Green bonds vs. Blended finance: A comparative look


As more and more world leaders call for intentional investments and purpose driven organizational strategy,[1] the popularity of impact investing is rising. Specifically, the green bonds market has seen explosive growth.[2] Are those investors environmental altruists? Or are they attracted by other aspects of green bonds?

Aaron Hurst argues in his book “The Purpose Economy” that today’s market is experiencing a shift from the age of the Information Economy, where technology and innovation are the leading drivers of US gross domestic product (GDP), to a Purpose-Driven economy, where a company’s social strategy and how it engages with stakeholders, employees, communities and customers — determines the company success.[3]

Hurst’s theory dovetails with the United Nations’ 17 Sustainable Development Goals (SDGs). However, despite what seems as a consensus regarding the accountability we all bear, as individuals or organizations, to enhance the sustainability and resilience of the society and economy, the SDGs are still largely not well known.[4]

While the SDGs remain absent from commonplace investment language, impact investing as a whole has seen tremendous growth, as it promises investors opportunities that are easy to comprehend, tap into the growing sentiment towards impact, and generate returns, all at once. Green bonds embody one such example of successful impact investing.  They are a simple concept, and play into the societal and economic shift towards an Impact Economy. As a result, these debts instruments, which target climate and environmental goals, have seen marked success, with constant market growth from $3B in 2012 to $167B + in 2018.[5] [6]

What are the lessons to be learned from the major success of green bonds? Given the existing market for impact led investments, why is the potential for SDG aligned deals executed by blended finance yet to be fully attained?[7]

There are several plausible reasons, few of which are tied to the fact blended finance as a financial structure is designed to advance the implementation of the SDGs. SDG aligned deals can be inherently unattractive for investors seeking commercial-rate returns, due to the lack of tested business models that offer both high returns and SDG-aligned impact, and investors’ uncertainty with the field. Blended finance structures are designed to balance the unattractive merits of SDG-aligned deals by unlocking concessionary capital provided by Development Finance Institutions or foundations to de-risk investments for commercial investors. Yet, blended finance as a tool is currently underutilized.

While the SDGs address the developed world in addition to the developing world, uninformed investors might think they only target emerging markets,[8] which typically mean riskier investments that might generate lower returns. This hesitation does not exist in the green bonds market. Most green bonds were issued by developed nations, with only China and India representing developing countries that are active in this space.[9] For an investor seeking returns and impact, an opportunity to invest in a wind-power project in France is somewhat more appealing than building resilience against the impacts of climate change in Fiji.[i]

Importantly, green bonds have simply been around for longer than blended finance, which lends a track record to the financial structure. While green bonds were first introduced to the market in 2007 by the European Investment Bank,[10] blended finance was identified as a financial investment vehicle only in 2015 during the UN negotiations for the post-2015 Agenda.[11] Moreover, whereas the main characteristics of green bonds are transparency and reporting, there is no standardized, ‘ready-to-use’ model for a blended finance investment; each vehicle is structured according to the local market, and the wants and needs of the deal sponsor, investors, or investees.[12] Private investors see the structure of blended finance as complex, and therefore entailing high transaction costs.[13] The unfamiliarity discussed earlier with regards to the SDGs is reinforced by the unprecedented blended finance model. Because people are generally risk averse, private investors, who constitute a critical part of the blended finance puzzle, are hesitant from being the first movers in this yet explored field.

Nonetheless, the primary hurdle for the blended finance market is to unlock more private capital to create higher development impact.[14] An examination of the green bond market success indicates that when mainstream companies like Toyota and Apple, and institutions such as Bank of America Merrill Lynch, Credit Agricole and HSBC, enter the market, it rapidly becomes global.[15]

Indeed, in the last five years the blended finance market has doubled in size, and momentum is building around the $126 billion blended finance market.[16] Thus, first-movers will be able to secure their presence in the emerging markets that providers of concessionary capital in blended finance structures typically target, and secure de-risked[ii] access to those new markets.

