Keith Ippel is the founder & Co-CEO of Spring, a leading early-stage impact investing ecosystem that’s raised $51M+ in early-stage capital.
To truly maximize the potential of impact investing and integrate it into the mainstream, we have an opportunity to use a proven investing approach—a diversified portfolio—to allow more organizations and investors the opportunity to participate.
One portfolio approach that’s gaining traction in the impact ecosystem are innovative financing structures working under the umbrella of “blended finance.” These are increasingly being created to tackle some of the world’s most urgent, complex challenges with a fresh approach that can be integrated into a diversified portfolio to balance risk.
Understanding Blended Finance
Blended finance is defined as “the use of catalytic capital from public or philanthropic sources to increase private sector investment in sustainable development.” This structuring approach leverages the power of philanthropic capital to enable organizations with differing risk and return objectives to invest alongside each other while still achieving their own objectives. These objectives may vary, including financial returns, social impact or a combination of both.
Blended finance addresses some of the main investment barriers for private investors around perceived and real risk, along with returns misaligned with the risk relative to comparable investments.
Applying this approach to impact investing allows investors to balance higher or lower levels of risk, return and impact to shape a portfolio that accurately reflects both their values and desired returns. This is an approach many investors take today with their portfolios—from lower risk and reward bond investments to public market investing to high risk and potential reward private company venture investing. Blended finance is an approach that allows purpose to integrate into all types of investment decisions.
Moving Forward With Blended Finance
There is real momentum in the blended finance movement because it can deploy more capital into financing opportunities outside of traditional investments. This can include key capital projects, impact real estate, as well as urgent climate issues needing immediate responses. Recently, nine families in Canada announced they would be deploying $405 million to climate action through a blended finance structure.
Beyond mobilizing financing for planetary issues, blended finance can also help address imbalances in who is receiving funding in traditional financing, creating equitable access for underserved and undercapitalized groups.
Blended finance offers powerful opportunities for reconciliation with Indigenous communities and other equity-deserving groups that would benefit from innovative solutions beyond the options typically available to them. One example of active reconciliation through blended finance was the Sorenson Impact Institute’s collaboration with Raven Indigenous Capital Partners and the Raven Indigenous Impact Foundation.
A key changemaker at the forefront of this movement is Aunnie Patton Power, Associate Fellow at Saïd Business School, University of Oxford. Building on her background in investment banking, Power designs innovative approaches to finance that achieve results for people and the planet. Her 2021 book Adventure Finance: How to Create a Funding Journey That Blends Profit and Purpose is a solid introduction for those curious about the alternative financing structures and instruments.
Best Practices
Remember that blended finance is a tool in the toolbox—it’s not rocket science. It’s a structuring approach that can be a part of any impact investing strategy. As such, and as with any approach, investors should get educated first, start small and invest alongside a community of more experienced investors to get comfortable with the approach prior to building this model into a meaningful part of your portfolio.
As you step into blended finance, consider the following best practices.
• First, ensure that any deals align with your risk, return and impact targets. You don’t need to step out of bounds to get involved.
• Second, build a community of co-investors who can take on different roles in an investment spanning risk and return tolerances and levels of strategic value to the investee.
• Third, when investing, look to see if an experienced blended finance fund is involved in the deal as they often represent great experience in the space and can validate deals.
Before making an investment, consider your impact thesis, risk and return profile, and make sure you know who else is investing. Often the easiest place to begin is investment funds.
Evaluating The Risks
When it comes to evaluating risk, remember that blended finance has long been used in sectors solving the biggest challenges, including energy, agriculture and healthcare in all regions of the world. As such, there is a wealth of deals to draw from and de-risk new deals.
Some points worth considering include: Does it pass your typical tests for risk such as team, space, competition, and progress or traction? What expertise do other investors bring to the table in support of the deal? Do they have an impact strategy and measurement model in place? Are other funders providing technical assistance funding too to help grow the internal capabilities of the investee project or organization, or should you play that role?
Conclusion
One of the most powerful elements of blended finance is its ability to be led by the community for the community. Each organization in the ecosystem has an opportunity to contribute, lead, support and collaborate within this movement.
In embracing this collaborative, portfolio approach to financing and using approaches like blended finance, industry leaders can mobilize more funding, faster for the greater good while aligning to investors risk, return and purpose goals.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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