A new edition of Future-minded, and a very exciting one at that. In this first 2021 edition of Future-minded - FMO’s magazine on accelerating for the SDGs - we have explored various ways of using blended finance instruments to create markets and mobilize private investments.
There is no silver bullet for the complex challenges of development. But blended finance - which involves combining public funds with private capital - can be an important part of the solution. As a Development Finance Institution (DFI), we blend public and private money. We use the higher risk appetite of governments to invest in people and places where it is needed the most; we nurture new ideas and technologies, and we give others the chance to follow when the first hurdles are taken. This can be game-changing finance, as it opens up the pathway for ‘big money’ to get to places where it didn’t go before: the un(der)banked, smallholders or new sectors like forestry in developing economies. Partners for impact 'Blending' may sound easy enough but in practice it requires deep understanding of finance and market context. We asked four early movers, like the European Commission and the Green Climate Fund, about their experience in blending finance. Why did they choose this solution? What were their hurdles? And what made them so determined to power on? Partners for impact, FMO’s Idsert Boersma and Andrew Johnstone of Climate Fund Managers, both manage blended finance products and discuss in a podcast their side of the blended finance story, which, oddly, appears to have a lot in common with … coffee! A couple of years ago I was proud to officially sign the agreement for our risk sharing participation program with Ansgar West from Munich Re. I am happy to see an interview with him in this magazine. We very much need global reinsurance forces like Munich Re to help close the SDG funding gap. According to Ansgar, one of the major barriers to make real progress is investors’ reluctance to sign up to the unfamiliar. Munich Re works with DFIs because it allows them – according to Ansgar – to develop innovative new structures that can widen the investor base in projects with clear sustainability goals.
Changing the rules Peter Bakker, President of the World Business Council for Sustainable Development, sees opportunity in urgency. He predicts that within three years, the fiduciary duties of boards will have shifted so they’re not only responsible for financial performance, but also for environmental and social impacts. The cost of capital will depend not just on a company’s financial exposure, but also on its sustainability performance, for the simple reason that a company that can manage its environmental and social impacts has a lower risk profile and should therefore attract a lower cost of capital. “If we can make that thinking mainstream in the next 3 to 5 years”, he says, “we’ll see a decoupling of sustainability from whether or not a CEO happens to ‘get’ why it matters, because the rules will have changed”. Trilemma But it is not just the private sector that has to step up. In April ODI, an international think tank, published a critical report on the mobilization of private investment by development finance institutions (DFIs). They see DFIs caught in a trilemma where the expectations are that they need to be able to pioneer markets in poorer countries, mobilize investments at scale from institutional investors while remaining financially viable. In an open talk CIO Huib-Jan de Ruijter and Senior Research Fellow, Samantha Attridge, reflect on the changes that are needed. ”A collaborative approach is the only way forward,” states Huib-Jan, maybe even more for creating markets than for mobilizing money. I hope you enjoy the magazine. Pushing for progress is urgently needed, and we can only push hard enough together.
Warm wishes, Linda Broekhuizen CEO a.i. at FMO