WASHINGTON — A new blended finance action plan calls on multilateral development banks to step up their efforts to leverage private capital. It also lays out a series of eight key initiatives that can help to accelerate blended finance and raise more funds to address the Paris Agreement on climate change and the Sustainable Development Goals.
The action plan was released Wednesday by the Blended Finance Task Force, a group of leaders from the private sector, governments, multilateral institutions, and nongovernmental organizations. It took center stage at a Thursday meeting at the International Finance Corporation, where task force members and others discussed barriers to scaling blended finance and how to use the new plan as a guide to address some of those challenges.
“The idea of this task force is frankly to drive to action as much as possible,” said Jeremy Oppenheim, the chair of the Blended Finance Task Force and the founder SYSTEMIQ. “A whole set of actions need to be put in place, central to this are two things, getting MDBs and DFIs [development finance institutions] to put more weight on their role in mobilizing private capital into developing countries and see that as absolutely central to their mandate. [But] it’s not just about the public sector changing the way of working, it’s also about the private sector.”
The eight initiatives include: MDBs and DFIs setting higher targets for how their money will mobilize private capital; institutional investors and asset managers committing to investing more in sustainable infrastructure; tackling regulatory disincentives; improving access to data; developing and scaling blended finance vehicles and instruments; increasing intermediaries to help develop projects; increasing investment in key areas including sustainable land use and resilient cities; and building local capacity in developing countries to help create blended finance deals.
Each of the initiatives has key targeted outputs with deadlines in the next six-18 months and spells out who is responsible for carrying them out. The task force will report publicly on its progress toward those outputs and achieving the goals stated in the roadmap.
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The task force and the action plan are focused on mobilizing capital for sustainable infrastructure, from sustainable cities to transportation, waste and sanitation, and more, a focus that was decided after taking an analytical view of where the capital requirements are most acute in the next decade or so, Oppenheim said. The task force’s analysis found that blended finance will be the most useful in the infrastructure space, he said. While there will be deals in other fields, it is important to focus on an investment type that institutional investors are familiar with, rather than trying to introduce them both to a new geography and to a new type of asset, Oppenheim said.
The task force will publicly release a performance scorecard on the eight initiative areas as a way for members and others to hold them accountable, and its success will be measured in part by how many sign on to the efforts and the momentum and action it can generate, he said.
While all issue areas are important, the first — the role of MDBs and DFIs — was highlighted as critical to underpinning an increase in blended finance in the discussion.
Josué Tanaka, the managing director, operational strategy and planning, energy efficiency and climate change, at the European Bank for Reconstruction and Development, told Devex that MDBs need to be more focused on working with the private sector, not just talking about the private sector, and they need to work to have each MDB dollar mobilize as much private capital as it can. MDBs need to both invest in the private sector and leverage their monies more effectively; it is the latter issue where EBRD has more work to do, he said.
The group gathered at IFC also discussed the importance of blending carefully, ensuring that financing doesn’t crowd out the private sector, and that it targets bankable, sustainable deals. Tanaka used the analogy of a putting sugar in coffee — there is a limit to how much you can add, likewise there is a limit to blending.
“I think there is a minimum threshold [in the] quality context, if that minimum threshold is not met it’s not blending that’s going to solve those issues,” Tanaka said.
At the event, IFC also committed to improve its efforts in the blended finance arena. Hans Peter Lankes, the vice president of economics and private sector development at IFC said the organization has been adopting an approach that prioritizes private sector solutions, in line with the World Bank Group Strategy. IFC is asking systematically if there is a private sector solution, or something that could be done to build an enabling environment or de-risk a private sector solution. Only if it fails on both fronts then will it award grants, Lankes said. The World Bank and IFC are searching for ways to increase mobilization to match institutional investors in particular, he added.
Lankes is also engaged in the efforts to increase standardization across MDBs, that “we hope to take forward with greater vigor in the coming months,” he said.
At the event, several companies and organizations talked about their work — Jeff Seabright, Unilever’s chief sustainability officer talked about a new fund Unilever, Norway, and the Global Environment Facility have launched to address land use issues, protect forests, and address issues in the palm oil supply chain.
Companies can engage not only by investing in blended finance deals, but also through credit enhancements, including using their purchasing power, he said.
The Rockefeller Foundation released a request for proposals this week to work with asset managers to establish a fund that would support and provide investments to the foundation’s 100 resilient cities initiative, Lorenzo Bernasconi, a senior associate director of the Rockefeller Foundation said.
“I think … we’re going now to a new era around blended finance,” he said.
The African Development Bank is also looking at its role in blended finance, which it has “adopted out of necessity,” said Astrid Manroth, the bank’s director for energy transformative partnerships, because it simply doesn’t have enough capital.
The AfDB has structured some funds, but is looking at how to mainstream blended finance, formalize its approach, and determine what’s needed internally to comply with the DFI principles, how it will justify concessional models, and prove market failures, she said.
Manroth warned that while blended finance is attractive, it is important to not lose sight of the need to continue raising enough development capital to help make bankable deals, work on enabling environments, and create the kind of support MDBs provide to countries so they can attract more private finance.
Major financial companies are also reorienting themselves around some of these issues. J.P. Morgan has committed to finance $200 billion in green projects by 2025 — a goal that is being tracked and stakeholders are being held accountable to internally, said Fuat Savas, the executive director of infrastructure at J.P. Morgan.
What the company needs is more bankable projects — and foundation and donor capital should double down to bolster some of the existing frameworks and tools developed through the World Bank and its Global Infrastructure Facility, Suavas said. If MDBs were to be more open with their data, particularly in infrastructure investments in developing countries, it would go a long way in helping J.P. Morgan and others make the case to institutional investors and help mobilize capital, he added.
TCX, which works to tackle the critical challenge of addressing foreign exchange or currency risk, was highlighted as one of the blended finance models that will be critical to unlocking more private capital. Ruurd Brouwer, the chief executive officer of TCX, said that it is now working to scale to about triple its current size, building a larger portfolio of frontier market currencies, or currency risk, and bringing in larger investors in an effort to reduce that foreign currency risk at a larger scale by shielding both international lenders and local borrowers from exchange rate volatility in emerging and frontier markets.
“What I hope the task force does in practical terms is to ... create a bit of a race to the top for the public and private sector to get more capital flowing systematically into these areas of the economy,” Oppenheim said.