Last week, experts gathered at the Guernsey Sustainable Finance Seminar to examine blended finance mechanisms, drawing attention to how, for example, Guernsey’s specialist insurance sector adapts its risk financing mechanisms.     

Justin Sykes, managing director at Guernsey-headquartered impact investor , highlighted the importance of blended finance and its contribution to the climate transition.

“Many transactions cannot occur without the financial engineering that brings in different forms of capital to de-risk private investor appetites. Blended finance is what allows us to move from proof-of-concept to scalable solutions,” Sykes said in a panel debate at the seminar.

According to a definition from the London School of Economics (source: LSE, Grantham Research Institute on Climate Change and the Environment, 30 November 2022), blended finance is "the strategic use of public sources of capital to attract private investment in developing countries. It entails blending public capital such as Official Development Assistance (ODA) or funding by development financiers with private capital." Public funds are usually offered on more attractive terms than the prevailing market conditions, and are used to de-risk investment projects to mobilise additional private capital.

The seminar's panel, which examined insurance and investment in climate adaptation and disaster response, stressed that climate finance is shifting from ad hoc responses to pre-arranged, scalable mechanisms. Blended finance can combine government funding, grants, guarantees, insurance/reinsurance and commercial capital can de-risk projects in fragile markets across the world and crowd in mainstream investment. 

“It’s about case studies. Once we have these structures in place and once proven, they can be replicated,” Sykes said. “An NGO focusing on climate resilient housing in emerging markets, for example, and operating in the Philippines – the most disaster-prone country – is helping finance households to improve their homes to be climate and disaster resilient. They have so far helped 1,500 homes but financial institutions are unwilling to do more financing due to the credit risk,” he continued. “An insurance product can help to de-risk this and raise finance from impact investors who previously would not do it. It’s an example of where an insurance instrument can help unlock larger levels of capital to support climate mitigation and adaptation.”

“Another example is in the green bonds space,” Sykes said. “We are working with an African utility firm to launch a combined green sustainable bond. What makes it unique is the UK government-backed guarantee fund. That is a game changer as they can approach UK pension funds that have an emerging market allocation and are able to consider for the first time investing into a West African corporate transaction with a guarantee in place.”

The European Union has also been stepping up efforts to catalyse public-private investment in African agriculture with the launch of the AgriBusiness Capital Fund (ABC) fund in 2019.

Mike Pickard, director, global (re)insurance, , said that Ukraine has a problem with the re-insurance market. “One of the biggest parts of their economy is the exportation of grain and if that can’t be insured, it’s hard to run that business,” he said. “We look to work with the European Bank for Reconstruction and Development (EBRD) who support a lot of projects in Ukraine and provide more risk cover to let them do what they do well. They need insurance but firms won’t insure them. We find mechanisms to provide reinsurance.” 

“Guernsey is a good place to do this as it has the right structures in place. We built a structure with the EBRD, with insurance underwritten and guaranteed by the EBRD. We are looking to replicate this model. Guernsey has enabled us to have this blended finance structure,” Pickard said.

Demand outstrips supply
Petra Demarin, senior advisor for strategic partnerships to the under-secretary general, International Federation of the Red Cross and Red Crescent Societies, said that demands were increasing but funds were not. “Natural disasters are funded almost exclusively by governments so we are required to do more with less and are looking at new approaches like blended finance,” she said.

However, Demarin pointed out that the humanitarian sector is extremely wary of the private sector. “They don’t speak the same language. We don’t hang out much, quite frankly, and the possibility of making money out of vulnerable people is terrifying though it’s nothing personal,” she said. “It makes it difficult for public-private sector partnerships. It needs to be commercially viable to be sustainable. Grant donations are often one off and not reliable,” she continued. “We always need grants for places like Palestine. What we are looking at is how to change the model. We try to decrease the case load. We want to focus grant funding in areas that aren’t commercially viable. And use different financing in places like Nigeria where there are commercial opportunities. It takes time to do this. This type of engagement is potentially beneficial for us.” Demarin believes that financial centres such as Guernsey can provide frameworks to channel investment where help is most needed.

Guernsey Finance also highlighted the island’s role as a hub for sustainable innovation. “Sustainable finance is a golden thread running through every part of Guernsey’s financial services industry. We pioneered two world-first regulated sustainable fund regimes, now with a combined net asset value exceeding £5 billion ($6.7 billion), alongside robust ESG frameworks and a collaborative financial services community,” Stephanie Glover, strategy and sustainable finance director at Guernsey Finance, said. “Every time we come together to share knowledge, debate solutions and form new partnerships, we strengthen Guernsey’s role in delivering climate-positive finance.”

The event gave Guernsey a chance to showcase its position as a partner in global sustainable finance, offering responsive structures and regulatory support that enable investors and managers to align capital with climate adaptation and net zero objectives. "Green finance" has been on of the ways that the island has sought to differentiate itself as an international financial centre in recent years. See more about Guernsey Finance here.