The world is facing monumental challenges: From climate change to the lack of clean water and sanitation, from the need for affordable housing to sustainable energy and infrastructure. While solving for these challenges requires stronger collaboration between the public and private sectors, academia and nonprofits, it will most certainly also require an extraordinary level of capital investment to scale solutions globally. According to the Global Commission on the Economy and Climate, as much as $90 trillion is needed over the next 15 years to develop a sustainable infrastructure that can begin to address the world’s most pressing environmental, economic and social issues.footnote1
What is blended finance, and why it matters
But where will all that money come from? “We have to mobilize the entire capitalist system to move the needle on challenges this large,” says Brian Moynihan, chairman and chief executive officer of Bank of America. “The world has trillions of dollars to invest, but the question is, can you get it organized?”
Now, an approach known as blended finance is helping to put the power of private capital to work on issues ranging from the environment to gender equality to ending poverty and hunger in developing and emerging markets. That is, sustainable development projects that typically start with public or philanthropic capital are blended with (and get a powerful boost from) private investment capital seeking both financial returns and the satisfaction of contributing to global solutions.
- Two main types provide long-term, large-scale capital to fund critical development needs:
- Institutional investors (banks, insurers, asset managers, etc.), who invest the vast majority of the required capital and typically invest for profitable risk adjusted returns
- Concessionary investors (public development assistance and foundations), who invest lesser amounts but may be willing to accept higher risk of loss or earn below-market rates of return
- Teams of finance subject matter experts, often sponsored by development banks or private institutions (foundations and NGOs), who match projects to investment capital
- Receive the financing and apply it to specific needs often found in emerging markets, including clean water access, medical facilities and sustainable development programs
The power to drive change
Take, for example, the WaterEquity fund, which brings together government agencies like the Overseas Private Investment Corporation, foundations, financial institutions and accredited investors to provide funding for clean water and sanitation efforts in the developing world. As part of that effort, Bank of America provided $5 million of interest-free capital as the first money into a fund that ultimately attracted $45 million in additional private capital for water and sanitation projects in South and Southeast Asia. Safe water and sanitation, beyond their humanitarian implications, will boost the global economy by creating healthier and more productive citizens and businesses. “Together with other financial services companies, development organizations and non-profits, we can use blended finance to support such projects as affordable housing, clean water and gender equality—challenges too big for anyone to solve on their own,” notes Anne Finucane, former vice chairman at Bank of America.
Blended finance has also been used to provide affordable housing in underserved communities. For example, Bank of America is working with the city of Charlotte, NC, to address the city’s affordable housing shortage. In collaboration with government agencies, a local foundation and private investors, the Bank is committed to establishing an affordable housing fund designed to raise as much as $50 million to increase the affordable housing supply. In a similar vein, Bank of America provided a $3 million grant to the nonprofit Root Capital in support of their efforts to promote and implement sustainable agriculture. Over the past 20 years, Root Capital has provided more than $1.3 billion in development capital to farming families and communities in Latin America, sub-Saharan Africa and Southeast Asia.footnote2
Goals at a global scale
As promising as such projects are, they represent just the start of blended finance’s potential to unlock trillions of dollars to address a wide range of issues, such as those outlined in the United Nations Sustainable Development Goals (SDGs).
The 17 goals run the gamut from access to clean energy to better working conditions, to expanding educational opportunities. In supporting those goals, the World Bank Group is promoting a variety of innovative, public-private financing approaches structured so that private investors may choose among various levels of risk and potential reward.
When the World Bank Group, other development banks and global financial institutions such as Bank of America use their resources not just to make direct loans and other financing structures for development, but to help reduce risks for private investors—that’s when capital can start building to a scale equal to the world’s challenges.
“A single project can benefit from the combining of different investor risk tolerances and expected rates of return,” Moynihan says. “That’s what blended finance is about. There’s the potential to mobilize vast amounts of capital without sacrificing private capital returns.”
To help move that process along, Bank of America recently announced $60 million in initial funding to create the Blended Finance Catalyst Pool, which supports climate resiliency, access to clean energy, affordable housing and water and sanitation. Development banks, institutional and private equity investors and other financial institutions are intended to co-invest alongside the Blended Finance Catalyst Pool, driving greater capital flows. Investment may be in the form of debt or equity and include funds that support SDG focus areas.
Amid the magnitude of challenges facing the world, the boundaries that separate people from one another seem less important than the overarching needs that bring them together, Moynihan says. “It’s about what we can all do, together, to drive meaningful change in the world.”
Originally published 2/18/20