Blended Finance’s Broken Promise and How to Fix It / Davos 2025

Summary

This panel discussion focused on the challenges and potential solutions for scaling up blended finance to address the funding gap for sustainable development goals (SDGs) in emerging markets and developing economies. The panelists, representing multilateral development banks, development finance institutions, stock exchanges, and pension funds, explored various aspects of blended finance and its current limitations.

Key points included the need to de-risk investments in emerging markets, improve policy frameworks, and build trust between public and private sectors. Panelists highlighted innovative approaches, such as the Danish SDG Investment Fund, which combines government first-loss guarantees with private pension fund investments. The importance of standardized frameworks, consolidated guarantee structures, and catalytic funding was emphasized to scale up blended finance.

The discussion touched on the reform of multilateral development banks to better leverage their capital and attract private investors. Panelists stressed the need to move beyond project-by-project approaches towards more strategic, policy-driven platforms. The role of local capital markets in mobilizing domestic savings was also highlighted as crucial for sustainable development financing.

Challenges such as the perception of risk in emerging markets, the small scale of typical blended finance deals, and the impact of credit rating agencies were addressed. Panelists called for more accurate risk assessments and faster re-rating of countries that have addressed underlying debt problems.

The discussion concluded with panelists expressing hopes for the future, including transferring successful blended finance models to larger scales, achieving more on-the-ground successes to build trust, improving sovereign credit ratings, and developing more country platforms for strategic investment approaches.

Keypoints

Major discussion points:

– The gap between blended finance flows and SDG financing needs remains large

– Multilateral development banks and development finance institutions are adapting their approaches to mobilize more private capital

– Trust and public-private partnerships are key to successful blended finance initiatives

– Reforms to the international financial architecture, including MDB reform, are needed

– Credit rating agencies may be overestimating risks in emerging markets, hindering investment

The overall purpose of the discussion was to examine why blended finance has fallen short of expectations so far and explore ways to scale it up to meet sustainable development goals, particularly in emerging markets and developing economies.

The tone of the discussion was generally constructive and solution-oriented. Panelists acknowledged challenges but focused on sharing successful examples and proposing ways to improve blended finance. There was a sense of cautious optimism that with the right reforms and partnerships, blended finance could be scaled up significantly.

Speakers

– Sara Pantuliano

Role: Chief Executive at ODI Global

Expertise: International development, sustainable development

РOdile Fran̤oise Renaud-Basso

Role: President of European Bank for Reconstruction and Development (EBRD)

Expertise: Multilateral development banking, blended finance

– Hayashi Nobumitsu

Role: Governor of Japan Bank for International Cooperation (JBIC)

Expertise: Development finance, international cooperation

– Jon Johnsen

Role: Chief Executive Officer of Pension Customers Administration (PKA)

Expertise: Pension fund management, sustainable investing

– Leila Fourie

Role: Group Chief Executive Officer of the Johannesburg Stock Exchange

Expertise: Financial markets, stock exchanges, sustainable finance

Additional speakers:

None identified

Scaling Up Blended Finance for Sustainable Development: Challenges and Solutions

This panel discussion brought together experts from multilateral development banks, development finance institutions, stock exchanges, and pension funds to explore the challenges and potential solutions for scaling up blended finance to address the significant funding gap for sustainable development goals (SDGs) in emerging markets and developing economies. Blended finance, which combines public and private capital to de-risk investments and catalyze additional funding, is seen as a crucial tool in bridging this gap.

Current State and Challenges

Sara Pantuliano, Chief Executive at ODI Global, highlighted the stark contrast between the current blended finance market, which stands at approximately $15 billion annually, and the estimated $4.2 trillion SDG funding gap. This vast disparity underscores the urgent need for innovative approaches to mobilise capital at scale.

Several key challenges were identified by the panellists:

1. Risk Perception and Credit Ratings: Leila Fourie, Group CEO of the Johannesburg Stock Exchange, emphasised that the perception of risk in emerging markets often hinders investment. This perception is exacerbated by credit rating agencies, which may be overestimating risks and applying qualitative overlays that disproportionately affect low-income and emerging markets. Fourie highlighted the need to address issues with credit rating agencies’ assessments, particularly the slow re-rating of countries that have addressed underlying debt problems.

2. Policy and Regulatory Frameworks: Odile Françoise Renaud-Basso, President of the European Bank for Reconstruction and Development (EBRD), stressed the need for clear policy direction and investment frameworks to attract private capital.

3. Adaptation to Global Changes: Hayashi Nobumitsu, Governor of Japan Bank for International Cooperation (JBIC), highlighted the difficulty in adapting to energy transformation and supply chain disruption, which adds complexity to investment decisions. He emphasized JBIC’s efforts to work with Asian countries on decarbonization while addressing these challenges.

4. Trust and Collaboration: Jon Johnsen, CEO of Pension Customers Administration (PKA), emphasised the importance of trust between public and private sectors for successful blended finance initiatives.

Innovative Approaches and Solutions

The panellists shared several innovative approaches and potential solutions to address these challenges:

1. Co-investment Models: Renaud-Basso discussed the EBRD’s efforts to create co-investment models and de-risking mechanisms to attract private capital. She mentioned specific examples such as working with ILX Fund and using synthetic securitization to free up capital for new investments.

2. SDG Investment Funds: Johnsen shared the success of the Danish SDG Investment Fund, which combines government first-loss guarantees with private pension fund investments. This model allows pension funds to enter projects that might otherwise be too risky, leveraging their long-term investment perspective. Johnsen emphasized the importance of trust and the government taking the first risk in making this model successful.

3. Standardised Frameworks: Fourie highlighted the development of standardised frameworks for green financing products to enhance market transparency and facilitate investment. She also discussed South Africa’s experience in creating a private placement environment and engaging with state-owned entities for potential blended finance solutions.

4. Regulatory Collaboration: Nobumitsu stressed the importance of collaborating with partners to improve regulatory frameworks in target markets.

