Why Blended Finance Might be a Climate Saver

By 23rd April 2021 Uncategorised
Agency Six LTD

By applying commercial muscle to humanity’s greatest problems, it’s possible that we can unlock great innovative commercial opportunities across climate change, green tech / clean tech and carbon transitioning.

 

Commercial innovation is clearly a driver of change, but we know that the only way to learn is to test, fail, and repeat. At Agency Six, we know this iterative process first-hand working closely with brands like HERU, who developed from scratch an innovative game-changing home pyrolysis system that can basically turn everything from nappies to plastic bottles into heat for hot water.

 

But while emerging new products in the UK present clear investment opportunities, sustainable investment opportunities in new markets remain risky for many big corporates and finance houses – geographical exposure and quite simply the risk of failure mean far too few are taking a leap of faith (or a calculated risk).

 

So, how do we incubate commercial solutions to the problems threatening the future, particularly projects around sustainable development goals (SDG) in the parts of the world that need it most?

 

Clearly, the economic opportunities are real in this arena, we are in a state of global carbon-transition, no question of that, but the commercial jeopardy of tackling those problems needs to be de-risked and the ‘viability gap’ closed – and that’s potentially where third-party capital can help, one example is under a blended finance model.

 

To quote finance platform Convergence, “blended finance is the use of catalytic capital from public or philanthropic sources to increase private sector investment in sustainable development…”

 

It differs from traditional capital raising as (its name suggests) it is a blended mix of governments, business and philanthropists.

 

Many players have shared interests – whether philanthropists, government or business – and blended finance can manage the risk for companies, or at least minimise it to an acceptable level. A number of projects have used blended finance with great success, providing a win-win-win solution for business, socially minded investors and those whose lives have been improved.

 

Examples include:

 

  • The Danish Climate Investment Fund (DCIF) raised $94 million from the Danish government and IFU and $142 million from Danish institutional investorsincluding PensionDanmark, PKA, Pædagogernes Pensionskasse, Dansk Vækstkapital and Aage V. Jensen Charity Foundation, for climate-related projects in developing countries as well as to create jobs through investee enterprises
  • The blended finance platform, Convergence, awarded a grant to ADM Capital for the design of financing facility for renewable energy and smallholder livelihood projects in Indonesia
  • In Cambodia, a combination of non-sovereign concessional lending, guarantees, grants, and technical assistance has been used to leverage local commercial finance and equity investments to accelerate access to piped water supply

 

Beyond de-risking, the coming together of finance through public-private collaborations brings many advantages, pooling skillsets and resources, a better understanding of local markets, removal of barriers to a project’s implementation, as well as the best way to assign capital effectively.

 

The role of marketing in this mix is to make people aware of this finance options and the potential it might have. To utilise case studies of excellence to demonstrate how blended finance works in practice. To keep the communication channels open so people can learn from other projects and facilitate dialogue and collaboration in this arena.

 

Much of this is still unexplored territory, and the jury isn’t 100% sure on blended finance. Concerns rightly focus on a lack of due diligence and feasibility of projects; the scale of projects being bespoke and often small; the sometimes difficult blending of cultures of private and public groups; accountability frameworks and clear lines of liability if private funds run dry (normally the state picks up the tab, which potentially is not so easy for a developing country); and all of this helps result in unease amongst institutional investors in dealing with this odd hybrid of asset class.

 

The power of collaboration remains imperative here, we must overcome the obvious concerns in order to facilitate the desired outcome of carbon-transitioning not simply being a first world priority. To create new pilot schemes, new interventions, and use the power of the markets, it is crucial we foster collaboration across corporations, finance house, NGOs and Governments.

 

To discuss how best to create awareness of your environmental projects or solutions contact us at simon@agencysix.co.uk

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