://doi.org/10.1186/s41018-019-0063-x [2] Convergence. (2021). The State of Blended Finance 2021. https://www.convergence.finance/reports/sobf2021/assets/The_State_of_Blended_Finance_ 2021.pdf [3] Jafri, J. (2022, March 14). New ways of philanthropic giving: blended finance and the SDGs Cambridge Judge Business School. https://www.jbs.cam.ac.uk/2022/new-ways-of-philanthropic-giving/. [4] Schultz, A. (2023, November 28). Philanthropy is Changing as Individual Donations Decline The Barron’s Daily. https://www.barrons.com/articles/philanthropy-is-changing-as-individual-donations-decline-a 56894a0 [5] UBS Global. (2024). Four trends in blended finance that will drive impact in 2024 and beyond. https://www.ubs.com/global/en/ubs-society/philanthropy/blog/2024/four-trends-in-blended-fin ance-2024.html#:~:text=Blended%20Finance%20uses%20capital%20from,funds%20to%20 deliver%20sustainable%20development. [6] Centre for Asian Philanthropy and Society. (2022). Decoded: Blended Finance In Action In Asia. https://www.thkforum.org/wp-content/uploads/2022/02/CAPS_Decoded_Blended-Finance-2. pdf
