Since 2023, The Harriet Collington Foundation has supported work at the LSE’s Grantham Research Institute on Climate Change and the Environment on best practice in blended finance, showing how governments can unlock billions in private capital to meet public policy priorities in housing, net zero, education and more.
Last year, Sarah Gordon, who leads this research as a Visiting Professor in Practice at the LSE and a Principal Consultant at HCF, published a report, Investing in our future: practical solutions for the UK government to mobilise private investment for economic, environmental and social policy priorities, which detailed:
- How ‘blended finance’ enables every £1 of taxpayer’s money to crowd in far greater multiples of private capital to achieve better outcomes in climate action, housing, education and more.
- Tried and tested case studies showing how, through collaboration and co-design, governments, multilateral organisations and philanthropists are already working with private investors for public good.
- Six regulatory and policy enablers that could radically scale up deployment of blended finance in the UK – and mobilise at least £50 billion in private investment over five to 10 years.
In the twelve months since the publication of the report, huge momentum has built around the potential of blended finance, momentum that has been accelerated by the election of a new UK government. Since Labour came to power in July 2024, specific initiatives include:
- The launch of the National Wealth Fund, aimed at mobilising private sector investment into clean energy in the UK. The UK Infrastructure Bank (now renamed the National Wealth Fund) will use its bulked-up £28bn balance sheet to catalyse private investment through an expanded range of blended finance instruments, including performance guarantees, and trialling new blended finance solutions that take on additional risk to facilitate higher impact in individual deals. With a target portfolio mobilisation ratio of 1:3, the NWF could mobilise at least £70bn of private investment.
- The announcement by Rachel Reeves of significant reform of the pensions industry, in order to improve efficiency and drive private investment into growth opportunities nationally. The Chancellor plans to consolidate the 86 Local Government Pension Scheme funds in England and Wales into eight large funds, with assets of about £50bn each. There are also plans to consolidate smaller defined contribution schemes across the UK from private businesses into pools of £25bn to £50bn.
- A speeding up of devolution to regions across the UK, with ten Combined Authorities, nine led by Mayors, now established and plans to extend these in 2025 and beyond. The Combined Authorities are already seizing the opportunity to provide ambitious local growth plans and attract private investment at scale.
- A landmark move to develop a government-backed Social Impact Investment Vehicle, bringing together socially motivated private investors, the voluntary sector, DCMS and HM Treasury, and building on the rapid growth in the UK’s impact investing market, now worth nearly £77bn and growing at 10 percent a year.
The Harriet Collington Foundation continues to support the work of the LSE’s Grantham Research Institute in this space, as Sarah engages with policymakers, civil servants, commercial investors and others on these proposals. Whilst the initiatives are to be applauded, concerns have been raised by commentators, investors and pension trustees that deserve to be addressed. In particular, ensuring that savers’ pension pots are properly protected and that the lessons of previous public-private partnerships are acted on.
Sarah’s research has distilled best practice into five key principles that, if implemented, help to ensure successful collaboration between public and private investors – and better outcomes for the public. These are:
- Open-mindedness about what type of financial instrument is most appropriate. Too often, governments decide on an investment structure or approach before consulting with the investors it most wants to attract.
- Design together from the outset. Public investors need to sit down with investee companies and specialist investors already involved in providing financial solutions in specific sectors, to identify capital gaps and what vehicle will best address them.
- Build trust and respect from the beginning. Identify where the differences are in desired outcomes, approaches and risk and return allocations between investors. Creating consensus around these at an early stage is key to success.
- Acknowledge differences in agency and expertise. Public and private investors have different skillsets and vocabulary. Often one party has much greater agency. These issues should be addressed openly.
- Establish appropriate governance arrangements so that each investor’s interests are properly protected.
Done well, blended finance provides a huge opportunity for government to work with private savers and investors for our shared goals – whether that is reaching net zero or building decent housing.