LONDON — The COVID-19 crisis has thrown the development finance community a curveball, triggering a surge in demand for financing from low- and middle-income countries at a time when movement restrictions, volatile markets, and competition for resources make it harder to meet that need. Innovative tools and solutions have become more essential than ever.
The Future of Development Finance, Devex’s virtual event on Oct. 29, gave experts from development finance institutions, impact investors, and donors the space to discuss these challenges and forge a new way forward.
Here are some key messages from speakers at the event.
Define and clarify
To create buy-in for innovative financing mechanisms and ensure they are used effectively, the development finance community must first build and work with agreed sets of definitions and principles, attendees heard.
Efforts to bring blended finance to scale, for example, have been hampered by inconsistencies around how the tool is defined, as well as a lack of clarity over how to determine the optimal levels of subsidy in deals to ensure that markets are not distorted and that private investors achieve their desired risk return, according to Martin Spicer, director of blended finance at the International Finance Corporation.
To address this, IFC has developed a set of “blended concessional finance principles” that Spicer said more than 20 DFIs have now signed up to use.
The need for rigorous impact measurement management was another common theme at the event, with speakers pointing to increasing demand from investors for tools that offer granular, comparable metrics with easy filtering to ensure investments align with their specific impact goals.
Growing corporate interest in sustainability investing, a mounting demand for transparency and a sense of urgency around achieving the SDGs are all spurring some interesting conversations and potential changes in development finance.
At a time of declining trust in institutions, investors “are not just going to trust promises or platitudes — but they want to see real results,” noted Amit Bouri, CEO and co-founder of the Global Impact Investing Network. For this reason, GIIN supports the IRIS+ system, which he said now has 11,000 users globally, including a fast-growing cohort of mainstream investors.
Other tools flagged by panelists include the U.S. International Development Finance Corporation’s new Impact Quotient tool, which focuses on inclusion, economic growth, and innovation weightings to measure impact, and IDB Invest’s Development Effectiveness Learning, Tracking, and Assessment tool, or DELTA.
As transparency around private sector companies’ impact increases, this will influence their valuations, creating a direct incentive for organizations to improve their records around their environmental footprint, employee diversity, and job creation in poor countries, argued Ronald Cohen, chairman of the Global Steering Group for Impact Investment and The Portland Trust.
With analysis by Harvard Business School’s Impact-Weighted Accounts Project already demonstrating companies that pollute more are worth less than their peers, “we’re going to see investors beginning to draw correlations with new variables about future growth and future profitability of companies that deliver impact as well as profit,” Cohen said. As a result, this could help direct greater investment, product, and employment flows to emerging countries.
Ensuring finance is targeted at countries, communities, and individual projects where it is most needed remains key, with speakers calling for renewed focus on reaching “last-mile” and vulnerable groups.
Ladé Araba, managing director for Africa at Convergence Blended Finance, and Jessica Espinoza Trujano, chair of the 2X Challenge, called for more racial and gender diversity within the fund management and impact investment industry, arguing that this would foster a greater unconscious interest in investing in Black- and female-led companies and initiatives.
An upcoming report by the United Nations Capital Development Fund and Organisation for Economic Co-operation and Development will demonstrate that the world’s lowest-income countries still attract only 6% of the private sector money mobilized by blended finance, said Laura Sennett, policy specialist at UNCDF. This can be partly corrected by mitigating the high investment risks — real and perceived — that are associated with many lower-income countries, she argued, suggesting that national development banks have a big role to play in helping reduce those related to the cost of capital and currency exchange.
The small project and ticket sizes of many deals in LMICs also make it hard for investors to justify the high costs involved, she added, proposing a portfolio approach in which a number of projects are aggregated or syndicated.
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Investing in a portfolio of local financial institutions, which then invest in their own portfolio of small and medium-sized enterprises, helps ensure that funds reach the right recipients and that on-the-ground risks are properly monitored, said Nadia Nikolova, lead portfolio manager for Allianz Global Investors.
Greater collaboration with last-mile players and national development banks is vital, argued Admassu Tadesse, president and CEO of the Eastern and Southern African Trade and Development Bank.
“What we need to see is some of those very interesting concessional pools of funding being opened up to African financial institutions who can actually also extend their reach to the last mile, push out the tenor, but also take a little bit more risk and not have all these big global funds and regional funds within Europe just being held by one or two institutions,” he said. “Because that really limits the ability to intermediate that type of special purpose funding.”
Coordinate and collaborate
Indeed, better coordination and collaboration among development finance institutions will not only improve their effectiveness but enable better outreach to the private sector, speakers agreed.
Those in finance need “to interact more broadly, more effectively, more ambitiously with the governments, with private sector, with civil society, with local authorities, with foundations,” said Rémy Rioux, chief executive of Agence Française de Développement. This month’s “Finance in Common Summit,” the first global event to bring together all public development banks, will go some way toward achieving this, he argued.
As private players become more interested in sustainability and impact investing, DFIs must continue evolving to tackle new frontiers and support business models that mainstream investors are not yet comfortable with, Bouri added. “That will be absolutely critical for the DFIs’ role and their leadership in this next phase as we emerge from the COVID crisis with an eye toward the ‘decade of action’ for the Sustainable Development Goals,” he said.