Blended Finance Solutions for Climate Action and Development

Blended finance solutions are a powerful tool for driving climate action and development. By combining different types of funding, such as grants and loans, blended finance can help mobilize private sector capital to support projects that might not be viable otherwise.

Blended finance has been used to support a wide range of projects, from renewable energy and energy efficiency to sustainable agriculture and water infrastructure. In fact, a recent study found that blended finance has helped to mobilize over $100 billion in investment for sustainable development projects.

One of the key benefits of blended finance is its ability to reduce the risk of investment for private sector actors. By providing a grant or other form of risk mitigation, blended finance can help to make projects more attractive to investors. This can be especially important for projects in emerging markets or in areas with high levels of risk.

Blended finance has also been used to support the development of new financial instruments and products, such as green bonds and social impact bonds. These instruments can help to mobilize capital from a wider range of investors and provide a new source of funding for projects.

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Blended finance is a way to combine different types of funding to achieve specific goals.

It involves combining concessional finance from donors or third parties with the normal own-account finance of development finance institutions (DFIs) and/or commercial finance from other investors.

The DFI Working Group on Blended Concessional Finance has agreed on a definition of blended finance, which is used to develop private sector markets, address the Sustainable Development Goals (SDGs), and mobilize private resources.

Blended finance is designed to support the careful use of concessional finance, with a focus on rigor and governance systems to ensure its effective use.

There is a growing trend of increased rigor and governance systems among institutions implementing blended finance, with a consensus on the need for greater transparency and harmonization.

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Blended finance models help bridge the gap between investors and social enterprises by balancing their needs and mitigating risk.

The UK social investment sector frequently uses a blended finance model that combines grant and repayable capital at a fund level, with the grant providing cover for capital lost due to defaults.

Guarantee loan schemes are another fund-level example, where a third party agrees to repay the lender if the borrower defaults, bringing investors into higher-risk segments of the market.

Tax reliefs can also be used within blended structures to attract new investors, offering a reduction in tax obligation for certain activities, such as Community Investment Tax Relief (CITR).

The Nesta Arts and Culture Impact Fund is a £23m fund with £5m of grant funding from the Arts Council England and the National Lottery Heritage Fund, which attracted a further investment of £18m from several investors.

The Recovery and Resilience Loan Fund (RRLF) is another example of a blended finance fund, offering £25m in loans and £4m in grants to organisations affected by the coronavirus pandemic.

The Access Growth Fund is a blended structure that offers blended products to charities and social enterprises, providing over £36.5m in flexible loans and £6.8m in grants since 2016.

Social Investment Tax Relief (SITR) allowed investors to claim a 30% income tax relief on their investment into qualifying social enterprises and charities, but it ended in April 2023.

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Blended finance offers numerous benefits to investors, charities, and enterprises alike. By leveraging public and private funding, blended finance can attract more conventional investors to impactful funds.

One of the key advantages of blended finance is that it enables impact-focused investors to use their resources to leverage in additional capital, creating a multiplier effect. This can grow the amount of investment available to enterprises delivering social and environmental impact.

Blended finance can also create opportunities for efficient capital recycling, increasing the value for money for impact-focused investors. In the case of FMO, they used public funding to support Hamkor Bank in Uzbekistan, helping it grow into a leader in financing micro, small, and medium enterprises.

Investors benefit from blended finance as it allows them to use their capital to leverage in additional capital from more commercial investors. This can provide a more attractive risk-return profile for investors.

Blended finance can also improve efficiency by reducing the time needed for investees to look for investment and enabling them to focus on delivering their impactful work. For example, FMO provided a EUR 8mln loan from one of their public funds to Walo Energy Storage, the first battery storage project in West Africa.

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Here are some key benefits of blended finance:

By providing a more attractive risk-return profile and improving efficiency, blended finance can be a valuable tool for investors, charities, and enterprises looking to deliver social and environmental impact.

Fostering partnerships is key to making high-impact investments a reality. We've been doing this for over 20 years, unlocking financing and technical assistance for businesses that are too risky for traditional funding.

Our public funds and guarantee programs help lower investment risks, making it possible for Development Finance Institutions (DFIs) and other impact investors to get involved. We've raised and manage more than EUR 2.8 billion in public funds, blended finance programs, and sub-delegated fund mandates.

We're the only Development Finance Institution that uses its accreditations to raise funding from the Dutch Ministry of Foreign Affairs, the European Commission, and the Green Climate Fund to mobilize capital on behalf of third parties using sub-delegation. So far, we've raised EUR 1.3 billion through sub-delegation.

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Here are some of the sectors we focus on to achieve the Sustainable Development Goals:

Strong governance processes are in place to ensure that blended concessional finance principles are consistently applied. We have an independent decision-making process for allocating development partners' scarce concessional resources. This ensures that concessional resources are used only when truly needed to support high-impact investments.

