In this section, we map the various types of blended finance structures available to real economy companies, with examples provided by CFO Coalition participants and partners, including Convergence and the Inter-American Development Bank (IDB).
The mapping follows the categorization introduced in the concept of Corporate Blended Finance.
Fund-Level Blended Finance
This refers to a combination of concessional funding (usually public or philanthropic funds) and full-return private capital in a fund for investments in companies’ regular equity or bonds.
Company-Level Blended Finance
Company-level blended finance is the use of catalytic capital from public or philanthropic sources directly in the capital of a company. In these transactions, public or philanthropic investors provide guarantees or insurance to improve the credit of companies, or give them subsidized concessional loans at below-market terms.
The most common forms of company-level blended finance are equity investments, below-market loans or local currency loans, as well as credit guarantees for the repayment of principal and interest on corporate loans or bonds.
For example, the IFC provides equity investments, local currency loans, and credit guarantees to support sustainable companies in emerging markets.
Project-Level Blended Finance
In project-level blended finance, public or philanthropic investors provide funding or financial support for important private sector infrastructure projects that support the SDGs, to help mobilize private capital.
The most common forms of project-level blended finance are guarantees and insurance. In the development finance space, these two highly effective mechanisms are used to leverage scarce public funds to incentivize the private sector. They can mobilize and leverage commercial financing by protecting against and/or mitigating risk, notably commercial default or political risks.
The World Bank Group, through its Multilateral Investment Guarantee Agency (MIGA), has an entire practice dedicated to promoting cross-border investments in developing countries by providing guarantees (political risk insurance and credit enhancement) to investors and lenders. While MIGA works primarily with governments, private companies often benefit from the guarantees and de-risking solutions when the participate in the projects. For example, In 2018, MIGA’s risk insurance arm recently supported the world’s largest solar power plant in Egypt by offering $210 million in financial guarantees for the international companies contracted to build the solar fields.
Guarantees are also used by export credit agencies to promote exports of national technologies and solutions in markets that are too risky for the private sector alone.
Outcome-Based Blended Finance
In outcome-based blended finance, public or philanthropic entities invest in fixed-income instruments in which the financial and/or structural characteristics are tied to predefined sustainability or environmental, social, and governance (ESG) objectives. The objectives are measured through predefined sustainability KPIs and targets.
The use of outcome-based mechanisms incorporate blended finance is a promising way for DFIs to scale the quality and quantity of SDG finance in emerging markets. With the increasing popularity of Sustainability-Linked bonds (SLBs), more and more companies and investors are getting comfortable linking financial instruments to their sustainability performance. Outcome-based finance can be used by DFIs to support corporations in providing critical solutions for the SDGs while ensuring more impact for their investments.
The concept of outcome-based blended finance is also related to development impact bonds (DIBs). These financial products are designed to furnish development programs with money from private investors who earn a return, paid by a third-party donor, if the program is successful. As with performance-based blended finance, DIBs require agreement at the outset on the objectives to be measured, which are then independently verified.
