Overview of The State of Blended Finance
The United Nations estimates that there is a funding gap of around USD $2.5 trillion a year to deliver the Sustainable Development Goals (SDGs). To narrow the gap, it will be critical to tap additional sources of capital, including from mainstream, institutional investors. Scaling up the use of blended finance – the strategic use of public and/or philanthropic funding to catalyse private sector investment – is a key lever to unlock the private sector opportunity and harness large-scale financial flows towards SDG investments.
The State of Blended Finance is a working paper that aims to expand the evidence-base around the potential for blended finance to narrow the SDG funding gap. The paper was commissioned by the Blended Finance Breakthrough Taskforce (BFBT), an initiative established by the Business and Sustainable Development Commission (BSDC). The research in “The State of Blended Finance” was led by Convergence, an institution that connects, educates, and supports investors to execute blended finance transactions that increase private sector investment in emerging markets. The purpose of this working paper is to help inform BFBT recommendations to remove systemic barriers preventing the flow of mainstream capital into blended finance transactions at scale.
Findings from The State of Blended Finance
The working paper analyses data collected by Convergence across nearly 200 blended finance transactions which have mobilised USD $51.2 billion towards sustainable development. The analysis shows that the number of blended finance deals is increasing each year. It shows that sub-Saharan Africa is the focus region of approximately 40% of blended finance transactions, though the median deal size is relatively small compared to other regions, accounting for only 16% of total capital mobilised by blended finance. Financial services, clean energy, and climate finance account for half of blended finance deals and almost 75% of blended transactions leverage either junior/subordinate capital, a technical assistance facility, or a combination of both. The working paper also provides a useful map of the key organisations active in the blended finance ecosystem (including the multilateral development banks, the development finance institutions, donors and private investors).
Most importantly, the working paper provides key insights based on the trends analysis and activity mapping. Notably, the report finds that there is fragmentation and a lack of coordination across blended finance activities, and blended finance initiatives need to be better aligned and complementary. In addition to better coordination, stakeholders should also seek to scale their solutions, instead of pursuing new but smaller ones. The paper also finds that in order for private investors to participate in blended finance investment opportunities, the risk-return profile must be at market prices or better, so diversification through the pooling of assets and projects across countries and sectors will be required to achieve the required investment profile.
To read all the insights from The State of Blended Finance, please download the working paper.
