An introduction to blended finance part III: a dual role supporting impact and returns
- Juan Lois
- Apr 29
- 8 min read
Updated: May 8
In this final part of our three-part series on blended finance and its dual role supporting investment for impact and returns, we provide real examples of actual investments that successfully integrated the principles of blended finance to maximise impact and returns.
To demonstrate how blended finance structures allow organisations with different objectives to invest in a project alongside each other and simultaneously achieve each of their unique goals, we will highlight three investments made in distinct regions of the world and comprised of a wide range of investors, including investments in:
Affordable housing and community development projects in the United States
Natural capital restoration in secondary and degraded forests in Central America and the Caribbean
Climate mitigation and economic development in Southeastern Europe, the Middle East, and Northern Africa
Case study #1: Wespath Benefits and Investment’s Positive Social Purpose (PSP) Lending Program
Wespath Benefits and Investments (Wespath) maintains one of the largest faith-based pension funds in the world, serving more than 100,000 active and retired clergy and lay employees of the United Methodist Church. With its subsidiaries, Wespath manages nearly $26 billion in assets (as of December 31, 2024) and is committed to making a positive impact on the environment and society while generating competitive returns that allow it to fulfil its fiduciary obligations.
One of Wespath's unique and long-standing investment programs is its Positive Social Purpose (PSP) Lending Program, founded in 1990, it has invested over $2.1 billion in affordable housing and community development projects in the United States and in global microfinance opportunities.
Fund background
The Broadview Senior Apartments project located in Broadview, Illinois demonstrates how Wespath's PSP Lending Program utilises blended finance principles to create positive social impact while generating market-rate returns.
As a senior debt investor, Wespath holds the primary claim on assets in the event of default, which helps minimise risk while ensuring competitive returns for its beneficiaries.
This affordable housing development, like many in the PSP portfolio, relies on what is often referred to as "lasagna financing" or multiple layers of funding sources that work together to make projects financially viable while addressing critical community needs.
Capital structure
The financing structure for the Broadview transaction included several layers of funding, each with different risk-return profiles:
First mortgage loan participation with Wespath holding the senior debt position.
Financing provided by the Cook County HOME funds, which are part of the U.S. Department of Housing and Urban Development's (HUD) HOME Investment Partnerships Program and finance a variety of housing activities assisting low-income households.
U.S. Government Low-Income Housing Tax Credit (LIHTC) program funding the equity investment.
Illinois Affordable Housing Tax Credits, which encourages private investment in affordable housing by providing a one-time tax credit equal to 50% of the value of qualified donations.
ComEd Energy Efficiency grant, which incentivised the integration of high-efficiency heating and cooling systems and advanced air-sealing techniques throughout the building envelope to minimise air leakage and reduce heating and cooling costs.
This layered financing approach enables Wespath to occupy a risk position that meets its fiduciary requirements while allowing other investors and funding sources with different risk-return expectations to participate in the same project. The result is a successful investment that provides stable housing for low-income populations including seniors, veterans, disabled persons, and individuals experiencing homelessness.
The PSP Lending Program has demonstrated remarkable resilience over time, even during economic downturns, due to several factors:
High demand for affordable housing -- With a nationwide shortage of approximately 7.3 million affordable rental units for extremely low-income households, these properties can maintain high occupancy rates as well as waitlists.
Government subsidies: Support from federal, state, and local agencies helps ensure steady rent inflows over the financing term.
Professional oversight: Wespath collaborates with Community Development Financial Institutions (CDFIs) that conduct thorough due diligence, underwriting, and loan servicing on these transactions.
By positioning itself as a first-position debt investor within this blended finance structure, Wespath successfully balances its fiduciary duty to generate competitive returns with its commitment to making a positive social impact in underserved communities.
Case study #2: forestry and climate change fund
Convergence Blended Finance is a global network for blended finance that works collaboratively with all types of stakeholders to help make the UN Sustainable Development Goals (SDGs) investable through blended finance. As a non-profit organisation designed to address the core challenges that hinder private investment in emerging markets and developing economies (EMDEs), Convergence provides guidance, education, and networking opportunities to advance the field of blended finance. Additionally, and importantly, they help mobilise private capital toward EMDEs by providing access to blended finance deals and by providing grants for the design of – and sharing learnings from – early stage blended finance structures.
One of the shared learnings we highlight here is a case study provided by Convergence on the Forestry and Climate Change Fund (FCCF) managed by the Investing for Development (IfD) SICAV.
Fund Background
IfD launched FCCF in October 2017 to directly address a major environmental challenge in Central America: the ongoing conversion of forest to pastureland. The fund was established as a USD 20 million, 15-year fund to create a viable and sustainable business model for timber production within secondary and degraded forests (SDFs).
Secondary forests are those that have naturally regenerated after significant human and/or natural disturbance, while degraded forests are those in which most or all of the commercial timber has previously been removed. SDFs represent a significant portion of global forest area (up to 58% according to the Forest Resources Assessment Report 2015) and are at particular risk of conversion to other land uses despite being an important source of a range of goods and economic services.
By investing in entities which provide management solutions to owners of SDFs, the fund was able to further demonstrate the economic value and commercialisation feasibility of sustainable timber production within SDFs, thereby contributing to climate mitigation and heightened local economic development.
