Blended finance aims to significantly reshape development finance by leveraging public and philanthropic money to crowd in private investment to emerging markets. Convergence is the first institution focused exclusively on blended finance. We educate, connect, and support investors to execute blended finance transactions, in effort to drive investment to close the estimated $2.5 trillion gap in funding per year for the SDGs.
A recent report co-authored by Convergence and the Brookings Institution looks at one innovative blended finance mechanism: development impact bonds. In an impact bond, investors provide up-front capital to service providers that deliver social services to a targeted population.
Contingent on the achievement of results, an outcome funder repays the investors their principal plus an agreed-upon return on investment. By shifting the focus from inputs to outputs and outcomes, impact bonds hold great potential to deepen development impact by establishing incentives for results and increasing the efficiency of donor money.
Social impact bonds are a well-established mechanism in high-income countries, with 90 SIBs contracted around the world, and all but one (the Colombia Workforce Development SIB) in high-income countries. Despite the potential of impact bonds to deepen development impact, the report finds that impact bonds are not a one-size-fit-all solution. First, impact bonds require a strong evidence-based theory of change.
There is a need to have a high degree of confidence in the relationship between the intervention’s proposed inputs and outputs and desired outcomes and impact to ensure investor buy-in. Second, impact bonds require metrics that are A: measurable, including considerations of data collection and quality; B: meaningful, to incentivise the service provider to achieve desired development impact effectively and efficiently; and C: set at the appropriate level, which is suitable to all stakeholders including service providers and investors.
Overall, the field of impact bonds is nascent and there is not yet a true evidence-base around the effectiveness and potential scale of impact bonds in developing countries. Convergence has not seen evidence that impact bonds can catalyse investment at scale, and capital catalysed through the mechanism is not truly commercial investment capital.
However, if the transaction costs are reduced over time, impact bonds do have the potential to significantly increase the effectiveness and efficiency of public and philanthropic spending, increasing the focus on metrics, shifting the emphasis from inputs to outputs or outcomes, and guaranteeing dollars spent reflect success.
Global Goals Week, which took place this week September 16 to 23, marked the second anniversary of the Sustainable Development Goals (SDGs). It was also an opportunity to raise awareness and accelerate the progress being made towards the SDGs. In remarks made on September 18, the UNGA Secretary-General António Guterres said these words:
“We can choose to bemoan the lack of financing for the 2030 Agenda in a world awash with so much unproductive and unrewarding finance. Or we can grasp the opportunity to reshape finance according to our urgent, collective needs.”
Following this sentiment, it is now critical for development practitioners to continue to explore the potential impact and scale of innovative mechanisms, like impact bonds, to crowd in private investment to emerging markets.
About the Author
Justice Durland
Justice focuses on documenting case studies on blended finance transactions, coordinating workshops and trainings, and building out Convergence’s database of past blended finance transactions. Prior to joining Convergence, she worked at the MasterCard Foundation as Program Coordinator for the Financial Inclusion team.