Good nutrition has a hugely positive impact on health and other social goals, like educational attainment and work productivity – but the sector remains under-financed relative to its potential. How can we change this? While there is also scope for increasing investment via national budgets or official development assistance, it is essential to think creatively about how to expand the pool of financing available to support nutrition by attracting diverse funders via novel structures, as well as deploying traditional aid in new ways—i.e., innovative finance.
'Innovative finance' refers to financial mechanisms that help to channel private and public financial resources towards solving global problems. It can provide complementary resources to traditional development finance as well as make development projects more effective or efficient – such as by linking financing to results or redistributing risk.
How does this work? Here we briefly explore four linked aspects:
- grants and technical assistance (TA);
- impact-related funding;
- debt and equity instruments; and
- first-loss and guarantees.
Grants and TA can help support blended finance and enable investment
Grants and TA, funded by development and philanthropic actors, can play a key role beyond their traditional application. Blended within a transaction, they provide innovative financing, e.g., building the capacity of a nutrition-supporting enterprise to become ready for investment and meet the criteria of commercial investors down the line. For example, the Good Food Innovation Fund provides food small- and medium-sized enterprises (SMEs) in East and West Africa with TA and grants, including to help prepare them to receive larger financing in the future.
Impact-related funding leverages finance to achieve greater impact
Outcome funding, impact bonds, and impact-linked finance are all instruments that link measurable impact targets, verified by independent evaluators, to financial rewards. While outcome funding and impact bonds have been extensively used in adjacent development sectors, such as health, their application in nutrition is relatively new – though Save the Children is currently working on developing results-based financing instruments and the Impact-Linked Fund for Eastern and Southern Africa includes agriculture and food security among its target sectors.
Debt and equity investments can be adapted to help meet social goals
In contrast to traditional debt and equity, impact investment refers to investments in which an investor seeks financial returns alongside a measurable positive impact on social goals. While this has channelled considerable support towards areas such as green energy, it is currently not addressing gaps in nutrition funding. But new initiatives are changing this. For example, the UN Capital Development Fund’s BRIDGE facility provides concessional revolving capital bridging to companies in frontier markets – including those in the food security and nutrition sector.
First-loss capital and guarantees are used to reduce the risk in other instruments
First-loss capital and guarantees are instruments used to reduce risk and thus attract investors that are risk-averse and would otherwise be reluctant to participate in impact-driven investments. In the former, one entity agrees to be the first to take losses if an investee cannot pay back investors; the latter is a promise to repay all or part of the investment if the investee defaults. For example, the Nutritious Foods Financing Facility is the first nutrition-focused debt fund using a blended finance structure. It aims to invest in SMEs producing nutritious foods in Sub-Saharan Africa. The structure includes a first-loss capital mechanism that aims to reduce risk to investors and thus attract further capital into the fund itself.
Considerable untapped potential remains
Innovative finance is thus a concept grouping together a set of approaches that aim to change the incentives for investors, make it easier to attract philanthropic and private funding to tackle global nutrition challenges, and do this more sustainably. It offers the prospect to recycle funds and reduce dependence on the public purse – whether national or donor.
While the landscape of innovative finance is vast, the application of these approaches within nutrition has been limited to date—particularly for guarantees and impact-related funding. Developing and deploying these approaches further will require new partnerships between the nutrition and finance sectors, with nutrition actors thinking creatively about financing approaches, providing the metrics and tools to support them, and learning from other sectors that have more experience with innovative financing. Thoughtfully developed and well deployed, innovative finance can amplify the positive impact that development- and private-sector actors can have on reducing malnutrition.
Want to learn more about the potential for innovative finance to improve nutrition? Check out our recent Discussion Paper.
And if you’re developing innovative finance solutions for nutrition, we would love to connect, so please reach out to our team.