ESG Investing

Blended Finance Grows during Pandemic, Expanding ESG Opportunities

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For some time, blended finance has been touted as a means to plug funding gaps and achieve UN Sustainable Development Goals. The concept now appears to be gradually catching on as a solution to raise much-needed development finance for sustainable projects.

There are many reasons to put more weight behind blended finance practices. By using public funding to attract commercial finance, a blended approach can make projects more attractive and feasible for private investors. At the same time, projects that might have otherwise struggled to attract private funding can suddenly find backers and become profitable. It also ensures greater opportunity for public funds to go further, potentially supporting multiple projects via the same public capital that would have allowed only one smaller project to go ahead on its own.

For ESG investors, real examples of this practice demonstrate how blended finance offers yet one more way to measure and maximize impact.

Advancing Energy Access

September saw the launch of the Energy Access Relief Fund—16 governments, foundations, and investors that have partnered to provide financial support to energy access companies in sub-Saharan Africa and Asia. Launched with a first close of $68 million and a target of more than $80 million to protect access to energy for at least 20 million people, it forms part of the World Economic Forum’s COVID Response Alliance for Social Entrepreneurs action agenda and is managed by Social Investment Managers & Advisors.

The World Economic Forum cites a need for vital support to help energy access companies across the two regions weather the fallout from the pandemic. It names Easy Solar as just one firm requiring assistance; the off-grid solar company provides power to 550,000 customers in Sierra Leone and Liberia. When the COVID-19 crisis hit, this previously fast-growing business suddenly faced supply disruptions, lockdowns, and frozen capital markets.

The World Economic Forum cites a need for vital support to help energy access companies across the two regions weather the fallout from the pandemic.

Pursuing Zero-Carbon Goals

Temasek, the investment arm of the Singapore government, has teamed up with banking giant HSBC to launch a debt financing platform dedicated to sustainable infrastructure projects in Southeast Asia as part of efforts to reduce climate change. The platform targets sustainable infrastructure such as renewable energy and storage, water and waste treatment, and sustainable transport. With an aim to see more than $1 billion in loans dispersed within five years, it hopes to deploy blended finance at scale over the long term in order to unlock more “marginally bankable projects,” thereby crowding in private and institutional investors.

Separately, Nigeria-based infrastructure fund manager ARM-Harith Infrastructure Investment recently launched the ARM-Harith Cities and Climate Transition (ACT) Fund in collaboration with the Global Innovation Lab for Climate Finance. Backed by the German, Dutch, Swedish, and UK governments as well as the Rockefeller Foundation, the ACT Fund acts as a blended finance instrument to unlock finance for low-carbon and climate-resilient development in urban areas across West Africa.

Coordinating around Blended Currency

The ACT Fund relies on a blended currency mechanism designed to mitigate high transaction costs and lead times as well as to shorten the project exit process so that capital can be redeployed more quickly elsewhere. In practice, this essentially means that projects are funded through ACT Fund equity during the riskier setup stages before shifting to local institutional capital in the form of long-term debt finance once they become operational. The same ACT equity funding can then be recycled into other projects to advance sustainable development.

Ultimately, development funds have the means to go further. Blended finance could create a win-win situation for the public and private sectors, in turn making success more attainable for UN Sustainable Development Goals and other ESG-driven efforts.

Any company, security, fund or other investment identified herein is provided solely for illustrative purposes and should not be construed as a recommendation or solicitation for the purchase or sale of any such investment.

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