5. Local Capital Market Development: Renaud-Basso emphasised the crucial role of developing local capital markets in mobilising domestic savings for sustainable development financing, including the importance of local currency financing.

Reform and System Changes

The panellists agreed that significant reforms and changes are needed in the financial system to scale up blended finance effectively:

1. Multilateral Development Bank (MDB) Reform: Renaud-Basso called for reforms to enable MDBs to better leverage their capital and support partnerships with private investors. She stressed the importance of moving from a project-by-project approach towards more strategic, policy-driven platforms to achieve scale.

2. Consolidated Guarantee Structures: Fourie advocated for consolidated guarantee structures and concentrated catalytic funding to enhance the effectiveness of blended finance initiatives.

3. Credit Rating Agency Reform: Addressing issues with credit rating agencies’ assessments of emerging markets to more accurately reflect risks and improvements in these economies.

Areas of Agreement and Disagreement

The panellists generally agreed on the need for clear policy frameworks, public-private collaboration, and innovative financial mechanisms. However, there were some differences in perspective:

1. Effectiveness of Blended Finance: Nobumitsu expressed some scepticism about the effectiveness of blended finance, questioning whether it truly catalyses additional investment or simply finances commercially viable projects. In contrast, Johnsen presented a more positive view based on their experience with the Danish SDG Investment Fund.

2. Approach to Risk Mitigation: While Renaud-Basso advocated for selective use of guarantees to avoid market distortion, Johnsen emphasised the importance of government taking the first risk to enable pension fund investments.

Future Outlook and Next Steps

The discussion concluded with panellists expressing cautious optimism for the future of blended finance. Key takeaways and action items included:

1. Scaling successful models: Transferring successful blended finance models, such as the Danish SDG Investment Fund, to larger scales and different contexts.

2. Building trust through success: Achieving more on-the-ground successes to build trust among investors and local stakeholders.

3. Developing country platforms: Creating more strategic investment approaches through country-specific platforms.

4. Expanding partnerships: EBRD to seek more partners like ILX Fund for co-investment without guarantees.

5. Implementing MDB reforms: Pursuing changes that allow MDBs to better leverage their capital and support blended finance initiatives.

The panellists shared their hopes for changes in the coming year, including improved collaboration between public and private sectors, more effective use of blended finance tools, and progress on addressing climate finance challenges.

In conclusion, while significant challenges remain in scaling up blended finance to meet SDG funding needs, the panellists identified several promising approaches and areas for reform. The discussion highlighted the complexity of the issue and the need for diverse, context-specific strategies to mobilise capital effectively for sustainable development in emerging markets and developing economies.

Sara Pantuliano: Good afternoon everyone and welcome to this really important session titled Blended Finance, the broken promise and how to fix it. I’m Sara Pantuliano, I’m the chief executive at ODI Global. I mean blended finance was envisioned as a transformative approach. The idea was to mobilize additional capital for sustainable development and the idea was to leverage public funds to the risk investment to attract more commercial capital and in fact you know we have seen the blended finance market grow. In 2023 it reached 15 billion dollars of annual flows and that was a five-year high but at the same time we’ve also seen the financial gap to meet the sustainable development goals of the SDG continue to grow. Last year the gap was amounting to a staggering 4.2 billion dollars so you see the difference between what the blended market is and what the SDG’s gap is. And so the economies particularly in emerging markets you know developing economies remain really evident on fossil fuels that’s something else we haven’t managed to improve. Renewable energy projects are far more expensive than in developed economies. This is a really critical barrier to progress. At COP 29 in Baku last year the global community agreed to triple annual financial support to developing nations as they called in the Paris Agreement, that’s the taxonomy. It committed to a funding target worth 100 billion dollars, they committed to increase that to 300 billion dollars and also to establish you know a goal to mobilize 1.3 trillion dollars annually by integrated public and private financial sources. But you know this really hinges on rethinking, redoing the international financial architecture. We can do that. if we don’t manage to find ways to de-risk this investment in emerging markets and developing economies. So to scale up investment, the only way is to enable this broader systemic change. And that’s what we want to discuss today. And I’ve got a fantastic panel to help think of how we achieve the systemic change that we talk about so much. I’ll start to my left to introduce Hayashi Nobumitsu, the governor of Japan Bank for International Cooperation. Next to Nobu is Odile Françoise Renaud-Basso, president of European Bank for Reconstruction and Development or EBRD. Leila Fourie, group chief executive officer of the Johannesburg Stock Exchange. And last but not least, Jon Johnsen, the chief executive officer of Pension Customers Administration or PKA. Odile, I’ll start with you because we’ve had this conversation together a few times and I know how much EBRD is doing. There’s been a lot of discussion on the role of multilateral development banks in how they need to change in international financial architecture and how they can really help mobilize this private sector capital by de-risking it. EBRD has innovated a lot in this space. Can you share what practical steps you think MDBs can take to mobilize this commercial capital? What kind of co-investment models of de-risking mechanisms you have seen that you think are really promising?

