By Alessandro Scalco
In an era where the intersection of finance and sustainability is becoming increasingly critical, blended finance stands out as innovative tools driving economic and environmental objectives.
Here's why these financial strategies are gaining traction, particularly in South Africa, and how they're shaping the landscape for investors, governments, and society at large.
A New Frontier in Development Funding
Blended finance isn't a novel concept but has recently been repackaged with a fresh label, focusing on using 'risk-tolerant capital' to attract private investment into developmental projects. This isn't merely about grants or free money; it's about structuring deals in ways that make investment in high-risk, high-impact areas more palatable for private investors.
For instance, Development Finance Institutions (DFIs) might opt for longer-term investments, providing a buffer that de-risks opportunities for commercial investors.
In South Africa, the push for blended finance is notably driven by government policy, highlighted in the National Development Plan (NDP) 2028, which underscores its necessity for achieving infrastructure goals.
The Just Transition Energy Plan further exemplifies this, noting that traditional financing won't suffice to meet the colossal funding needs for transitioning to a sustainable economy. Here, blended finance acts as a bridge, enabling the country to leverage international commitments while attracting private capital.
Growth Drivers and Market Dynamics
The growth in blended finance isn't just top-down; it's propelled by a confluence of forces:
- Governmental push with policies and plans recognising the need for innovative financing to meet developmental and environmental targets.
- Borrowers' perspective, as entities are increasingly aware of the benefits of accessing risk-tolerant capital, which can lead to better pricing and terms, thereby making projects more viable.
- Investors' interest with a growing appetite among investors for mechanisms that align financial returns with social and environmental impact.
- Social Consciousness and a societal shift towards investments that contribute positively to community and environmental health, amplified by social media and global awareness campaigns.
Africa's Position in Global Blended Finance
While Europe leads in implementing blended finance, Africa, particularly South Africa, is poised to catch up. The continent offers unique opportunities for investors looking to diversify into emerging markets with high growth potential but also comes with risks that blended finance can mitigate. However, Africa's approach to ESG (Environmental, Social, and Governance) considerations lags behind Europe's, where these factors are deeply integrated into investment strategies. South Africa, though, with its regulatory frameworks like Regulation 28, is beginning to embed these considerations, albeit sometimes superficially.
Investor Engagement and Responsibility
Who are the key players in this evolving financial landscape? The answer is broad and inclusive:
- Asset managers and pension funds. There's a shift in understanding fiduciary duty, now encompassing not just financial returns but also the livability and sustainability of environments where beneficiaries reside.
- Facing long-term risks from climate change, insurers are increasingly interested in funding projects and implementers that are focusing on reducing insurers' risk linked to environmental and social issues.
- Individual investors, especially the younger demographic, are more conscious of where their money goes, pushing for investments that reflect their values towards sustainability.
This movement towards blended finance in South Africa reflects a broader global trend where financial mechanisms are not just about profit but about creating a sustainable future. As these strategies gain momentum, they challenge traditional investment paradigms, inviting all stakeholders to reconsider what it means to invest responsibly.
The potential for South Africa to lead in this arena is immense, given its rich biodiversity and developmental needs, making it a fertile ground for pioneering financial innovations that could set precedents for the continent and beyond.
Alessandro Scalco is the Blended Finance Lead at RMB.
BUSINESS REPORT