Blended Finance is defined by Convergence as “the use of catalytic capital from public or philanthropic sources to increase private sector investment in sustainable development.” (Convergence Finance). They note that blended finance strategies have mobilized approximately $140 billion to-date based on their data. The concept of blended finance includes situations where multiple finance tools with different risk/return profiles are combined in a single project or investment deal so that returns to certain investors are enhanced relative to risk - while donors with lower needs for returns can accept higher risk and lower returns. Combining different instruments - for example, a grant, a financial guarantee, concessionary or subordinated public debt, discounted lending or return rates, and private investment - allows for a wider range of finance sources to participate in a program or company’s financing. For more information see Convergence.
One useful element of many blended finance solutions are financial guarantees. Financial guarantees are finance tools that reduce the risk of providing loans and encourage greater experimentation in lending. For example, loan guarantees are described as having the “objective [of] induc[ing] lenders to extend loans to individuals and firms they would otherwise not accept as loan clients” (Vogel and Adams, 1996). Loan guarantees have been useful for experimental new funds for nature such as Althelia (Mirova) and others who have been able to decrease the risk of non-repayment to investors in the fund through a loan guarantee program. As an example, Mirova’s $100 million Sustainable Ocean Fund is supported by USAID which will provide up to $50 million in principal protection in the event of a loss of investment.
Another example of a blended finance approach can be seen in the Debt Conversion that was orchestrated to help fund marine conservation in the Republic of Seychelles. In this case, the Nature Conservancy combined a loan and grants (provided in part by philanthropic foundations) in order to buy back debt held by the Paris Club.
Enterprise Challenge and Innovation Funds
Funding instrument that distributes grants (or concessional finance) to profit-seeking projects on a competitive basis. It subsidizes private investment in developing countries where there is an expectation of commercial viability accompanied by measurable social and/or environmental outcomes. Challenge funds can mitigate market risks, while spurring innovation to fight poverty and reduce environmental degradation.
Financial Guarantees
Guarantees can mobilize and leverage commercial financing by mitigating and/or protecting risks (such as political, regulatory, and foreign-exchange risk), notably commercial default or political risks. Guarantee programs are often designed to help entrepreneurs obtain bank financing by dealing with collateral constraints. The guarantee functions as a promise by the guarantor to the lender that, in the event that the borrower defaults on payment, the guarantor will repay the lender a specified proportion of the foregone principal. This allows traditional lenders to take risks and learn new markets outside current risk profiles. The scheme can be attached to biodiversity related businesses which are often operating in non-mature markets and lack financial records
Private Guarantees
Guarantees can mobilize and leverage commercial financing by mitigating and/or protecting risks (such as political, regulatory, and foreign-exchange risk), notably commercial default or political risks. The guarantee functions as a promise by the guarantor to the lender that, in the event that the borrower defaults on payment, the guarantor will repay the lender a specified proportion of the foregone principal. This allows traditional lenders to take risks and learn new markets outside current risk profiles. The scheme can be attached to biodiversity related businesses, which are often operating in non-mature markets and lack financial records. Private companies and Non-government organizations can extend these guarantees.
Public Guarantees
Guarantees can mobilize and leverage commercial financing by mitigating and/or protecting risks (such as political, regulatory, and foreign-exchange risk), notably commercial default or political risks. A public guarantee can encourage financial institutions, i.e. commercial and development banks, to offer loans to new companies. Public guarantee programs are often part of bilateral or multilateral development assistance and seek to address market failures without unintentional distortion of existing banking systems and financial markets. The scheme can be attached to biodiversity related businesses.
Project Finance for Permanence
Project Finance for Permanence (PFP) is an innovative approach to permanently and fully fund conservation. The terminology is borrowed from Wall Street, where a single "closing" is negotiated with Government, foundations and private donors to gradually eliminate the gap in protected areas financing. PFPs is a solution for graduating from piecemeal funding initiatives. Successful PFPs were completed in Brazil, Costa Rica, and Canada.
Lower cost of capital for conservation investments
Identify and model policy interventions that can lower the barriers that hold back private investment in biodiversity-friendly sectors. The aim is to lower the capital costs of investment and achieve a better risk-return profile for investors and for companies receiving financing. The analytical framework and model developed for renewable energy may be adapted to conservation investments.