Odile Françoise Renaud-Basso: So thank you. Thank you very much for this question and thank you for inviting me in the panel. And indeed, I think that’s a very, very topical discussion. I mean, it’s a long-term discussion. And there is no, I think, one quick fix and one easy solution. I think it’s important, not only, I mean, the blended finance piece and the volume of financing is, of course, a very important element and we know how important it is in the COP discussion to build the confidence that there will be the financing available and so forth. But I think that if we really want to make progress. we need to look at the whole picture because and and that’s very much where MDBs also can contribute and because all this I mean sorting out the climate issue is not only and developing it’s not only about volume it’s also about implementing the right policies, implementing the right strategies that will unlock investment opportunities, that will unlock a lot of projects in which to to invest. So I think the first key part is the fact that if we look at the climate ambition now all MDBs are very that at the core of their the way they define their mandate and their objective so everybody has step up the level of ambition and the way we integrate these objective in all our in all our financing and and approach. The second point I wanted to make is MDBs per se are the model of MDBs is a bit of the core blended finance in the sense that you have public money shareholder capital which leverage private financing because we all issue funding and and then they multiply they multiply our capital so we have a limited capital and we really invest much more than than the I mean and that’s core the business model but of course we need to go even even beyond. To come back to the first point I was I was making about the the importance to have an encompassing approach to that I think a big part of the role of the MDBs in the debate is to work on the policies that are the relevant that will give the visibility and the confidence of the private sector to invest in the countries and that’s something which if you look at the climate space for example working on the strategy having clear policy direction with policy plans to green the energy sector to decarbonize the economy to to deal with adaptation. This is a very clear fundamental component if you want to first be able to develop project and then attract private investors because then you have clarity, you need to have also part of it is having, I mean, transparent, credible, sound investment framework and then this gives confidence for people putting their money in the country that this is part of the long-term strategies, the policy will not change in six months and they have visibility of what will be, I mean, where the country is going. The second point, the second role for us is really to bring, as you were saying, some concessional funding with our investment in order to leverage and we do that a lot with climate funds, you know, there are some climate funds that have been set up at the international level, the Green Climate Fund, CIF, I mean, the Capital Instrument Fund for the World Bank and with really grand financing that are used to leverage and to increase our potential of financing and bring to the country or to the client the appropriate mix between concessional funding and more commercial funding. The last point, I think, is really for us to work on with private sector investors in order to bring them co-investing with us and there, there are, I mean, we work on a number of different type of instrument, the more traditional one is the B-landing, you know, B-landers, we have, and there, this is a very useful instrument. What we see is that the regulatory tightening of bank, in the bank regulation and so forth has quite reduced the appetite of the banking sector to do that. Asset managers may be more interested and have more capacities, but we need, I mean. And this is one limited instrument we need to go much beyond. Developing local capital market, I think, is a very important dimension, and for two reasons. The first one is that you have a lot of savings, I mean, which is not invested in the countries which are going abroad, and using, mobilizing local saving is a very important component of financing the development of the country. The second element is that it really helps also to bring financing in local currencies, and being able to match and to reduce the exchange rate, which is one element of the challenge. This is very important. But of course, we are also working on some risk-sharing approach, first loss pieces, and so forth. What I found is that very often this is seen as the solution, but when you look to scale it at a very wide scale, it’s extremely expensive. So you need a lot, a lot of concessional funding in order to be able to cover the risk. So that’s why it’s not, I mean, I think it’s relevant in some pieces when you’re, in particular, a very early market, early, you know, highly risky new technology and so forth, but it cannot be a widespread, it will not be the solution to finance emerging, I mean, SDGs globally.

Sara Pantuliano: Thanks, Odile. We’ve heard the perspective of NMDB from Odile, but DFIs are also a very important component, a critical component of the global financial architecture. Nobu, can you tell us a little bit about how JBIC has adapted its risk-taking activities to try and, you know, continue mobilizing capital at scale in emerging markets and developing economies?

Hayashi Nobumitsu: Well, we are JBIC, Japan Bank for International Cooperation. We used to be called Ex-Im Bank of Japan, but as our universe has expanded more than export and import to more and more investment, we are called JBIC now. And in this world of disruption, and division, as our mission is to support Japanese companies’ activities overseas, it’s getting more and more difficult for them to adapt to energy transformation and supply chain disruption. So we have to be innovative in terms of adopting technology and in terms of taking mores and in terms of collaboration with our counterparts in other countries, and we’re collaborating with the NDBs. And oftentimes, our challenge is less about how to find financing, but more about the regulatory framework or about the ability of the host countries to execute those projects. And an enormous amount of money of financing is needed, especially in Asian countries, as they grow and as they decarbonize. Well, we’ve been talking about decarbonization, but in Asia, the reality is that they continue to use fossil fuel. A lot of coal power is still there, which are still very new. So we continue to work with them, how they can decarbonize, using gas in transition, but using more renewable energy and strengthening the grid. These are a lot of policy issues involved, the capacity issues involved, regulatory framework issues involved. So in such Asian countries like Indonesia and Vietnam, we set up a working team with the governments, with the government agencies, and with Japanese companies, so that as we develop a certain real project, we advise those governments to improve their regulatory framework, so that hopefully, when the project is ready. the framework is also improved. That is how we try to work with those countries. But these are what we can do in Southeast Asian context. In other parts of the world, we have to ask our partners, other bilateral agencies, or especially MDBs, like ODIHR. When we did the wind power project in Egypt, the support, the collaboration with EBRD or IFC were very, very important. Well, more specifically about wind financing, it is really challenging for us. We once put some money in the fund which finances renewable energy project. So we took a catalyst role in taking the first loss so that more private industries come in. But after all, we weren’t quite sure how much we were catalyzing, because you never know whether we have just financed those projects that were commercially viable anyway, or let them make more profitable or less risky. But I am not saying I am adverse to blended funding. We take advantage when there are those who can give grants or concessional money. When we did the project financing in some of the Pacific islands, well, those projects in Pacific islands are very, very difficult. But in telecommunications, some projects can be commercially viable. So we provided finance, but US and Australian counterpart brought some concessional money, which made our project viable. And in the case of many Asian countries, there are a lot of potential for geothermal projects as a renewable energy. But the geothermal project is often very risky because… Because you never know until you start, you can get enough heat or enough steam. And in the case of one project we did in Indonesia, we asked for the ADB to provide some fund from their trust fund, which comes from the grant of the member countries. And now we are doing another project in Germany, which uses closed-group geothermal system, which just needs heat, not steam. It’s an innovative project, so that the commercial banks are not still reluctant to offer to be in the project, which is the very first commercializing project. And we, as an official bank, got in there, because they’re Chinese companies, we’re one of the sponsors. And hopefully the second or third project will be fully commercialized. So we will continue to take advantage of whatever blended finance there are, but for me, if you have a grand design of big blended finance, there’s a solution that comes, I’m not quite sure about it. I have to look at each transaction. I am less of a person of principle of good design, but I am a transactional person.

