The linguistic quagmire of blended finance
Blended finance can provide a powerful mechanism for investors and philanthropists to maximise the impact of investing and giving. But obscure vocabularies and a lack of clear, transparent advice can be barriers. Advisors need to act as translators, mediators, and strategic compasses all in one, cutting through the linguistic fog to find the right path.
Blended finance. SDGs1 , ESG2 . Responsible innovation. Everywhere in financial services we’re confronted by an endemic tendency to lean on jargon and overcomplicate. It’s used as a way of indicating skill and marking expertise. But the reality is that hyper-experts often leave clients at sea and, by the end of a meeting, nobody is really any the wiser.
Philanthropy is especially vulnerable to linguistic hurdles because it lacks the technical and legal framework of the financial world. We might talk about “long-term sustainability”, and “responsibility”, but there are no “right” answers to what these mean. This can be a frustration for advisors and for clients.
It matters because the range of instruments, methodologies and approaches for philanthropic giving is ever evolving. Both development aid and the non-profit world need to know how investors and philanthropists can contribute together to the sustainable economy. This is particularly relevant to the rising generation of wealth owners, whose thinking about environmental issues and social challenges is innate to a degree that it wasn’t for their parents’ and grandparents’ generations.
But jargon, ego and complicating the uncomplicated can often exclude philanthropists from the mechanisms and approaches that can drive true systemic change. And blended finance is a perfect example.
The case for blended finance
Blended finance, when we set the verbiage aside, is a pretty logical concept. Simply put, it is a method of bringing together different pots of capital – philanthropic, private and state – all with a shared goal. Philanthropists who want to transform systems – change a country’s economic trajectory, eliminate a disease, safeguard the natural world – need to work in partnership. That partnership can be with other philanthropists, with investors, with governments, and with other strategically mobilised forms of capital.
It sounds like a magic recipe – and it can be a way of making great things happen. But there are challenges. The first of these is that bringing more stakeholders together tends to slow and complicate processes. Second, while grant-makers and private funders are ultimately at liberty to put money towards anything they like, in any way they like, investment from governments has to deliver proven financial as well as social and environmental returns (what we call “impact”). This is where philanthropic capital excels. It is answerable to no-one, is highly risk-tolerant, is flexible, and it has the freedom to fail without consequence.
Blended finance can be a powerful tool for social and economic development. According to the Organisation for Economic Co-operation and Development (OECD), there is a global development spending shortfall of some USD2.5 trillion per year. And the pull of recovery spending post-Covid is diverting government funding away from overarching, longer-term issues. But those SDGs can still be achieved if public, private and philanthropic sources can work together3.
The backing of philanthropists and governments reduces risk in investment opportunities. The result is that these opportunities are made accessible to the private sector. In return, private investments help accelerate development and increase positive impact. Through lowering risk and yielding a financial return for private investors, something that would otherwise be seen as too visionary, too soon, or too large (and therefore risky) – or simply as a charitable project – becomes a viable investment opportunity.
Where it works
One of the major success stories for blended finance over the past decade has been its application in providing Brazil with a sustainable energy network. One study in the journal Energy, Sustainability and Society compares the energy sustainability of Brazil and Nigeria as the biggest economies in South America and Africa respectively. Where Brazil has gone from strength to strength, Nigeria lags behind – in part, the study says, as a result of its limited financing vehicles and poor public-private funding partnerships.
As of 2019, hydro-electric renewables contributed 80 per cent of the energy supply in Brazil. The shift has been driven by finance from the Brazilian Development Bank paired with philanthropic and private funding, along with a national push for electrification. The result is that Brazil is now leading the world as a low-carbon power generator – in no small degree thanks to the power of strategically applied blended finance. The study concludes that the same would be possible in Nigeria if the model of strong policy, a dynamic bank, blended finance and diversified funding vehicles could be adopted4.
Making sense of it all
Philanthropy advisors like me and those in my team help to shape ideas and shed light on what others are doing – approaches, successes and, occasionally, failures from which we can learn. We are privileged to work with clients who have both the desire and capacity to use their wealth to change the world for the better. These people know that the choices they make can hugely influence the future of our planet and, potentially, our survival. For some, the simple act of contributing is the end game – to save lives or change lives is enough. For others, it’s just the first step in being part of systemic change. Both have value and merit. We are privileged to help connect the dots, through Pictet’s networks, clients and peers, non-profits, and those vital but linguistically opaque experts. We act as a guide and conduit for getting the right capital to the projects that need it.
I often meet clients who have faced a lot of ego in this sector – experts who talk more than listen and tell rather than advise. In the best cases, this serves only to complicate things; in the worst, it can put them off entirely. Nobody wants to come across as illiterate in their field. But there is a huge language gap between experts and philanthropists – despite their shared goals. As I see it, it’s vital to put the philanthropists centre stage, to try to help them work out the right path, and civilise the linguistic jungle.
finance and the SDGs, 2022