With a growing interest in the potential for blended finance in Brazil, and the structure of blended finance deals becoming increasingly viable, now is the time to explore this way of getting capital to important but hard-to-fund projects.
Blended finance brings together commercial and philanthropic investors to direct much needed capital to social and environmental projects that might otherwise struggle to access credit. It is an effective tool for attracting private investors to engage with small and medium-sized enterprises that need investment, while mitigating investment risk and offering market rate.
Blended finance deals are usually supported by a consultancy company to strengthen project delivery, for example helping to manage cashflow or improve internal administration. This consultancy support offers reassurance to private investors that credit will be repaid, and to philanthropic investors that their investment will deliver the intended impact.
Blended finance can be used to leverage private funds for a variety of social and environmental projects, for example:
· Agribusinesses: such as family-owned farms developing organic agriculture or working with native species that won’t negatively impact biodiversity.
Blended finance supports agribusinesses to innovate. This overcomes the tendency in this sector to favour existing technologies and practices that aren’t always environmentally friendly or sustainable.
· Biogas generation: which converts waste / garbage into renewable energy while reducing harmful methane emissions.
Renewable energy must be scaled up to support the energy transition from fossil fuels. And with a long history of green energy production, Brazil is well positioned to develop biogas generation capabilities. While biogas production in Brazil is accelerating, funding is still needed for capacity to reach its full potential.
· Educational projects: that improve access to quality, affordable education in low-income and underserved communities.
Blended finance is an effective tool for attracting private capital into a key sector where it has been historically challenging to attract new investors. We are seeing increasing interest in blended finance for education, as it offers a way to engage private investors on market terms and with minimised risk.
· Health projects: that improve health outcomes in low-income and underserved communities.
In another key sector where it can be difficult to attract private investment, there is increasing interest in blended finance as a potential catalyst for new funding. This might be increasing access to healthcare provision, improving healthcare infrastructure, or preparing for potential future threats such as pandemics or climate change.
“Brazil doesn’t have a strong culture of philanthropic investment. We want to raise awareness about blended finance as a viable option for both private and philanthropic investors. Blended finance structures offer market rates for private capital alongside the impact returns philanthropic investors are looking for. All while delivering credit for the social and environmental projects that need it.”
Roberto Vianna do R. Barros, Partner Banking & Finance, Vieira Rezende
A frequently used and growing tool in the international market, blended finance is directed towards impact investments. Project outcomes must have a positive impact on either the environment or society, contributing to at least one of the United National Sustainable Development Goals (SDGs).
Blended finance opens access to credit to small and medium-sized companies that don’t have the credit score needed to access traditional credit markets that favour large-scale financing. It is structured to provide credit from two sources:
1. Philanthropic investors willing to receive a return on investment lower than the market rate.
2. Commercial investors who expect to receive market rate for their investment.
This means the companies that need funding for impact projects pay below market rate for the credit they need to develop and grow. Commercial investors receive market rate for their investment, and philanthropic investors gain access to initiatives aligned with their social or environmental objectives.
For philanthropic investors, blended finance offers a viable structure for investing in projects that will have a positive impact. While financial return on investment isn’t as important for philanthropic investors, the impact of investments must be measured and reported back regularly.
There are different ways to measure impact, with metrics and indicators varying depending on the project. The Organization for Economic Cooperation and Development (OECD) has published a guide with principles for blended finance operations, including monitoring for transparency of results. The structure of a blended finance deal, supported by a consultancy service with experience in this area, offers philanthropic investors the assurance of rigorous impact measurement and reporting.
For commercial investors, blended finance is similar to a regular investment, offering market rates but without the barriers of investing directly in an impact company. The incentives are both financial and the opportunity to have a positive impact on the environment and society.
Specialist consulting firms, play a crucial role in structuring blended finance deals and attracting investors. When finance is secured, consultancy firms will work to ensure projects are able to pay back credit, as well as fostering funded businesses and supporting their management. What this support looks like will vary, depending on the project. For example, for an agriculture project it might be improving data to increase crop yields or mitigate risks to the harvest, for bioenergy it might be supporting a focus on technology and innovation.
To achieve the United Nations SDGs, Brazil needs a significant increase in investment. Current levels of development funding are not enough to finance all the projects needed. Blended finance provides an opportunity to address the gap.
Vieira Rezende provides legal services to support stakeholders with structuring agreements within the capital markets transactions involved with blended finance.
One recent example is a capital markets securitisation transaction used to finance four social businesses. These businesses are projected to impact over five million people in Brazil over the investment period:
1. An educational platform that helps students improve their writing skills.
2. An educational platform that enables children to create their own books.
3. A health technology company that provides telemedicine services.
4. A workforce management platform that connects workers with businesses offering fair wages and flexible conditions.
The Environmental and Social Impact Investment Receivables Certificate (CRIIAS) issued was structured by Grupo Gaia, a consultancy dedicated to fostering impact businesses, and Artemisia, an organisation focused on supporting social enterprises – with legal services provided by Vieira Rezende. The deal was regulated by the Brazilian Securities Exchange Commission (BSEC) and was the first blended finance deal to be traded on the Brazilian Stock Exchange.
In February 2024, the Brazilian Federal Government formally announced the Private Capital Mobilization and Foreign ExchangeProtection Program – Eco Invest Brasil. Provisional Measure No. 1,213/2024regulates Eco Invest Brasil and defines four sub-lines: Blended Finance, Liquidity, Exchange Protection, and Project Structuring. These sub-lines are referred to collectively as the Line.
The Line's resources will be transferred from the National Climate Change Fund. It will have its own accounting and governance, segregated and separated from the other resources of the fund. The Line will be accessed by financial institutions qualified as financial agents for the Line, under the Ministry of Finance regulations.
The blended finance sub-line allows partial credit to be offered to eligible projects, combining public and private resources to reduce the average cost of financing. Financial institutions will be able to access the resources of the sub-line and pass them on through financing to investors, in addition to fundraising operations abroad. In a proportion that will be defined in rounds of allocation auctions, institutions that demand the lowest proportion of catalytic capital compared to operations abroad will be rewarded.
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Brazil's dynamic political and economic environment offers diverse opportunities. Expert guidance is essential to navigate these complexities. This selection of articles highlights why Brazil is an attractive destination for international investment.