Sara Pantuliano: That’s very clear. So not a general fix, but case by case, let’s have a look. Well, let’s hear the other perspective. Leila, I mean, the financial market infrastructure players like stock exchanges are a fundamental part of this architecture that we want to transform. Stock exchanges are the key intermediaries. They facilitate liquidity, they enhance market transparency. What do you think are the key ingredients? What are some of the examples of the reforms, regulation frameworks that Nobu was talking about? But also, I know that you are part of the UN Alliance of Global Investors for Sustainable Development. What are the findings of the alliance?

Leila Fourie: Sara, and I think you opened with this comment around the gap for funding for SDGs, and it’s actually four and a half trillion US dollars, and if we look over the last decade, the deals that have been done through blended finance amount to 200 billion US dollars, so you can see that we’re falling far short, and some of those issues that you raised in your opening remarks are really driving this, and so the perception of risk, and that’s underpinned by potential political instability, currency risk, policy uncertainty, the lack of scale, the convergence state of the study, and on average, blended finance deals are sitting at around 50 million US dollars, the commercial institutions, their mandate and their entry level is 100 million dollars, so more needs to be done to scale up, and then of course the complex deal structures, where you’re trying to get public players working with private players, and so some of you may have read Stéphane Durkheim’s book, where he talks about how countries who have enabled public-private sector collaboration have increased the size of the economic pie, relative to those who are funded separately, and he uses the term the developmental bargain, and so as an exchange, and I see our central bank governor is here, and some of our commercial finance industry people are here too, and so what we are working at in our financial infrastructure is to try and overcome some of those. So the first problem of perception of risk and, Odile, you had mentioned concessional finance, guarantees, et cetera. Those do go a long way, but as you say, more needs to be done. So on scalable, scaling up the finance, standardized frameworks are required. At the JSC, we’ve introduced a number of green financing debt products. So green bonds, impact bonds. We spoke a little bit earlier about some of the decarbonizing initiatives, and we’ve created transition bonds to make sure that we don’t have stranded assets, but that those institutions who are wanting to close down coal-related plants and therefore then build renewable projects can also have access to that sort of funding. In addition to that, in terms of the accelerators, consolidated guarantee structures are required, and concentrated catalytic funding is required, and we’re seeing some tremendous work. And of course, you really need a crisis to catalyze this, and renewables is really at the center of that. And so we need to see more products that are really implemented at scale. And we are starting to see the beginning of that, but I think much more needs to be done. In South Africa, now some of those points that I’ve raised have really been on the global stage in my interaction on the UN Global Compact Board and the UNGISD Board. Globally, the alliance have created. a blended finance structure. Locally within South Africa, we do have a number of very good example. The car train funding was funded off a blended finance, equity, private equity and private debt structure together with some concessional finance from governance, government and MDBs. And what we are starting to see is a bit of an acceleration of cooperation and issues like in South Africa, the power crisis, a looming potential water crisis generate a coalition of the willing. And we’ve also seen some very powerful public private sector coalitions, which I can talk a little bit about later, which have galvanized and really started to create a platform for scaling up.

Sara Pantuliano: Great, and I think it is this coalition that is something we need to understand in more detail, because I think this is where the promise is. And Jon, this is a perfect segue for you because BKA has brought together a coalition that has experimented with a really interesting blended finance model, because you’ve worked with the Investment Fund for Developing Countries of the Danish Ministry of Foreign Affairs with other investors to create this, to launch this Danish SDG Investment Fund, which has done quite well to mobilize capital for SDGs in emerging markets and developing economies. Tell us more about it. Tell us what the secret ingredient of the success story is and whether it can be replicated. Yeah, for sure, I think it can be replicated.

Jon Johnsen: So PKA is the largest labor market pension fund in Denmark. And my members are the healthcare and social workers of Denmark. And they want, of course, and I need to also ensure that they have the highest possible return so they can have as high pensions as possible. But they also want to do good in the world. So they are sort of a double. thing that we have to live up to if we can. So what we have done is that together with the Danish government, we made a coalition consisting of two very important ingredients. The first ingredient is that the Danish government will take the first risk. So that makes us possible for us to enter projects that might have too high risk if we were to go alone. So if we had to do these investments alone. So the Danish government ensures the first risk is also deferred returns and so on. So it’s a whole capital structure that ensures that we can actually invest also in emerging and developing economies. That’s the one thing. The other thing is that the Danish government, and of course, on the back of our investments, set up a whole team that can actually do these types of investments. Being a Danish pension funds, I mean, we would never have the competences or the ability to build our own team that can do these type of investments. It’s too complex. You need local skills, you need, and as we just heard, you know, what about currency risk, political risk, and all of that, that you need a special entity that actually take care of that part as well. And that’s what the Danish government decided when we decided that we would invest alongside with the Danish government. And it’s actually located very closely linked to the foreign minister, so they have all the access to all the diplomacy and so on, so they can ensure. We closed the first fund seven years ago, and it’s fully invested now, and now we actually opened up the second fund. So, and also with some experiences, I mean, some investments were good, some were maybe not, and now we have a team with the skills and the knowledge of how to do these type of investments, so I very much look into this next phase of the SDG fund. of Denmark.

Sara Pantuliano: Great. Norbert, I’ll come back to you, because you sounded a bit skeptical about this blended finance market, but do you envisage JB to do something along the lines John is describing, to scale, creating this mechanism so that these coalitions can do more and more of this?

Hayashi Nobumitsu: Well, I’m quite ready, and, well, it’s very interesting. Well, in the, say, in the Asian contest, I know how to play the game. We know very well those institutions in Asian government, and Japanese companies are in many countries. But in the African contest, for example, much, we see much less Japanese companies. We have much less relationship with host government. So I would very much like to work with people like you, or EBRD, or African Development, or other agencies who know the system, and who know how to, who to talk with.

Sara Pantuliano: John, what do you think needs to change on the side of, you know, more public money, to really get more investors to do what you’re doing? Are pension funds a special case, or can other investors do what you do?

