On 25 June 2024, Hogan Lovells Sustainable Finance and Investment team was privileged to host a roundtable with the Green Finance Institute (GFI) to discuss using blended finance for scaling investment in climate and nature, and for impact and sustainable development purposes more broadly. 

The roundtable was borne out of a desire to explore ways in which regular blended finance transaction participants might better avoid re-examination of the same or very similar problems on each deal, for example regulatory challenges, tax issues and common private, public and philanthropic negotiation “hot spots” arising due to parties coming to the table with different expectations concerning documentation and process. For a discussion of some of the common challenges we see arising in blended finance transactions, please see our article here.

The conversation was structured around the following questions:

• What are the ongoing barriers to scaled capital flows to climate, nature and sustainable development?

• What one learning would you share?  How do we generate action to finance the climate and nature funding gap?

There were many insightful comments and perspectives, the following themes particularly stood out:

• Policy: must be recognised as a key lever.  The first question has to be what policies can governments set to incentivise investment in climate, nature and sustainable development? Only in that context can funders identify gaps and bring appropriately structured financing packages to bear, which may include blended finance and other options, in flowing the funds in that overall policy-driven structure.

• Sectors: provide vitally relevant context for any outcomes-orientated transaction in this space. Solutions are needed on a sectoral and jurisdictional basis and whilst no-one expects there to be a “one size fits all” arrangement, the extent of sectoral difference is sometimes underestimated and needs to be accommodated in structuring.

• Ground level: beginning with ground level need, sitting with problems to truly understand issues drivers, leveraging local experience and creating enablement environments using funding are all vital for success. If a transaction is structured to emphasize private sector funding parties’ requirements (for example with onerous due diligence procedures, impractical compliance standards and ultimately extractive terms), it will fail to achieve desired outcomes.  Technical assistance is crucial for many projects in terms of enabling larger scale invest-ability. Communication and mutual respect amongst diverse parties are key, success turns on a deep understanding of the need, the risk environment, and the motivations behind who is taking what risks and why. 

• Structural archetypes: although there is a need from a cost efficiency and timing perspective for the private and public sector to coalesce around some standardised structural understanding (which may be achieved using structural archetypes to help alignment on project expectations), innovation and novel expression of transactions within that shared understanding will continue to be required. 

• Gradual integration: needed when bringing private investors into projects and has major potential benefits. Very early stage “first of a kind” investment scenarios are unlikely to be appropriate from a private capital perspective, however, sharing out small investment proportions with private capital partners to begin with – to aid in project familiarity and build longevity of experience can be used as a way of getting private capital on the learning curve to better understand particular sets of risks, processes and geographies, before investing more extensively in similar (possibly later stage or subsequent investment round) opportunities.

• Local currency funding: seems to be a perennial issue.  Commercial banks are regularly unable to invest in local currency and thereby take on associated foreign currency risk. More solutions need to be found here and there is clearly a role for back-funding larger domestic financial institutions to fill this void.

Our Sustainable Finance & Investment team creates thought leadership to ensure that you can navigate your sustainable business future. Please contact us to discuss blended finance further, including how to use blended finance to implement your climate and nature investment strategy.

This note is intended to be a general guide and covers questions of law and practice.  It does not constitute legal advice.

Authored by Emily Julier and Bryony Widdup.