CrossBoundary Group
01.05.2024
White paper
01.05.2024
White paper

Every Deal is a Blended Finance Deal

Key Insights
Every deal has positive or negative externalities that are not fully captured in its financial returns
A blended finance process acknowledges these externalities and asks whether any actors have decided those externalities warrant either additional compensation
This paper explores at least three relevant archetypes of blended deals

One of the many nice surprises of returning to in-person conferences post COVID was finding that “blended finance” has entered the common vernacular. In 2019, it still felt like a new term that warranted a quick explanation with each use; now, it seems like even the most staid of financial institutions are bandying it about with casual abandon.

That said, it is worth quickly revisiting the definition. Our friends at Convergence provide the following:

Blended finance is the use of catalytic capital from public or philanthropic sources to increase private sector investment in sustainable development

We might propose an even simpler, yet more comprehensive framework: every deal is a blended finance deal.

Every deal has externalities

Every deal has positive or negative externalities that are not fully captured in its financial returns. Business and investing invariably affect the climate, or biodiversity, or public health, or a society’s civic cohesiveness, and/or many other attributes of the world we live in.

Blended finance acknowledges these externalities and asks whether any actors have decided those externalities warrant either additional compensation (such as revenue subsidies or a lower cost of capital) or penalty (e.g., taxes, fines, etc).

Even if seemingly not financial relevant today, there is always a question whether new mechanisms (such as a carbon tax) may reward or punish these externalities in the future, and/or whether the business may face competition from a substitution good that better addresses these externalities.

From this, we can imagine at least three relevant archetypes of deals:

  • Deals where the desired public or social goods are already internalized and amplified by the core business model. This is the sweet spot where purpose and profit overlap; where we can achieve our sustainable development goals by simply pushing investment professionals and C-suites to better realize the intrinsic relevance of these factors to their pursuit of shareholder returns. Examples could include companies that lower their costs by investing in renewable energy, or goods that have measurable marketing benefits from social factors such as net-zero commitments or certified fair supply chains.
  • Deals where public or philanthropic actors are already acting to appropriately incentivize business and investment. The Inflation Reduction Act (IRA) in the US is an example of almost $1 trillion in various subsidies and industrial policies that will incentivize massive investment into climate-relevant technology. Another example would be rural electrification in developing countries, where the World Bank or country governments have appropriately decided that expanding access to electricity generates benefits beyond the private consumers’ initial ability to pay, and therefore provide new connection “top-ups” or energy charge subsidies. (Similar incentives often exist for rural agriculture/farmers.)

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