Jon Johnsen: I think other investors can also join, I’m sure, and I know it’s the hope of the Danish SDG Fund to get other investors on board, or family offices, and so on. I think pension funds has a very long-term perspective on investments, and that gives them a special angle on this, that, so, you know, they can think 10, 20, 30 years ahead. I think that’s very important. You also asked before, you know, what is sort of the secret to make this work? I think it’s trust. I mean, the government trusts that we won’t, you know, of course we need our returns, but we won’t sort of, you know, go too far to get our returns. Back to some of the projects, could they, you know, be viable just as projects without some risk capital? from the government or could they not? So, I mean, there’s a lot of trust built into that system and also trust from the pension funds to the Danish government that, you know, they can set up a team that actually works more or less like a private equity set up and that they will be able to eventually sell off some of these projects and then we will get our returns. And they actually succeeded in that. So I think trust is a very important part here. I mean, we need to trust each other to do this and somebody has to move first. And I think we talked to the Danish government and they talked to us and then, I don’t know who moved first, but we moved together and made it possible.

Sara Pantuliano: Odile, a big part of the conversation over the past two, three years to try and leverage more capital towards the SEG financing gap, but also now the target that was set at COP29 last year, you know, the more blended finance, hinges on the reform of the multilateral development banks. It’s been this process that we’ve followed for a while now, led by the G20 that really expects an operational model that supports this kind of partnership. Can you tell us a little bit what has been achieved so far? What progress has been made in this respect and what is still to come and what we need to do?

Odile Françoise Renaud-Basso: Before doing that, I would like to really react and build upon what has been said about pension fund and so forth, because what I found interesting is that in your case, you have a first loss from the government. What we try to do is to, and what we are succeeding in doing is working with some pension fund asset managers. In Europe, we started, we have a fund with ILX, for example, based in the Netherlands, where they do some co-investment with us without guarantee. I think because the level of risk of the project, because of the project preparation, the quality of our involvement in the project, the selection of the project and so forth, you can have some investment in emerging markets, in renewable. or which are investable by asset managers without a guarantee. And I think that’s the question and where we need to be careful about blended finance is that we need to go as far as we can in bringing private sector without guarantees in our markets. Because this is where you have the scale. You need guarantees in some areas when it’s very first technology, very risky project and so forth. But you will never have the scale to have guarantees for the trillions we are looking for. So being very selective and avoiding distorting, you know, distorting the market where you provide guarantee where it’s not needed and really focusing on where you need this type of guarantees. And this is key. And to be able to do that, I mean, and to bring more private investors in without guarantee, quality of the product preparation, transparency of the data. And I think that’s something we are working, part of the reform agenda of the MSBs is being published much more, our data about the losses, the risk of default and loss in default and so forth. And the outcome is very good. I mean, the results we have, the gap between the risk of perception and the reality of the risk is huge. It doesn’t mean that you don’t have risk, but in many cases, you have a big gap. So I think that the more we can pass, convey this message, show our data and so forth, the best it will be. Then in terms of the other dimension of the reform, I mean, we have worked all of us a lot on leveraging our capital, being able to take more risk. I mean, increase our balance sheet and push the boundaries, not being too conservative, take into account the preferred credit status plus callable capital. So this is, and then you’ve seen quite a big increase of MDBs capacity. But the third component is a bit linked with the first point, is I think that all MDBs now are also moving to a model where the more we can share with the private sector, the better it is. So we will, we do this kind of partnership with. asset managers. We are working on synthetic securitization, because the scale is a big issue for private investors, and we try to do big projects, but sometimes you have small projects. So linking to all these projects, putting that on the market with securitization, that’s a way to attract and also to accostumate and get private investors used to invest in emerging countries where you have this kind of bond with synthetic risk, already quite a lot of diversification and so forth. And the last point I want to make is the concept of moving from project to project approach to a more policy, platform approach and policy pipeline approach. And to do that, for example, country platform, we have been talking a lot about that, is rather than each MDB looking at one project in one country, really working with the country on what is the plan, what is the objective, what is the strategy, and then have a pipeline of investment and have a bulk of money, and then this is a way also to have a common strategy, common platform, and share the investment pipeline. And then you bring more interest from donors, because you have more clarity, but also you have a lot of efficiency gains from the beneficiary country that doesn’t have to manage a one-to-one project, and from our perspective. So I think moving from this project to a sort of more strategic approach is a very important element of the evolution and working together.

Sara Pantuliano: Great. Leila, from the perspective of South Africa and emerging markets, what are the key lessons that you can share with other emerging markets of how you’ve created a conducive investment ecosystem?

