Making Blended Finance Work for the Sustainable Development Goals
The global community has spoken loud and clear: more resources must be mobilised to end extreme poverty and mitigate the effects of climate change. Blended finance - an approach to mix different forms of capital in support of development - is emerging as an important solution to help raise resources for the Sustainable Development Goals in developing countries. But scaling up blended finance without a good understanding of its risks could have unintended consequences for development co-operation providers. This report presents a comprehensive assessment of the state and priorities for blended finance as it is being used to support sustainable development in developing countries. It describes concepts and definitions, presents an overview of actors and instruments, and discusses lessons learned from blending approaches, tracking and data, and monitoring and evaluation
The OECD, along with the IFC-led DFI working group recommends the following five principles to increase effectiveness of blended finance and move towards “blended finance 2.0” to actually leverage commercial funding towards the SDG at scale:
- Anchor blended finance use to a development rationale. Consider blended finance within a broader financing and development cooperation strategy, and support its use for particular and well-defined development objectives, outcomes and results.
- Design blended finance to increase mobilization of commercial finance. Donor governments should increase efforts to mobilize commercial finance that does not currently support development outcomes, and direct greater financing to developing countries, particularly low-income and least developed countries.
- Tailor blended financing to local contexts. Blended finance should align with strategic priorities of developing countries, and be attentive to national and local strategies and plans. The long term sustainability and impact of solutions supported by blended finance depend on their responsiveness to local development priorities and needs. Deployment should be discussed and co-designed with public and private stakeholders at strategic levels.
- Focus on effective partnering for blended finance. Donors should ensure that risks are allocated in a sustainable and balanced manner between development finance providers and commercial partners. Governments, if possible, should identify and set standard approaches to blended financing to avoid further fragmentation of efforts, and allow scaling up.
- Monitor blended finance for transparency and results. Governments should pay greater attention monitoring and evaluating blended finance interventions, and ensure that blended finance is considered in M&E strategies for development cooperation. Clear metrics should be defined for blended finance approaches, and adequate resources allocated to support M&E activities. Improve efforts to track finance flows towards blended finance, and make information on these flows easily accessible to all public and private actors, and to the general public.
Financing the Sustainable Development Goals (SDGs) is a monumental undertaking, and there is a global call for the private sector to incorporate sustainability in business models and outcomes, and to invest in development projects that bring about wider positive social outcomes. Public and private partnership (PPP) projects have been on the rise, opening up opportunities for governments to collaborate with business in delivering public goods and services, but limited government resources and un- or under-developed markets are increasing investment risks for businesses.
Blended finance is an emerging risk-mitigating solution that uses larger official development or philanthropic funds to create or improve markets in difficult regions, countries, and sectors, and to put in place investment guarantees to attract and secure commercial financing, including support for PPPs.
This publication provides a snapshot of the global blended finance landscape, based on the private sector investments made by 35 bilateral and multilateral development institutions between 2012 and 2015. The data shows that guarantees was most effective in mobilizing private sector financing, particularly in Africa and Asia, and that the banking and financial services sector and the energy sector attracted the most investment from the private sector. ODF funding and interventions are still largely focused on more stable middle-income countries, and disproportionately target development issues (i.e., climate action getting more funding and attention than biodiversity issues such as marine life conservation). There are still large investment gaps in social sectors such as health and education, and in low-income and least developed countries.