‘Blended finance has fallen short’ – UN briefing

Blended finance has failed to drive private investment towards the SDGs at the scale needed to achieve them, a new UN policy briefing argues, calling for a “reshaping of international financing architecture”.

Reimagining financing for the SDGs: from filling gaps to shaping finance, published last week, highlights that investments in blended finance have stalled around US$15bn yearly, while up to US$7tn is required every year to meet the UN Sustainable Development Goals, according to data from blended finance network Convergence. 

“Blended finance, often championed as a silver bullet for addressing the SDG financing gap, has plainly fallen short of its promise,” Mariana Mazzucato, professor in the economics of innovation and public value, University College London, and author of the report, wrote in an accompanying blog.

Blended finance is an investment deal structure where concessionary capital from government-backed or philanthropic sources is used to attract private capital in investments targeting the SDGs – in this case in emerging economies specifically.

The definition of blended finance used in the report specifies that investments must target the SDGs in developing countries in particular.

• Read more in our Impact 101: What is blended finance?

Concessionary investments typically yield below-market rates returns, may carry a higher risk than conventional investments, and can include grants. If a deal is considered too risky or not profitable enough for private investors, a small amount of this “catalytic” investment can make the deal more attractive – that’s why blended finance is often seen as a powerful enabler to mobilise private capital towards the SDGs.

However the policy paper argues that blended finance has failed to mobilise private investment: in practice, most of the non-concessionary capital in blended finance deals come from public sources, such as development finance institutions, rather than private investment, with private sector contributions accounting for just 38% of blended finance in 2023. 

“Although blended finance structures are designed to use limited public resources to catalyse private sector investment, the reverse is happening,” says the report. 

“In practice, concessional public finance is leveraging non-concessional public finance to support private initiatives, with limited participation from de-risked private capital”.

Although blended finance structures are designed to use limited public resources to catalyse private sector investment, the reverse is happening

The policy paper also questions whether blended finance is used in deals where it makes a real difference, which is difficult to assess given the lack of reliable metrics on “additionality” – to establish if a deal would have gone ahead even without the use of catalytic capital in a blended finance structure. The fact that blended finance is used more in sectors with a relatively low risk (like climate mitigation) than in higher-risk areas (like climate adaptation) suggests that it is not used in the most impactful way, the report argues.

• Read more: Climate-focused blended finance deals plummet by 55% in 2022 – Convergence

An award-winning economist, Mazzucato is the founding director of the UCL Institute for Innovation & Public Purpose and an advisor to policy makers around the world. She is the author of several influential books including The Entrepreneurial State: debunking public vs. private sector myths, published in 2013. 

The report, part of a series of policy briefs aimed at helping “decision makers around the world navigate tough choices” is published by the UN Department for Economic and Social Affairs and the Institute for Innovation and Public Purpose in collaboration with the UN High-level Advisory Board on Economic and Social Affairs.

Disappointments and myth-busting

In recent years, many hoped blended finance could be a decisive tool to “bridge the financial gap” to reach the SDGs in developing countries. In 2022, partners including AVPN and the Asian Development Bank launched the Global Blended Finance Alliance in an effort to bring together international organisations to boost the uptake of blended finance. 

But a year later, Nick O’Donohoe, then CEO of the UK’s development finance institution, British International Investment, and former adviser to the Bill and Melinda Gates Foundation on blended finance, admitted it had not delivered what was originally hoped. Speaking at the GSG Global Impact Summit 2023. “There’s too high an expectation from commercial partners that risk will be taken away by a government entity waving a magic wand,” he said. The concessionary finance needed to make such deals work was a scarce resource, he added, and it should only be used to address the most difficult issues.

In the report, Mazzucato addresses several “myths” around blended finance that supporters hoped it would achieve, but did not happen in practice.

‘Blended finance is not to blame’

Reacting to the report, Tristan Ace (pictured), chief engagement officer and head of policy at Asian social investors’ network AVPN, said: “While exploring new and innovative approaches is valuable, blended finance is not to blame for the widening gap in achieving the SDGs.” Some misconceptions about its mechanisms needed to be addressed, such as seeing blended finance primarily as a mechanism to “de-risk” investments. 

“Concessional finance, including philanthropic capital, plays a catalytic role in driving impact across project sourcing, deal structuring and capacity building,” he said. “It draws in private capital from the outset, who may not engage at all without the concessional element.”

Concessional finance draws in private capital from the outset, who may not engage at all without the concessional element

He also pushed back on the lack of additionality of blended finance mentioned by Mazzucato in the report: “Minimum concessionality and impact additionality are core principles of blended finance, and while there are sometimes gaps between intent and action, the role of catalytic capital is also to hold private capital to account on this.”

Flip the narrative

The report recommends the adoption of “mission-driven frameworks” for public-sector investment (for example, from development finance institutions or multilateral banks), where public resources are dedicated to specific “missions” which directly address the SDGs. The public sector in this way would set the priorities on where concessional capital would be allocated, and the private sector would respond to opportunities for public-private partnerships – rather than the other way around. The provision of concessional public financing should also be tied to explicit outcomes, the report argues, which ensures the private investment mobilised is impactful.

“This approach flips the narrative,” Mazzucato wrote on Substack. “Instead of the public sector de-risking private initiatives, it steers private initiatives towards societal goals.” 

She added that national or multinational development banks had the potential to “act as investors of first resort rather than lenders of last resort. They must move beyond gap-filling to actively shape markets.”

The report says the Fourth International Conference on Financing for Development (FfD4), to take place in Seville, Spain, in summer 2025, and brings together global state representatives to discuss issues and need for reforms around the SDGs will offer a “pivotal opportunity to realign the international financial architecture with the SDGs”.

Top image: A woman and child walk through the flood waters in east Jakarta, Indonesia during floods in 2017. Reproduced under a Creative Commons licence. Credit; Kompas/Hendra A Setyawan/World Meteorological Organization