Leila Fourie: Yeah, absolutely. some very exciting projects and initiatives that are underway, maybe before I start there just to build on what Odila was saying, and I do agree that consolidated guarantee structures are not going to be enough to address the first loss and the lack of collateral project processes. If you look at all of the MDBs, they’ve got very anemic balance sheets, but that said, the ODI has put out a report indicating that only 45% of that funding is being allocated, so I do think that more needs to be done to leverage those balance sheets on a consolidated basis. In South Africa, we’ve seen quite a material transition, and John, you spoke about trust as a key cornerstone. South Africa’s faced congenital mistrust between public and private sector in the environment of macroeconomic headwinds over the past decade. We established a new political regime in June of last year, which has created a genuine point of inflection, and our president has spoken at this platform a couple of times about what’s happening there. What we’ve done is tackled the need for funding and the execution of policy across a number of areas. Firstly, on the insurance side, a number of changes have been made by our regulators to shift the categories of investment that are regulated to encourage pension funds and asset managers to allocate to infrastructure projects and to non-standard environments. I think more needs to be done for those institutions to take that up, but we’re starting to see the groundwork. In addition, we have faced a national crisis of power security and are also facing water shortages and this has created a tremendous coalition of the willing where we’ve started to see a genuine trust build up between our public and private sector. In the private sector, we have all of the large companies, over 150 of the largest organizations called the CEO Initiative. We are focused on addressing power security, the logistic security and general safety and security and there’s a new work stream focused on growth now. We have been engaging government on financial initiatives to unlock growth and one of the key underpins of that is public-private sector collaboration in funding. And so we are starting to see the building blocks of genuine growth. Government have created a very important enabling policy. They’ve created the ability for which is an enormous ideological shift from a previously very centrist state-owned entity environment to a more enabling and transformed state-owned entity situation and they’ve created tax incentives for renewables which has generated a genuine willingness by corporates to start to invest. That’s also encouraged private individuals to start to invest in renewables and all of these funding structures are shifting towards a more blended environment. The JSC itself has created… a number of platforms. Firstly, we created a private placement environment, which is a market infrastructure to create a slightly more standardised terms and conditions for private equity. So it’s a bit of a hybrid between public and private equity or capital raise. And we’ve had 46 new projects, many of which are in the renewable space, starting to seek funding. We are also in engagements with a number of our state-owned entities to look to potential funding, which would likely be blended finance, including concessional finance, public listed debt, and in some instances, the possibility of even equity listing either of subsidiary entities or projects. And so overall, what we are seeing is I’m proud to say that the country is actually leading the way in the emerging markets. And South Africa has a mercurial way of really reacting very well to a crisis. And so I think the power crisis, which has now, I’m very pleased to say, profoundly turned around. We have not had any of the rolling blackouts that our country was becoming so used to for at least 10 months. And more than 10 gigawatts of power has been funded through our national energy regulator. And so I think what we are creating at the tip of Africa is a blueprint that other emerging markets can leverage off. There are, of course, many other funds that we have across the continent where we collaborate with other international players. So, for example, the emerging market Africa infrastructure fund. Companies like Standard Bank, Allianz, the Dutch and the German central banks are all funding initiatives to crowd in and to accelerate on a consolidated basis to address the small number, the small value of transactions. And so, all in all, I think we’re taking a very multifaceted and systematic approach. But I come back to John’s point that underpin of this is trust and building a level of cooperation and a coalition of the willing between public sector, private sector and, of course, the MDBs.

Sara Pantuliano: And I couldn’t agree more. I’m actually quite struck that none of you has mentioned credit rating agencies and the role that they play in all of this because they’re fundamentally impressing risk. We’ve seen in a lot of the work at ODI the role that they do play, stifling perhaps the ability of the MDBs when it comes to the capital and how to really spread the capital a bit further. But also markets, they don’t necessarily know well and the way they price risks sometimes really stifles the investment. We don’t have much time, but a quick reaction on that would be interesting.

Leila Fourie: Yeah, very quick and it’s a favourite topic of mine. And if you look at the numbers, the UN has put out a report indicating that more than 90% of emerging markets raise their debt through, and this is low income countries, in hard currency. And if you look at the facts, the FCI has put out a report indicating default rates of 3.5% for emerging markets, recovery rates of 70%. The Standard & Poor’s overall global… global default rates are 3.5%, so comparing to 3.4, and the recovery rates are even lower. And so I think the problem that Africa and many low-income and emerging markets are facing is that the qualitative overlay that rating agencies apply to the ratings, whether it be their perception of political uncertainty, policy instability, is overrated, and moreover, the problem that when countries have addressed the underlying debt problems, the time to re-rate is much longer. And so you have a circular effect where these countries are reliant on hard currency funded debt, they’re paying on average 25% in, these are the low-income countries in Africa, on their debt, and so it creates a vicious circle of the higher likelihood of debt. It really does need to be addressed, and there’s a lot that’s happening. The African, there’s coalition between the African countries to start to advocate and address. I personally am working very strongly on the UNGC to ventilate this, and the Secretary General has responded to it, and he’s actually met with the international rating agencies, and we’re hopeful that there will start to become a genuine focus on credible and quantitatively based ratings, which of course determine the cost of funding. 100%.

Sara Pantuliano: Do you want to add anything? No, okay, well, we have really two minutes, but in 30 seconds each, there’s a question I often ask when I moderate panels at the annual meeting. We’ll be back here in a year’s time, annual meeting. in 2026, between now and then, what is the one thing that you really hope will have changed? The one thing that can really contribute to scaling up this blending promise? Who wants to start? So, okay, should I start?

Jon Johnsen: Okay, I think what I really hope for is that the structure that we have developed, the Danish pension funds and the Danish government, we could transfer that to and maybe get some of the MDBs to do first losses, first capital, and so on. Maybe we can scale it to even more. I would really hope for that to happen. And then, of course, what I’ll do, you know, personally, myself, I’ll get more pension funds and then want to invest in the SDG fund, so it can be even bigger, you know? It’s small, but, you know, one step by step, it might be bigger.

Sara Pantuliano: We’ll hold you to that. Sure.

Hayashi Nobumitsu: Yeah, well, we need success on the ground. In order to build trust, as you said, we have to show that it is working. We need more ODA, we need much less debt, we need more technical assistance, but unless we have a successful example on the ground, we can’t build trust among those people on the ground or for the potential investors. So we will work, continue on.

Sara Pantuliano: Excellent.

Leila Fourie: So my hope is, firstly, that national rating age, sovereign rating agencies begin to rate based on the genuine underlying risk rather than the qualitative perception. And then, secondly, that as a country, we have scaled up and are able to deliver on our infrastructure needs, both within South Africa and more broadly into the continent.

Sara Pantuliano: Excellent, I know the…

Odile Françoise Renaud-Basso: And I have two wishes. The first one is to have five partners, like Function Fund, to co-invest with us and to be able to demultiply what we are doing. And the second one is to develop more contributions. platforms. So to have more this kind of strategic approach with the countries where we really agree on a plan and then we deploy it and it’s much quicker, much faster and at higher scale. Fantastic.

Sara Pantuliano: Well the title of the session was blended finance broken promise but I really think that you know this fantastic panel has left you with a lot of inspiration about how we can fix that promise and make sure that we really scale blended finance to support sustainable development. Please join me to thank very much our fantastic panelists. you

Agreement Points

Need for clear policy direction and investment frameworks

speakers

РOdile Fran̤oise Renaud-Basso
– Leila Fourie

arguments

Need for clear policy direction and investment frameworks

Developing standardized frameworks for green financing products

summary

Both speakers emphasize the importance of clear policies and standardized frameworks to attract investment and scale up finance for sustainable development.

