BLENDED FINANCE

Blended finance brings together mechanisms that combine official development assistance and philanthropic capital to improve the investment conditions for private sector participation.The term first emerged in 2002 to describe the incentive structures used by multilateral development banks and public-sector institutions to finance infrastructure projects. Today, blended finance is being redesigned to meet the growing investment needs required to address sustainable development challenges.

Climate change adaptation and the transition to a low-carbon economy have now been added to the persistent needs around economic and financial inclusion, in this context, blended finance provides risk-mitigation mechanisms that help build confidence in strategic investments such as renewable energy, sustainable construction and agriculture, and financial inclusion. These mechanisms are even more relevant for critical sectors with structurally limited financial returns, including social entrepreneurship, water and sanitation, and nature-based infrastructure.

In the development of mission-driven entrepreneurship, the risk-mitigation mechanisms inherent to blended finance can remove several barriers:

• By supporting research and innovation, blended finance enables project leaders to experiment with new socio-economic models and to test emerging techniques and technologies designed to strengthen their impact.
• By subsidizing entrepreneurship support organizations, coworking spaces, incubators, and accelerators, blended finance mechanisms combining private investment with official development assistance enhance the material resources and training opportunities available to entrepreneurs. This allows them to build skills, expand their networks, and access the knowledge required to fully integrate sustainability considerations into their business models, products, and services.
• By mobilizing public funds to provide guarantees for high-impact projects, blended finance improves access to finance by reducing risk for traditional private investors, particularly for commercial banks and microfinance institutions, thereby enabling more suitable credit terms aligned with entrepreneurs’ needs and capacities.
• Through partnerships with technology companies, including e-wallet providers, mobile payment services, crowdfunding platforms and, more recently, decentralized organizations operating on blockchain technologies, public development assistance and philanthropic capital can leverage new channels to increase the availability of funding for mission-driven projects.
• By facilitating the structuring and coordination of the high-impact entrepreneurship ecosystem, blended finance helps create conditions that strengthen networks and promote cross-sector learning. This contributes to greater public awareness, the expansion of impact investing and improved visibility and credibility for emerging solutions as they enter the market.
• Governments can also act without directly investing upfront, by adapting public procurement frameworks within Public-Private Partnerships, they can support high-impact innovations, provide market visibility and create a scale of demand that encourages investment and amplifies impact.

Given the diversity of stakeholders involved, the variety of capital sources and uses, and the wide range of possible structures and partnerships, blended finance naturally constitutes a space for innovation. To address the challenges linked to the complexity of financial regulations and the scientific and sociological foundations of sustainable development, it is useful to adopt practices inspired by design thinking and iterative experimentation to navigate short-term uncertainty. To align with a realistic timeline for systemic change, these approaches must be supported by a collective, long-term commitment to mobilize adequate resources, both in terms of skills and capital.

Although blended finance has significant transformative potential, it continues to face structural and contextual barriers that prevent certain countries and actors from fully benefiting from it. To achieve their objectives, stakeholders engaged in developing blended finance mechanisms must design their initiatives while anticipating several constraints.

• The perception of risk, particularly in economies that still place primary emphasis on financial returns, works against high-impact entrepreneurs, especially in emerging markets. Considered risky or insufficiently attractive, projects often face financing difficulties and struggle to convince banks and private investors, even when public guarantees are provided.
• The alignment of objectives among stakeholders is the cornerstone of an effective blended finance structure. However, achieving this alignment is challenging, as expectations in terms of financial returns and impact can differ widely across public, private, and philanthropic investors.
• The complexity of certain blended finance mechanisms can hinder their adoption and implementation. These structures often require close coordination among public, private, and philanthropic actors, who are frequently governed by different legal and regulatory frameworks.
• The difficulty of valuing the non-financial benefits of funded projects, whether due to a lack of methodology, data, or verification systems, can undermine the credibility of certain mechanisms and discourage investors.
• Institutional capacities remain limited in many contexts, both on blended finance mechanisms and on impact entrepreneurship itself. This can restrict the ability to design, structure and manage blended finance instruments, creating a need for tailored training and support for all stakeholders.
• Regulatory and legal disparities between countries can complicate the implementation of blended finance structures, particularly with respect to accountability, investor protection, intellectual property rights and issues related to unfair competition.

To overcome these challenges, it is essential to strengthen collaboration among stakeholders, improve transparency in financing, and encourage the pooling and scientific validation of data on non-financial benefits. Developing local capacities within both the public and private sectors is equally important, as is the establishment of a coherent and accessible framework that reflects the social, environmental and governance priorities of each context, moreover, when blended finance serves social enterprises and sustainability-oriented actors, its promoters must work to develop, disseminate and standardize the language and practices of impact management in order to support long-term, meaningful transformation.