Capital structure
After identifying local challenges and solutions to forestry and conservation, IfD adopted a blended finance approach through the use of first-loss capital to mitigate for uncertainty and perceived risks held by institutional investors unfamiliar with investing in secondary forest restorations. The fund is a multi-tiered closed-end private equity fund that is built off two share classes (i.e. tranches or “layers” in the cake example provided in our first article of the series). The Class I Shares provide first loss protection in the event of credit losses or defaults. This tranche appealed to public investors that were primarily seeking development impact and were willing to take additional risk to achieve their goals.
Class J shares are the senior ranking investment class in the fund, benefiting from downside risk protection provided by the other subordinate tier of shares (i.e. Class I shares). By diving the fund into tranches, IfD was able to reduce the perceived risk of the fund to market rate levels that aligned with risk-return expectations from Development Finance Institutions (DFIs) and institutional investors.
The fund also allowed for senior notes, targeting High Net Worth Individuals (HNWIs) and institutional investors seeking the most risk protection. Noteholders ranked senior to all shareholders of the fund and were thus the most protected from any potential losses.
Lastly, the fund was complemented by a technical assistance program (TAP) that helped ensure the investment readiness of the fund’s pipeline borrowers by improving the technical, organisational, and entrepreneurial skills of local forest management entities that were potentially eligible for investment by the fund.
Overall, the fund attracted numerous investors representing a wide range of investment expectations, as shown in the nearby chart provided by Convergence. For example, Luxembourg’s Ministry of the Environment, Climate and Sustainable Development provided the first-loss capital commitment (Class I shares), while the Luxembourg Ministry of Finance invested in Class J shares. Additional Class J investors included Banque Internationale à Luxembourg (BIL), Banque et Caisse d’Épargne de l’État (BCEE) (commonly known as Spuerkeess), Foyer Insurance, and additional private investors.
By leveraging a tiered capital structure, FCCF was able to provide each investor with the return expectations that met their individual risk appetite, while successfully delivering critical climate mitigation, adaptation, and local economic development benefits.
Case study #3: Green for Growth Fund
Another successful example of blended finance in action is the Green for Growth Fund (GGF).
Fund background
Founded in 2009 as an initiative of the European Investment Bank and Germany’s KfW Development Bank, the GGF is a unique public-private partnership with a layered risk-return structure.
It blends funding from public sources and international financial institutions to attract private capital to substantially increase investment volumes to regions and sectors that do not normally attract such flows.
The fund centers on mitigating climate change and promoting economic growth by investing in measures that reduce energy consumption, resource use and CO2 emissions. The GGF operates in 19 markets across Southeast Europe, Turkey, the European Eastern Neighborhood Region, and the Middle East and North Africa.
Capital structure
The GCF is a closed-end, Luxembourg registered investment company that was set up in 2009 for an unlimited duration. It is open to institutional investors only and utilises a tiered risk-sharing structure to attract commercial capital from multilateral and private institutional investors.
As a public-private partnership, the GGF leverages funds from public investors, in the form of first-loss C shares, and international financial institutions' funds in the form of mezzanine shares, and allows private capital in the senior shares and notes.
The fund offers five types of shares (i.e. tranches), shown on the adjacent chart provided by Green for Growth, each with a distinct risk/return profile to suite varying investor expectations.
Investors in the GGF primarily include multinational development banks (including the European Investment Bank, Germany’s KfW Development Bank and the European Bank for Reconstruction and Development, among many others) and private institutional investors (including Finance in Motion, ASN Bank (the largest sustainable bank in the Netherlands), GLS Bank (a German bank with a focus on social and environmental impact investing), the Austrian-based fair-finance Vorsorgekasse AG, the Dutch Foundation Stichting Democratie and Media, among many others).
Since its inception, GGF’s blended finance structure has successfully attracted a range of public and private investors, allowing it to invest EURO 1.7bn in partner institutions cumulatively . The fund currently manages 962mn Euros and is invested in 65 active partner institutions, which are contributing to significant emissions reductions and savings in water, waste, and energy. For example, GGF provided a EUR 28 million loan for the construction and operation of a 50MW solar plant in Topoje, Albania, which is estimated to generate 108,000 MWh of clean energy annually and eliminate ~1,900 tonnes of CO2 emissions per year. This plant – known as the Blue 1 solar plant – is the largest unsubsidised project of its kind in the Western Balkans and increases the stability and resilience of the Albanian energy system by diversifying its energy mix and reducing its reliance on hydropower, which has not been able to provide sufficient electricity to meet local demand during the country’s dry years.
Opportunities for faith-based investors
Blended finance structures offer the unique ability to meet varying investor risk/return expectations while meaningfully scaling environmental and social impact.
This three-part series aimed to introduce key concepts and structures – including tiered capital structures, subordinated debt, and first loss protection – to better inform faith-based investors with dual mandates on the benefits of blended finance solutions.
Integrating these investments into an asset-owner's investment portfolio can assist in better aligning the organisation’s investments with their values, while demonstrating industry leadership and helping facilitate the transition to a more sustainable and inclusive economy.
With numerous investment opportunities currently in the market, and no shortage of qualified asset managers, faith-based asset owners looking to help scale impactful investments that generate risk-commensurate returns should not hesitate to further explore the feasibility of blended finance solutions for their portfolios.
Check out the first and second posts in this series:
Disclaimer
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