Importance of collaboration between public and private sectors

speakers

– Jon Johnsen
– Leila Fourie
– Hayashi Nobumitsu

arguments

Importance of trust between public and private sectors

Need for consolidated guarantee structures and catalytic funding

Collaborating with partners to improve regulatory frameworks

summary

The speakers agree on the crucial role of collaboration and trust between public and private sectors in successful blended finance initiatives and improving investment environments.

Similar Viewpoints

Both speakers advocate for the development of co-investment models and de-risking mechanisms to attract private capital and scale up investments in sustainable development projects.

speakers

РOdile Fran̤oise Renaud-Basso
– Leila Fourie

arguments

Creating co-investment models and de-risking mechanisms

Need for consolidated guarantee structures and catalytic funding

Both speakers discuss how financial institutions (pension funds and DFIs) are adapting their approaches to invest in developing economies, often in partnership with government entities.

speakers

– Jon Johnsen
– Hayashi Nobumitsu

arguments

Pension funds partnering with government to invest in developing economies

DFIs adapting risk-taking activities to mobilize capital

Unexpected Consensus

Importance of local and specific approaches over general solutions

speakers

– Hayashi Nobumitsu
РOdile Fran̤oise Renaud-Basso

arguments

Difficulty in adapting to energy transformation and supply chain disruption

Importance of moving from project-by-project to policy platform approach

explanation

Despite their different institutional backgrounds, both speakers emphasize the need for tailored, context-specific approaches rather than one-size-fits-all solutions in addressing development challenges.

Overall Assessment

Summary

The speakers generally agree on the need for clear policy frameworks, public-private collaboration, and innovative financial mechanisms to mobilize capital for sustainable development in emerging markets and developing economies.

Consensus level

There is a high level of consensus among the speakers on the main challenges and potential solutions in blended finance. This consensus suggests a shared understanding of the issues at hand and potential pathways forward, which could facilitate more coordinated and effective action in mobilizing capital for sustainable development.

Different Viewpoints

Effectiveness of blended finance

speakers

– Hayashi Nobumitsu
– Jon Johnsen

arguments

Well, we once put some money in the fund which finances renewable energy project. So we took a catalyst role in taking the first loss so that more private industries come in. But after all, we weren’t quite sure how much we were catalyzing, because you never know whether we have just financed those projects that were commercially viable anyway, or let them make more profitable or less risky.

So what we have done is that together with the Danish government, we made a coalition consisting of two very important ingredients. The first ingredient is that the Danish government will take the first risk. So that makes us possible for us to enter projects that might have too high risk if we were to go alone.

summary

Nobumitsu expresses skepticism about the effectiveness of blended finance, while Johnsen presents a more positive view based on their experience with the Danish SDG Investment Fund.

Approach to risk mitigation

speakers

РOdile Fran̤oise Renaud-Basso
– Jon Johnsen

arguments

You need guarantees in some areas when it’s very first technology, very risky project and so forth. But you will never have the scale to have guarantees for the trillions we are looking for. So being very selective and avoiding distorting, you know, distorting the market where you provide guarantee where it’s not needed and really focusing on where you need this type of guarantees.

The first ingredient is that the Danish government will take the first risk. So that makes us possible for us to enter projects that might have too high risk if we were to go alone.

summary

Renaud-Basso advocates for selective use of guarantees to avoid market distortion, while Johnsen emphasizes the importance of government taking the first risk to enable pension fund investments.

Unexpected Differences

Role of credit rating agencies

speakers

– Leila Fourie
– Other speakers

arguments

And so I think the problem that Africa and many low-income and emerging markets are facing is that the qualitative overlay that rating agencies apply to the ratings, whether it be their perception of political uncertainty, policy instability, is overrated, and moreover, the problem that when countries have addressed the underlying debt problems, the time to re-rate is much longer.

explanation

Fourie unexpectedly brought up the issue of credit rating agencies and their impact on emerging markets, while other speakers did not address this topic. This highlights a potentially overlooked factor in the blended finance discussion.

Overall Assessment

summary

The main areas of disagreement centered around the effectiveness of blended finance, approaches to risk mitigation, and the role of various institutions in facilitating sustainable development investments.

difference_level

The level of disagreement among the speakers was moderate. While there were differing perspectives on specific approaches and mechanisms, all speakers generally agreed on the need for innovative solutions to mobilize capital for sustainable development. These differences in opinion highlight the complexity of the issue and the need for diverse strategies to address the challenges in blended finance.

Partial Agreements

Both speakers agree on the need for increased private sector involvement, but differ in their approach. Renaud-Basso focuses on MDBs sharing more with the private sector, while Fourie emphasizes the need for consolidated guarantee structures and catalytic funding.

speakers

РOdile Fran̤oise Renaud-Basso
– Leila Fourie

arguments

I think that all MDBs now are also moving to a model where the more we can share with the private sector, the better it is.

Consolidated guarantee structures are required, and concentrated catalytic funding is required, and we’re seeing some tremendous work.

Similar Viewpoints

Both speakers advocate for the development of co-investment models and de-risking mechanisms to attract private capital and scale up investments in sustainable development projects.

speakers

РOdile Fran̤oise Renaud-Basso
– Leila Fourie

arguments

Creating co-investment models and de-risking mechanisms

Need for consolidated guarantee structures and catalytic funding

Both speakers discuss how financial institutions (pension funds and DFIs) are adapting their approaches to invest in developing economies, often in partnership with government entities.

speakers

– Jon Johnsen
– Hayashi Nobumitsu

arguments

Pension funds partnering with government to invest in developing economies

DFIs adapting risk-taking activities to mobilize capital

Key Takeaways

Blended finance has potential but faces challenges in scaling up to meet SDG funding needs

Trust and collaboration between public and private sectors is crucial for successful blended finance

MDBs and financial institutions play a key role in de-risking investments and mobilizing private capital

