Tuesday, May 21, 2024

Blended finance can fill investment gaps to meet SDGs

During the covid waves in India, several producers of raw materials required for face masks, vaccines and supply chains were struggling to meet demand as they fell short of working capital. To address this, multiple stakeholders —the Indian government, USAID, The Rockefeller Foundation and other development agencies, financial institutions, entrepreneurs, accelerators, and academia—launched a blended financing entity called Sustainable Access to Markets and Resources for Innovative Delivery of Healthcare (Samridh).

Since 2020, Samridh has reached over 25 million people and deployed over $16 million in philanthropic funds to over 60 social enterprises. It has mobilized a capital pool of $300 million to offer both grant and debt financing provisions to healthcare enterprises and innovators and helped sustain their operations. According to the Office of the High Commissioner of Human Rights, there is currently an annual shortfall of $4 trillion in developing countries, despite the combined sum of private capital flows, personal remittances, official development assistance (ODA) and private grants. A policy brief by the G20’s Think 20 Engagement Group highlights that several nations of the Global South are likely to fall short of their 2030 sustainable development goals (SDGs) on account of a funding gap. We must start working on filling this gap both through new investments and reallocation of existing capital. India’s finance minister Nirmala Sitharaman has repeatedly highlighted the role of multilateral development banks (MDBs) in using innovative finance techniques to scale catalytic financing for SDGs to be met.

Low-income regions, adaptation sectors and marginalized populations find it harder to attract funding, due to small deal sizes, high regulatory complexity and country-specific risks. Moreover, relying solely on philanthropy and government funding cannot address transnational challenges. Current public resources are not enough. Limited access to appropriate capital, fewer incentives for innovative practices and weak market intelligence and networks are among the reasons we must look towards the private ecosystem of blended finance solutions.

Blended finance instruments can provide investors with distinct benefits, including the ability to tailor risks to specific needs, apart from capital loss protection and financial and social returns. It incentivizes and mobilizes private capital in emerging and frontier markets where public resources and donor funds are limited. For instance, in India, government support helped many organizations get finance at the incubation stage, though they must raise working capital through other means.

To plug finance gaps, instrumental returnable grants and zero-coupon loans can be of substantial help to organizations with high-impact solutions, as these help meet short-term financial requirements (to be repaid later). To mitigate risks, blended finance initiatives offer technical support, capacity-building aid, relevant data and tools for impact measurement, monitoring and evaluation. Successive grants are outcome-based, as set milestones must be achieved for further funding.

Global crises like climate change and food insecurity can be fought by leveraging blended finance. Given India’s G20 presidency this year, the Global South is in focus. In view of the G20 Sustainable Finance Roadmap, India has emphasized the need to adopt innovative financing methods and can help the Global South develop blended finance instruments to meet SDGs. The Investor Leadership Network and Rockefeller Foundation have suggested creating a rolling pool of funds offering first or second loss guarantees, so the private sector can cover hard-to-insure risks such as regulatory changes, taxation shifts and reputational damage. The network also recommends creating a shared database of projects that MDBs are screening to give the private sector full access to emerging-market risk data.

Another tool at the disposal of private foundations is catalytic financing. The leadership of philanthropic organizations in incubating and expanding the field of ‘impact investing’ has led to inroads made within the private sector. Philanthropies are perfect partners for innovation, as they could complement measures that the public sector can take to improve the risk-return balance, while directly engaging with private-sector partners.

With a range of development funders already showing strong political will and allocating funds to innovative mechanisms of finance, there is a growing momentum in support of blended finance as a systemic approach. India’s G20 leadership is thus the Global South’s moment to call for greater support and financial instruments.

Developing nations require an environment that lets private investments thrive, which calls for activating policies that allow private players and philanthropies to support their growth. Innovative blending can support project preparation and solve information gaps, enabling investment in multiple projects. It can work at the institutional level by blending public subsidies in the market to encourage private investments.

With the Ukraine war, covid pandemic, increasing impact of climatic changes and natural disasters like the recent earthquake in Turkey and Syria, the SDG financing gap is widening. Emerging and frontier economies must step up advocacy of efficient access to fit-for-purpose catalytic capital for develop high-quality projects and expertise. We must unlock transition finance to build a tomorrow where no one is left behind.

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