The funding gap for development challenges far exceeds the current available resources. The responsibility to address these issues extends beyond philanthropic actors and government; the private sector must actively contribute to problem-solving. Blended finance is the strategic use of philanthropic and development funds to increase private sector investment in sustainable development.
Philanthropic funds serve to mitigate risks, introduce concessions, and enhance capital efficiency. This dynamic approach renders investments in critical social causes more attractive. For instance, a company aiming to establish a clean energy project in India when faced with concerns about risks, longer time frames and low returns, philanthropy can provide high risk-taking concessional funds. This enhances the project's attractiveness to potential investors while creating a positive environmental impact.
In India, blended finance assumes a pivotal role in tackling the nation's pressing development challenges. Policymakers have also recognized the potential of blended finance in addressing multifaceted issues such as education, healthcare, financial inclusion and climate change.
Blended finance can play a crucial role in the growth and sustainability of social enterprises, especially those which use the power of innovations to bring a positive disruptive change. These enterprises, over 2 million, employ more than 18 million individuals, actively contributing to the country's economic growth. They operate across diverse sectors, including education, healthcare, agriculture, and renewable energy. Furthermore, social enterprises stand out for their contribution to gender equality, with women constituting 40% of their workforce.
Navigating The Funding Landscape
Early-stage social enterprises face a significant funding gap due to their unique characteristics and focus on underserved segments. It takes longer to have the innovations adopted by the market leading to longer time to profitability. Challenges include forming diverse leadership teams, balancing social impact and financial sustainability, and meeting investor criteria. The lack of conventional financials, evolving business plans and strategies and limited data lead to being overlooked by conventional lenders and investors.
Beyond enterprise-specific challenges, funding social enterprises presents unique challenges for equity and debt investors. Equity investors prioritize high returns and quick exits, which may not align with social impact goals. Commercial capital providers are concerned about market distortions from non-traditional funding methods, potentially subsidizing inefficient businesses and distorting risk perception. Debt is mainly accessible to enterprises with a strong financial track record and adequate collateral. Meeting these investor expectations while focusing on underserved segments remains a significant challenge for these enterprises.
Philanthropic support for social enterprises is limited. Risk of impact washing due to profit motive, capacity and capital constraints to collect impact data and challenging regulations contribute to the difficulties in raising philanthropic capital. Conservative interpretations of the law like CSR funding for social enterprises and a limited understanding of blended finance among Indian philanthropies hinder full support for for-profit social entities.
Blended finance serves as a multifaceted solution, addressing market failures by mitigating perceived risks in social enterprises through innovative risk-shifting mechanisms, such as guarantees and concessions. By bridging critical funding gaps, it facilitates access to affordable finance for enterprises. Moreover, blended finance encourages innovation by deploying concessional financing to support the development of impactful technologies, acting as risk capital to facilitate the involvement of commercial capital. This approach not only prevents impact washing but also enhances capital efficiency through result-based financing, where funding is contingent on the achievement of measurable impacts rather than mere inputs or activities, ensuring accountability and effectiveness.
Blended Finance As A Catalyst for Sustainable Impact
The OECD, in its report, underscores the role of the Asian Development Bank (ADB) in championing blended finance in India. Blended finance, supported by ADB, Urban Climate Change Resilience Trust Fund (UCCRTF) and the Canadian Climate Fund for the Private Sector in Asia (CFPS), is reshaping the affordable housing sector. A strategic USD 10 million injection alongside ADB's USD 58 million loan is expanding green, affordable housing. This approach ensures climate resilience and affordability with ADB and UCCRTF's technical assistance while CFPS tackles initial cost barriers. Importantly, it ensures that all mortgage loans directly benefit economically disadvantaged and low-income groups, aligning with India's inclusive development goals.
Amid climate change, vulnerable communities face its harshest impacts. Building resilience is crucial, and promoting green livelihoods is key. Distributed renewable energy (DRE) products like New Leaf Technologies' biomass-powered cold storage boost energy access and reduce climate vulnerability. As financing such products is tough, Villgro recognized the need to support intermediary organizations like Farmer Producer Organizations (FPOs) to facilitate technology adoption and climate resilience.
Initially, Samunnati offered 40 per cent of the product cost with a 50 per cent first loss guarantee, but as the FPOs demonstrated the business value and creditworthiness, the loan support increased to 80 per cent of the product cost with a 20 per cent first loss guarantee. This case study illustrates how blended finance empowers farmer communities through cold storage, enhancing food stability, fair pricing, and innovation, addressing funding challenges for vulnerable communities in the face of climate change.
Blended finance emerges as a vital catalyst for sustainable impact in India's social enterprise sector. Tackling market failures, it strategically mitigates risks in social enterprises, bridging funding gaps, and encouraging innovation. The transformative power of blended finance is evident in its ability to address unique challenges faced by over 2 million social enterprises, contributing significantly to economic growth, gender equality, and impactful sectors like education, healthcare, agriculture, and renewable energy. From preventing impact washing to reshaping affordable housing and empowering vulnerable communities in the face of climate change, blended finance stands as a multifaceted solution.
As regulations evolve and charities show increased interest, the journey of blended finance reflects its potential to drive real change on the ground, unlocking new opportunities and amplifying the potential for lasting impact in India's social enterprise landscape.
- Vibha Tilwalli Sharma, CA, CFA, lead, Impact Finance, Villgro