Innovative approaches like SDG investment funds and green financing products show promise

Reforms are needed in the financial system, including MDB reform and addressing credit rating agency issues

Country-specific approaches and coalitions can help create conducive investment ecosystems

Resolutions and Action Items

EBRD to seek more partners like ILX Fund to co-invest without guarantees

EBRD to develop more country platforms for strategic investment approaches

Jon Johnsen to get more pension funds to invest in the Danish SDG fund

Leila Fourie to continue advocating for credit rating agency reform through UNGC

Unresolved Issues

How to effectively scale blended finance to meet the trillions needed for SDGs

Balancing the use of guarantees/concessional funding with market-based approaches

Addressing the gap between risk perception and actual risk in emerging markets

How to replicate successful country-specific models in other contexts

Suggested Compromises

Using blended finance selectively for high-risk projects while pursuing market-based solutions where possible

Balancing public sector risk-taking with private sector investment to build trust

Combining policy reforms and financial innovations to create more investable projects

MDBs per se are the model of MDBs is a bit of the core blended finance in the sense that you have public money shareholder capital which leverage private financing because we all issue funding and and then they multiply they multiply our capital so we have a limited capital and we really invest much more than than the I mean and that’s core the business model but of course we need to go even even beyond.

speaker

Odile Françoise Renaud-Basso

reason

This comment provides a fundamental insight into how multilateral development banks already operate on a blended finance model, challenging the notion that blended finance is entirely new or separate from existing structures.

impact

It shifted the conversation to focus on how to expand and improve existing models rather than creating entirely new systems. This led to further discussion on specific mechanisms and approaches MDBs can use to mobilize more private capital.

I am less of a person of principle of good design, but I am a transactional person.

speaker

Hayashi Nobumitsu

reason

This comment challenges the idea of a one-size-fits-all approach to blended finance, emphasizing the importance of practical, case-by-case solutions.

impact

It introduced a more nuanced perspective on implementing blended finance strategies, leading to discussion of specific examples and the need for flexible, context-specific approaches.

I think pension funds has a very long-term perspective on investments, and that gives them a special angle on this, that, so, you know, they can think 10, 20, 30 years ahead. I think that’s very important.

speaker

Jon Johnsen

reason

This insight highlights a unique advantage of pension funds in blended finance arrangements, pointing to their ability to make long-term investments that align with sustainable development goals.

impact

It sparked discussion about the role of different types of investors and how their specific characteristics can be leveraged in blended finance models. This led to further exploration of how to attract and involve various investor types.

You need guarantees in some areas when it’s very first technology, very risky project and so forth. But you will never have the scale to have guarantees for the trillions we are looking for. So being very selective and avoiding distorting, you know, distorting the market where you provide guarantee where it’s not needed and really focusing on where you need this type of guarantees.

speaker

Odile Françoise Renaud-Basso

reason

This comment provides a crucial insight into the limitations of guarantees and the need for strategic use of blended finance tools to avoid market distortions.

impact

It shifted the discussion towards more nuanced approaches to risk mitigation and the importance of targeting blended finance instruments where they are most needed and effective.

The problem that Africa and many low-income and emerging markets are facing is that the qualitative overlay that rating agencies apply to the ratings, whether it be their perception of political uncertainty, policy instability, is overrated, and moreover, the problem that when countries have addressed the underlying debt problems, the time to re-rate is much longer.

speaker

Leila Fourie

reason

This comment highlights a critical issue in the current financial system that disproportionately affects developing countries and hinders their access to affordable financing.

impact

It introduced a new dimension to the discussion, focusing on systemic barriers in the global financial architecture. This led to consideration of broader reforms needed beyond just blended finance mechanisms.

Overall Assessment

These key comments shaped the discussion by moving it from general concepts of blended finance to more specific, nuanced considerations of implementation challenges and opportunities. They highlighted the complexity of the issue, emphasizing the need for flexible, context-specific approaches rather than one-size-fits-all solutions. The comments also broadened the scope of the conversation to include systemic issues in the global financial architecture, particularly around risk perception and rating methodologies. Overall, these insights deepened the analysis, introducing greater complexity and practical considerations to the conversation about scaling up blended finance for sustainable development.

How can blended finance models be scaled up to address the large funding gap for Sustainable Development Goals?

speaker

Sara Pantuliano

explanation

The current blended finance market ($15 billion annually) falls far short of the $4.2 trillion SDG funding gap, indicating a need for significant scaling.

What policy and regulatory changes are needed in emerging markets to unlock more investment opportunities?

speaker

Odile Françoise Renaud-Basso

explanation

Implementing the right policies and strategies is crucial for unlocking investment opportunities and attracting private capital.

How can local capital markets in developing countries be strengthened to mobilize domestic savings for development?

speaker

Odile Françoise Renaud-Basso

explanation

Developing local capital markets can help mobilize local savings and reduce currency risk for investments.

What are effective ways to de-risk investments in emerging markets without relying too heavily on expensive guarantee mechanisms?

speaker

Odile Françoise Renaud-Basso

explanation

While guarantees can be useful, they are too expensive to scale widely. Alternative de-risking approaches are needed.

How can successful public-private collaboration models like the Danish SDG Investment Fund be replicated in other countries?

speaker

Jon Johnsen

explanation

This model has successfully mobilized pension fund capital for SDG investments and could potentially be adapted elsewhere.

What changes are needed in credit rating agency practices to more accurately reflect the risks in emerging markets?

speaker

Leila Fourie

explanation

Current credit rating practices may be overstating risks in emerging markets, leading to higher borrowing costs and hindering investment.

How can multilateral development banks (MDBs) better leverage their balance sheets and increase capital allocation to blended finance projects?

speaker

Leila Fourie

explanation

MDBs are reportedly only allocating 45% of their funding, suggesting potential for increased leverage and capital deployment.

What successful examples of blended finance projects can be showcased to build trust and attract more investors?

speaker

Hayashi Nobumitsu

explanation

Demonstrating successful projects is crucial for building trust among potential investors and stakeholders on the ground.