Opinion: Blended finance isn’t perfect, but it’s essential

I recently read Mariana Mazzucato’s blog and UN policy brief commenting on blended finance falling short of expectations and the need for a new approach to mobilising private finance. Her piece brought forth issues plaguing blended finance that should be addressed, such as the need for alignment of donors’ goals with those of developing countries themselves and the need for donor transparency.

• Read more: ‘Blended finance has fallen short’ – UN briefing

As the global network for blended finance, Convergence exists to mobilise private investment into sustainable development through blended finance, and we’ve been doing it for nearly a decade. So, we wanted to respond to Dr Mazzucato’s piece and offer our own real world perspective on where blended finance is and how we think it needs to evolve.

While Dr Mazzucato states that blended finance has stagnated, the Convergence data she cites actually shows a notable rise in 2023. And the climate portion of the blended finance market in particular saw its highest ever annual financing total, growing by 120% to US$18.3bn in aggregate investment from $8bn the year prior – the entire market currently sits at around $23bn. Recently, we’ve also seen a small number of very large blended transactions come on the market that have the potential to be replicated and are providing much needed momentum (read more in the first story in this edition of The Impact World This Week).
 

Another assertion surfacing in Dr Mazzucato’s piece and also in a recent Financial Times op-ed, is that blended finance has failed because it has not single handedly delivered the money for the Sustainable Development Goals (SDGs). Comparing annual blended finance volumes directly to the total SDG financing gap of $5tn-$7tn creates a misleading narrative about effectiveness. Blended finance was never designed to fill this entire gap; instead it serves as a catalyst for market development and private sector engagement. When we look at successful blended transactions we see how relatively small amounts of catalytic capital can mobilise significant private investment (such as the SDG Loan Fund). These multiplier effects demonstrate blended finance’s real promise: not as a gap-filler, but as a market enabler that creates pathways for commercial investment in developing economies. Emphatically, it is not a silver bullet, but only one tool among many that need to be activated to achieve the SDGs.

Clarity and co-ordination needed from the development community

The underlying issue, as many including Dr Mazzucato have observed, is that the development community has still not organised itself to get the most out of collaboration with private sector investors, whether in blended transactions or more classic development finance operations. In the case of blended finance, official donor agencies in particular could be clearer and more coordinated with each other about where they want to engage with private sector investors. They also need to be better negotiators for development impacts and more transparent about tools, risk tolerances, processes, and other rules of engagement. We absolutely agree with her statement that there need to be mission-driven financing frameworks across the public sector in which public finance leads the way in shaping and co-creating markets.

Blended finance is not a silver bullet, but only one tool among many that need to be activated to achieve the SDGs

At the end of the day, creating a false choice between current blended finance approaches and new financing frameworks misses the opportunity to strengthen both. The development finance community doesn’t need to choose between mission-driven strategies and effective blended structures, the evidence shows that these approaches can and should complement each other. While theory might suggest waiting for perfect conditions or ideal transaction structures, practice demands a more pragmatic approach. We shouldn’t let perfect be the enemy of good, particularly when dealing with urgent development challenges that require immediate action.

• Read more: Blended funds: don’t get obsessed with leverage

The reality is that both quality and quantity matter in development finance. While we should absolutely strive for high-impact, well-structured transactions, we cannot ignore the sheer scale of financing needed to address global development challenges. Accordingly, dollar targets and funding goals serve as practical proxies for measuring impact and progress. Target funding amounts don’t diminish the importance of quality, instead they acknowledge the real financing gaps that must be addressed. In practice, scale and impact aren’t opposing forces; they’re complementary metrics that help us understand how and where we’re making meaningful progress.

The development finance landscape has witnessed a clear shift as the nexus of capital has decisively moved from public to private sources. While public sector leadership in development is crucial, questions around government capacity to execute complex mission-driven financing strategies without meaningful private sector engagement remain. While we broadly agree with the importance of country-led development goals and strategic public sector involvement, historical evidence and current market realities have shown that purely public sector-led approaches often face significant challenges in speed and efficiency, which, ironically, makes a strong case for blended finance as a solution rather than a problem.

An essential tool

This is precisely why organisations like Convergence play such a critical role in the development finance ecosystem. Our work focuses on strengthening blended finance by identifying and analysing which private capital mobilisation models are most effective. Through rigorous data collection and analysis, we have built a comprehensive evidence base and knowledge center that helps the development community understand what works, what doesn’t, and why. 

Critical voices are valuable. By examining where blended finance may be falling short, they help to ensure that it ultimately delivers real impact. Blended finance remains an essential tool in mobilising private investment for sustainable development, not as a panacea but as a catalyst for broader market engagement in the places that need it most. The urgency of global challenges means that it’s more important than ever that we work together to make blended finance as effective and efficient as it can be. 

Joan Larrea is the CEO of Convergence, the global network for blended finance

Header photo of mangrove seedlings by Bishnu Sarangi from Pixabay