The SDG Loan Fund – one of the largest blended finance funds launched to date focused on emerging and frontier markets – was chosen by the IJGlobal judges to win the innovation award for Latin America.

The independent panel of judges on IJGlobal ESG Awards 2024 was impressed by its innovative financial structure that is designed to unlock institutional capital to achieve sustainable development goals in challenging markets.

One of the judges said: “The SDG Loan Fund demonstrates sound commitment to areas that many groups aren’t looking into.”

Another of the judges added: “This high-impact loan fund in emerging and frontier markets is clearly of a sufficient scale to make a significant impact and help those who would otherwise have struggled to support developments in the regions that need it most.”

The SDG Loan Fund launched in 2023 at a fund size of $1.111 billion benefits from multiple layers of risk protection including a $111 million first-loss investment from FMO, which is credit-enhanced with a $25 million unfunded philanthropic guarantee provided by the John D and Catherine T MacArthur Foundation.

Together, these catalytic investments are unlocking $1 billion in private capital from institutional investors that would not customarily be able to finance high-impact loans in emerging and frontier markets.

According to the submission, the need for capital to reach SDGs in developing countries in 2020 amounted to $3.9 trillion. However, this annual funding gap increased by 56% after the outbreak of Covid-19.

The fund will exclusively invest in participations in FMO-originated loans, thereby granting institutional investors priority access to FMO’s investment pipeline and enabling them to benefit from its industry-leading ESG practices.

FMO has around 45 staff members dedicated to ESG, who support borrowers in improving their ESG performance based on international standards – IFC performance standards and OECD MNE guidelines – by implementing ESG action plans.

The fund’s capital will be invested in companies and projects across Latin America, Asia, Africa, and Eastern Europe active in 3 target sectors:

• renewable energy – target allocation of 30-40%
• financial institutions
• agribusiness

The SDG Loan Fund considers the impact of its activities to across 3 pillars.

Benchmark and blueprint for the industry – the SDG Loan Fund demonstrates how blended finance can be deployed at scale to mobilise unprecedented levels of private sector investment towards high-impact projects in emerging markets. Through this, it serves as a benchmark and blueprint for future blended finance funds. In the long-term, a more frequent and effective use of blended finance techniques may enable investors to make larger allocations to emerging markets.

Private capital mobilisation into EM – the large SDG funding gap in emerging markets requires the effective use of rare catalytic capital to maximise the mobilisation of private capital. In the fund, catalytic capital provided by FMO was strategically deployed to use finite resources efficiently to satisfy the risk-return requirements of institutional investors, achieving a mobilisation ratio of 1:9 (where $1 of catalytic capital from FMO mobilises $9 of private sector capital), well-above the average mobilisation ratio in the blended finance market (1:4).

Fund contribution to SDGs – the fund will target contributions to 3 SDGs (SDG 8: decent work and economic growth, SDG 10: reduced inequality, and SDG 13: climate action). Once fully invested in around 100 high-impact loan participations, the fund hopes its investments will support close to 60,000 jobs and to avoid some 450,000 tCO2 per annum, according to FMO’s historical experience and analysis.