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Fostering partnerships is a crucial aspect of achieving our goals, and we've been doing it for over 20 years. We've been a pioneer in designing and managing partnerships for innovative public and blended financing to support entrepreneurs and projects.

Our approach has allowed us to unlock financing and technical assistance for impactful businesses that are scalable but don't yet qualify for financing from Development Finance Institutions (DFIs). By using concessional funding from our donor partners, we can lower investment risks when they're considered too high.

We've raised and manage more than EUR 2.8 billion in public funds, blended finance programs, and sub-delegated fund mandates. This is a significant amount of capital that can be used to support businesses and projects in fragile economies or sectors.

Our public funds and guarantee programs pave the way for DFIs and other impact investors. We've been successful in mobilizing capital on behalf of third parties using sub-delegation, raising EUR 1.3 billion so far.

Here's a breakdown of the sectors we focus on, which are fundamental in achieving the Sustainable Development Goals:

We're committed to fostering partnerships that can help businesses and projects become bankable and ready for scale up. By working together, we can achieve more and make a greater impact.

Governance and Transparency is crucial in fostering partnerships, and IFC's Blended finance practice is a great example of this.

IFC's Blended finance practice uses concessional resources strategically and transparently to deliver on impact.

To achieve this, they follow five key blended finance principles: rationale for blended concessional finance; crowding-in and minimum concessionality; commercial sustainability; reinforcing markets; and promoting high standards.

These principles are also known as the DFI Enhanced Principles for Blended Concessional Finance for Private Sector Projects.

IFC has developed strong governance processes to ensure that blended concessional finance principles are consistently applied.

An independent decision-making process is used for allocating development partners' scarce concessional resources.

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We've been at the forefront of blended finance since its emergence, initiating new funding structures to mobilize capital for high-impact businesses and projects.

FMO has been ranked number 1 in blended financial services deals by commitment between 2018-2023, according to the Convergence league tables. We're one of the most active Development Finance Institutions in blended finance.

In the same period, we ranked number 3 in agriculture blended finance, and we're one of the most frequent investors in climate mitigation blended finance transactions.

The SDG Loan Fund, managed by FMO Investment Management, is a great example of our ambition to mobilize more commercial investors using blended finance. It's one of the largest blended finance funds in the market to date, with a commitment of USD 1.1 billion.

More than 40% of our funding supports companies that we label as green, and 56% of our funding supports companies that aim to reduce inequalities. This is a significant contribution to specific green activities and/or reducing inequalities.

We've also been pioneers in innovating finance, with Building Prospects being the first DFI to manage revolving donor funding in 2002. This created an ongoing cycle of investments and funding by reinvesting loan repayments and returns in new projects.

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The DFI Enhanced Concessional Principles are a set of guidelines that aim to make blended finance more effective and sustainable.

Contribution that is beyond what is available otherwise absent from the market, and should not crowd out the private sector.

Blended finance should contribute to catalyzing market development and mobilizing private sector resources, with concessionality not greater than necessary.

The goal of blended finance is to achieve impact that is sustainable and contributes towards commercial viability.

Blended finance should address market failures effectively and efficiently minimize the risk of market distortion or crowding out private finance.

Promoting high standards is crucial, including in areas of corporate governance, environmental impact, integrity, transparency, and disclosure.

The DFI Working Group on Blended Concessional Finance has agreed on a definition of blended finance, which involves combining concessional finance with normal own account finance and/or commercial finance to develop private sector markets and mobilize private resources.

To ensure a strict and disciplined approach to blended concessional finance, institutions like IFC are promoting the adoption of the blended finance principles.

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Meeting Climate and Development Goals is crucial, and blended finance can play a significant role in achieving this.

According to the International Finance Corporation, blended finance can help mobilize up to $1 trillion in new investment by 2025 to support sustainable development.

Blended finance can help address the $2.5 trillion annual funding gap for sustainable development projects, which is a significant barrier to achieving the United Nations' Sustainable Development Goals (SDGs).

By combining concessional funding with commercial capital, blended finance can reduce the risk and increase the return on investment for sustainable development projects.

This approach can help mobilize more private sector investment in areas such as renewable energy, where the cost of capital is often prohibitively high for many developing countries.

Blended finance can also help attract more private sector investment in areas such as sustainable agriculture and water management, where there is a clear business case for investment.

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In fact, a study by the Global Environment Facility found that every dollar invested in blended finance can leverage up to $10 in additional private sector investment.

By mobilizing more private sector investment in sustainable development, blended finance can help reduce poverty, improve living standards, and promote economic growth in developing countries.