Putting aside the inherent differences between green bonds and blended finance as financial structures, there is a lot to learn from green bonds’ ongoing success. Primarily, since mainstream organizations have the ability to lead investment trends, targeted efforts to sway them to become players in the blended finance market can lead other private investors to follow. Secondly, the field of blended finance must be standardized in order to scale. Although the flexibility blended finance’s investments allow could be considered an advantage, as structures are still being developed, transaction costs are relatively high and there is not enough transparency in how those investments are being deployed. Yet, assuming the prosperity of green bonds is at least partially due to green bonds’ appeal to environmental altruism, it should be noted that green bonds can be included as an SDG-aligned investment with a blended finance structure, and probably produce even greater impact.[iii]

The question remains, are those markets comparable? Whereas green bonds embody a relatively low-risk and seemingly simple way to achieve returns and practice sustainable investing, blended finance relies on the soundness of the capital structure to de-risk, and is typically a complicated transaction. Blended finance, also unlike green bonds, offers an opportunity to become a part of an active coalition investing in the SDGs, and to promote valuable and meaningful “impact” by advancing a range of most pressing issues globally.

Blended finance is an emerging financial vehicle in a commonly risk-averse field, aiming to scale in an environment that is already saturated with impact investing opportunities. This will not be an easy task. Despite the hurdles elaborated on in this piece, leaning on successful tactics the green bond market had maneuvered in addition to affording the private sector some time to explore the SDGs, will ultimately promote blended finance as a leading impact investment tool. Hopefully, it will also revitalize the word ‘impact’ and validate the legitimacy of the whole field.

Author: Nov Chemouny Liss

[1]Larry, Fink. “ Larry Fink’s 2019 letter to CEOs: Purpose & Profit”. BlackRock, January 2019

[2] Mark, Tereck. “Who Will Pay For Nature? How To Catalyze Private Investment In Sustainability”, Forbes, November 28, 2017

[3] Aaron, Hurst. (2014). The Purpose Economy: How your desires for impact, personal growth and community is changing the world. USA: Imperative Press.

[4] BMW Foundation-Herbert Quandt:“ The Kind of Aggressive Timeline the World Needs” ,Twenty Thirty, October 16, 2018

[5] See footnote 2.

[6] Climate Bonds Initiative: “2018 Green Bond Market Highlight”, January 2019

[7] Blue Orchard Academy: “Blended Finance 2.0: Giving voice to the Private Sector”, October 2018 (pp 5)

[8] Alice, Rowsome. “The UN’s Sustainable Development Goals Aren’t just for ‘Developing’ Nations”, Vice Impact, September 12, 2017

[9] IFC Perspectives: “ Capital Markets, Climate Finance”, Green Bonds

[10] See footnote 9

[11] Ana Maria, Lebada. “Financing for (Sustainable) Development: Building the Vascular System of the Post-2015 Development Agenda”, IISD- SDG knowledge Hub, December 17, 2014

[12] Conor M. Savoy & Aaron N. Milner, “Blended Finance and Aligning Private Investment with Global Development- Two sides of the same coinCenter for Strategic & International Studies, March 2018 (pp22)

[13] Blue Orchard Academy: “Blended Finance 2.0: Giving voice to the Private Sector”, October 2018 (pp 24)

[14] Samans, Richard (2016), “Blending public and private funds for sustainable development”, in OECD, Development Co-operation Report 2016: The Sustainable Development Goals as Business Opportunities, OECD Publishing, Paris

[15] Enrico Lo Giudice,”The green bond market, explained”, World Economic Forum, July 25, 2017

[16] Convergence- Market Size: “Blended Finance

[i] Fiji: A 2016 tropical cyclone caused damage estimated to be 1/3 of the country's GDP. The World Bank initiated a bond it proceeds will be invested in projects that will help the country better prepare itself to resist damages from similar natural disasters. 

[ii] Blended finance is a financial vehicle blending concessional and commercial funds to de-risk SDG aligned investments.


Grace Stone