How Philanthropic Funds Helped Mobilize Over $1 Billion in Investments for Sustainable Development

When the MacArthur Foundation launched the Catalytic Capital Consortium — or C3 — in 2019, it built upon the foundation’s four decades of work in impact investing and ambitions to support and expand the idea of how patient, flexible and risk-tolerant financial capital can be deployed to meet the world’s top-line problems.

Along with partners the Rockefeller Foundation and the Omidyar Network, it set its first sights on helping the philanthropic sector maximize its role in achieving the U.N.’s Sustainable Development Goals, or SDGs, by 2030.

At the time, Rockefeller estimated that the SDGs, a shared blueprint of 17 goals to end poverty, protect the planet and help all the world’s citizens enjoy peace and prosperity, faced an “astronomical” gap of $2.5 trillion dollars in developing countries.

Then COVID, global conflicts and other contributing factors exacerbated the problem. Increased economic pressures drove more than 100 million more people into extreme poverty; the number of people facing food insecurity escalated to more than 200 million; and inflation ballooned the costs of achieving climate goals like net-zero carbon emissions.

Today, despite growing investments, the U.N. Conference for Trade and Development estimates that developing countries face an SDG investment gap of roughly of $4 trillion, $2 trillion for energy transition alone.

In November, three partners: Allianz Global Investors, FMO Investment Management and the John D. and Catherine T. MacArthur Foundation, introduced the SDG Loan Fund, a new $1.1 billion blended finance fund to spur investments to advance SDG goals in emerging and frontier markets. MacArthur committed $25 million in the form of a guarantee intended to reduce risk and encourage private investors to get on board. This is the foundation’s 11th and final investment through the C3 initiative, which set out to move over $100 million in impact investments.

Here’s how the partners’ relationships helped establish a fund that is already mobilizing substantial institutional capital across multiple sectors and SDGs.

Coming together

The private-sector-initiated fund started with a drawing on a napkin at an emerging markets conference after colleagues from Allianz heard a panelist from the Dutch Development Bank FMO discuss its organizational capacity to deliver private capital. Nadia Nikolova, lead portfolio manager of development finance for AllianzGI, chased the speaker down, and they all spent the rest of the afternoon in the cafeteria sketching out the ideas that became the SDG Loan Fund.

The fund was designed to mobilize $1 billion in private capital in the countries and sectors where it’s needed most and offered multiple levels of risk protection, “credit enhancements” that help commercial investors take on more risk and encourage private sector investment.

As with all catalytic capital activity, the intention was to unlock investments and outcomes that wouldn’t otherwise be possible by seeding projects that aren’t yet able to demonstrate commercial viability; scale business capacity to reach new populations, geographies and circumstances; and sustain the ability to serve groups that challenge commercial viability. The goal is to help private investors identify ancillary business opportunities in work that advances the SDGs, like providing housing, building to achieve climate goals, and providing banking services as economic opportunity grows across the board.

Debra Schwartz, MacArthur’s managing director, impact investment, provided real world examples like putting agribusiness in local context for smallholder farmers, funding transport and storage facility challenges, and connecting financial institutions with rural outreach on climate solutions.

“But for” relationships

The SDG Loan Fund plays on the strengths of its three partners. FMO, which has a 50-year track record of investing in emerging markets, will retain the loan on its balance sheet and is a first loss investor in the fund. Its wholly owned subsidiary, FMO Investment Management, is the fund’s portfolio manager, and will provide priority access to FMO’s deal pipeline.

Allianz Global Investors is the fund manager, and maintains risk management responsibility on the fund, including veto rights. Meanwhile, MacArthur’s flexible philanthropic guarantee was considered pivotal to the process.

Each commitment led to the next. Nikolova said that “but for MacArthur, FMO’s investment in the fund wouldn’t have happened. But for FMO’s investment in the fund, the billion-dollar capital wouldn’t have come. And without FMO Investment Management and AGI providing the plumbing, the whole thing probably wouldn’t have come together.”

Mobilizing $1.1 billion

By the end of last year, the SDG Loan Fund became one of the largest blended finance funds on record, mobilizing $1.1 billion in high-impact loans to companies and projects aligned with helping emerging and frontier countries meet goals.

It has attracted $9 in private capital for every $1 committed in public funds. For each dollar MacArthur committed as a guarantee, the fund raised 40 commercial investment dollars. The fund has successfully reached its billion-dollar goal, and monies are already flowing to intended markets. Transactions specifically target SDG 8: decent work and economic growth; SDG 10: reduced inequality; and SDG 13, climate action.

Nic Wessemius, managing director of FMO Investment Management, cited the impact to a specific loan investment in one of the first wind farms in Costa Rica, which expanded exponentially through the fund.

A novel solution

Catalytic capital in general, and blended finance in particular, provide important answers to achieving SDG goals. Public capital can’t do it alone. And even as philanthropy has embraced the SDGs and invested a reported $112 billion in SDGs by as early as 2016, the gaps remain staggering.

Overall, the Force for Good Initiative (FFGI) estimates that the cost of meeting overall member state goals rose by 25% last year alone, and that achieving them calls for a minimum investment of $135 trillion, making the pressures of attracting institutional investors to the cause even more essential.

MacArthur remains bullish on growing and innovating in the field. Just as catalytic funding seeks to advance larger investment, a central part of the philanthropic commitment to C3 involved advancing the impact investing field itself. MacArthur made $10 million in grants to “fuel learning and market development related to catalytic capital,” and worked to strengthen the evidence base and build collective learning.

Said Schwartz, "Although the SDG Loan Fund completes MacArthur’s investments for the C3 initiative, we are exploring ways to continue supporting the growth of the catalytic capital field. We believe the initiative has shown that catalytic capital is an important tool for unlocking impact and investment that would not otherwise be possible. MacArthur continues to make new catalytic capital investments, and plans to share more in the first half of of 2024 on future goals.

New thinking and collaborations like the SDG Fund can be a game changer, one that Schwartz said demonstrates how blended finance can be deployed at scale to mobilize “unprecedented levels of private sector investments.”

Featured