Panel, Conference Presentation
Bridge and Blend: The Role of DFIs in Scaling Sustainable Financing
- Private capital is projected to help bridge the estimated $2.5 trillion annual financing gap for Sustainable Development Goals, requiring collaboration across all institutions to achieve significant progress.
- Development Finance Institutions (DFIs) are expected to act as a bridge to de-risk investments and catalyze billions to trillions in private investment through concessionary financing and pipeline building, though current mobilization in emerging markets falls short of the intended speed and levels.
- A growing group of institutional investors is expected to utilize SDGs as a framework for investment strategies, yet the current private investment community is expected to continue directing more capital toward middle-income countries rather than low-income ones.
- DFIs are expected to face substantial transformation challenges as they adapt to commercial bank models ill-suited for their mission, with specific needs for dedicated "stretch fund" vehicles and specialized institutions to manage higher risks and early-stage innovation.
- The International Finance Corporation (IFC) expects to have deployed approximately $1.6 billion in concessional finance from 2010 to 2020, with a target to increase financing to low-income countries from less than 20 percent to 40 percent following a capital increase, aiming for a 40/60 split between low and middle-income markets.
- New private sector windows are expected to de-risk non-commercial risks in low-income IDA countries and serve as models for stretch funds, though DFIs are observed to follow market patterns rather than showing a disproportionate skew toward low-income countries where blended finance transactions currently comprise only about a quarter of the total catalog.
- Foundation-led interventions are expected to be more active than DFIs in early-stage projects, where recent spending of $6–$7 million on feasibility studies has generated leverage of approximately $500 million, addressing the scarcity of bankable projects.
- Enabling environments and regulatory conditions are expected to be critical missing pieces making projects non-viable, with the IFC expecting to identify meaningful projects and build these conditions over a three to five year time frame to prevent a pricing race to the bottom.
- Urgency is expected to necessitate cracking development problems and making significant headway very soon to allow for scaling by 2030, potentially forcing the industry to standardize transactions and harmonize metrics to speak a common language.
- Official donor aid is expected to remain flatlining at approximately $150 billion a year, creating a situation where existing DFIs are not operating on the scale required for the SDGs and cannot leap into high-risk early-stage activity all at once in the short term.
- Returnable capital structures are expected to allow donor resources to be recycled, changing donor perceptions of these funds compared to fiscal spending, while guarantee instruments are expected to be used more extensively to unleash local currency financing.
- Despite expectations that DFIs would prioritize the least developed countries, they are not expected to have reached maximum potential in leveraging syndications and halo effects, necessitating a move away from just executing individual transactions to building market infrastructure and scaling innovations.