How much would it cost to fully actualise the United Nations Sustainable Development Goals (UN SDGs)? According to the Global Commission on the Economy and Climate, $90 trillion over the next 15 years. With only ten years left to achieve the Sustainable Development Goals, the current approach is not working. Historically, financial institutions have focused on financing one or two SDGs in isolation, and this funding is often directed towards relatively low-risk investments. Only a small percentage of the private sector’s invested assets currently target projects and regions that could advance sustainable development. For example, why is solar power not thriving in Africa, the sunniest continent in the world? Collectively, we need to reconsider how we can realistically finance the SDGs by 2030, and this is where blended finance impact investment vehicles have an opportunity to shine.
What is blended finance?
Kenya Bankers Association (KBA), Kenya Climate Innovation Center (KCIC) and Financial Sector Deepening (FSD) Kenya are collaborating on an innovative Blended Finance project. This project will see the partners support entrepreneurs to access the capital needed to scale up their businesses. The trio defines blended finance as “the use of catalytic capital from public or philanthropic sources to increase private sector investment for sustainable development.” Speaking during a virtual workshop on blended finance, Dr Edward Mungai, KCIC CEO, says that the project seeks to attract private-sector investment and finance alongside development finance and philanthropic funds to manage the risks and enhance returns.
According to the project organisers, blended finance offers a win-win-win option for all parties: wins for development finance and philanthropic funders, as they make their limited dollars go further; wins for private investors, as they generate attractive returns, and most importantly, wins for populations in developing countries, as more funds are channelled to their communities in ways that enable sustainable growth.
FSD-Kenya has committed to provide funding for the implementation of the project. KBA and KCIC will approach donors for additional grant funding to serve as a credit guarantee fund for the project and increase bank finance that project beneficiaries can access.
Blended finance’s catalytic effect
During the workshop, Kenya Climate Ventures, a private financial investor, sited three organisations who owe their success journey to blended finance. According to KCV CEO, Victor Ndiege, it was the efforts of consolidated financing from KCV, KCIC and its partners that saw the scaling of the three businesses from what was just ideas to thriving businesses with positive impacts to the society and environment. The three enterprises, KimPlanter Seedling and Nurseries, Ukulima tech and Zaynagro have impacted over 1million lives demonstrating the tremendous potential of blended finance to close the gap required to finance the ambitious SDG agenda and deliver development outcomes.
Echoing the importance of blended finance’s catalytic effect to help tackle significant challenges is Dr. Habil Olaka, KBA CEO. “Supporting entrepreneurs access capital for their businesses within the green economy using different forms of financing is an important pillar at tackling climate finance and a step forward towards achieving the SDGs,” he says.
Mr Ouma Olum, green finance specialist at FSD Kenya on the other hand says, “green financing works well when private and public finances are collectively mobilised for clean, resilient and inclusive growth.” He continues to stress that, blended finance structures can be applied to different sectors, asset classes and fund horizons. For instance, Kenya Climate Innovation Centre, in partnership with the Danish Embassy in Kenya and the European Union, to fund smallholder agriprenuers in Kenya.
It is therefore, important to note that, private investors are now looking at investing in the senior and mezzanine tranches of the sustainable development. Representatives from Sidian Bank, Standard Bank, Kenya Commercial Bank and Absa Bank Kenya all present at the conference echoed that banks are now supporting initiatives and projects in the green economy offering opportunities for businesses to position themselves better.
The challenges of blended finance
Blended finance funds have the potential to attract more private capital towards financing the SDGs than ever before. However, they bring their challenges.
One of them is the ongoing management of the size of a blended finance fund’s different tranches. Some degree of liquidity needs to be offered to investors coming in the senior tranches of the fund. In contrast, some proportionality between tranche sizes has to be maintained to keep the risk-return profile of each tranche.
Another challenge is for investors into senior tranches to apprehend the necessary level of protection given by the first loss tranche. The impact investing space still lacks reliable aggregated performance data on similar past investment portfolios. Ideally, reliable default statistics over a long period will enable us to provide senior tranches of blended finance funds with an investment rating. This would ease decision-making and portfolio construction for private investors.
In conclusion, blended finance impact funds are a valuable piece of the puzzle. They can invest significantly in riskier markets because they catalyse investment from traditional financial institutions. Impact funds structured using blended finance can invest in businesses and markets which have previously been overlooked and yet have the potential to unlock major transformative growth. This will make a significant contribution to the SDG financing gap and transform the lives of people who live in these markets.
Pamela Okutoyi is a sustainability writer at KCIC Consulting