Blended Finance

Many projects needed for development and climate goals, such as renewable energy, infrastructure, healthcare and small business lending in developing countries, struggle to attract private investment because of high perceived risks or low expected returns.

Blended finance uses concessional money from governments, development banks and foundations to improve the risk-return balance for private investors. Common tools include first-loss capital, where public investors agree to absorb initial losses; guarantees; below-market-rate loans; and grants for technical assistance or project preparation.

For example, a development bank might take the first 20% of any losses in a fund investing in solar power in Africa, making it attractive for pension funds and insurers to invest the remaining 80%.

Blended finance is supported by organisations such as Convergence, the OECD and multilateral development banks. Supporters argue it can mobilise large amounts of private money for development. Critics point out that the amounts mobilised have been smaller than hoped, that deals can be complex and costly, and that public money must be used carefully to avoid subsidising projects that would happen anyway.