Institutional investors make up a diverse group, each operating with different mandates, constraints, and risk-adjusted return preferences. However, they are often mistakenly treated as a homogenous group of investors, while there is value in better understanding the unique investment preferences and regulatory conditions of different segments. Therefore, the Taskforce commissioned Convergence to support in segmenting the private sector ecosystem to better understand how to drive more institutional investment towards the Global Goals in developing countries. Tideline contributed in an advisory role.
This resulting report provides an analysis of the investment motivations, requirements, and constraints of six segments of institutional investors: I) pension funds, ii) insurance companies, iii) sovereign wealth funds, iv) commercial banks and investment banks, v) private equity firms, and vi) asset/wealth managers. Blended finance structures must create assets that fit within the mandates, constraints, and risk-adjusted return preferences of each institutional investor segment. Based on our research, there are five key considerations that will determine whether and to what extent an institutional investor participates in blended finance: I) communication and messaging, ii) policy and regulation, iii) mandate, iv) allocation and capacity, and v) transactional factors.
This working paper was commissioned by the Blended Finance Taskforce and contributes to its consultation paper “Better Finance, Better World”. The Taskforce was launched as an initiative of the Business & Sustainable Development Commission in 2017 to look at blended finance from a private sector perspective and to see how blended finance can make the SDGs more “investable” for commercial players. The Taskforce is developing an action plan to rapidly scale the blended finance market in order to mobilise more private capital for the SDGs, particularly for sustainable infrastructure in emerging markets and would welcome your feedback.
The Taskforce commissioned a series of working papers on blended finance (including this one) to contribute to this action plan. “Mobilising Institutional Capital at Scale for the Global Goals Through Blended Finance” was prepared by Convergence (and Tideline in an advising role) and catalogues investment motivations, requirements, and constraints of institutional investors in taking advantage of blended finance mechanisms. “Blended Finance in Clean Energy” was prepared by the Climate Policy Initiative and analyses opportunities where blended finance can mobilise large scale private capital for clean energy. “Financing Sustainable Land Use” was prepared by KOIS Invest and explores how to unlock business opportunities in sustainable land use with blended finance.
All reports are available here.