Blended finance remains ‘most promising tool’ for financing development, but needs fixing – UN conference

Global business leaders this week committed to tackle the challenges preventing blended finance from scaling – calling it the “most promising tool” for driving more private investment towards sustainable development.

The commitment was made as part of the Fourth International Conference on Financing for Development (FFD4) which took place this week in Seville, Spain, with a mission to “support reform of international financial architecture”. 

Blended finance is a type of impact investment where concessional capital (which accepts lower returns or higher risk than a conventional investment) from government-backed or philanthropic sources is used to attract private capital in investments targeting the UN Sustainable Development Goals (SDGs).

In an official communiqué on Monday the FFD4 Business Steering Committee, co-chaired by the International Chamber of Commerce and the Global Investors for Sustainable Development Alliance, which managed the private sector track of the conference, said it believed that “blended finance remains one of the most promising tools to crowd in private capital through innovative, fair and balanced risk-sharing between public and private actors.” 

Blended finance remains one of the most promising tools to crowd in private capital

It also acknowledged blended finance's current shortcomings and recognised a need for improvement: “It continues to be under-utilized and fragmented,” the statement continued. “Moreover, new and scaled up investment vehicles and platforms are needed to efficiently aggregate and channel capital to high-impact sectors in developing countries that contribute to sustainable development.”

Blended finance deals in 2024 reached US$18.3bn – far from the estimated US$5tn-8tn needed annually to reach the SDGs by 2030, according to a report by gobal network Convergence Blended Finance. In a UN briefing earlier this year, economist Mariana Mazzucato said it had “fallen short” of expectations. 

Blended finance is also facing an unprecedented challenge as international development aid, the main source of concessional capital in blended finance deals, has dropped over the past few months. This, in particular, threatens the riskier yet highly impactful investment deals in the least developed markets, which are more reliant on catalytic capital to go ahead.

• Read more: Blended finance market should brace for impact of development aid cuts – Convergence warning

But leaders at the Seville conference are hoping blended finance can be improved to mobilise more private investment.

In their communiqué, the business leaders called for an expansion of concessional capital provided by public-backed funders including governments, development finance institutions and multilateral banks. It also called for increased transparency and impact reporting of blended finance deals to improve impact and support investment decisions.

Further recommendations include the standardisation of blended finance structures to make the design of transactions easier and less costly, and the development of innovative financial instruments, such as thematic bonds (like green bonds or blue bonds) and aggregation platforms that bring together several investors for one deal, to share out investment risk. 

‘Development is everyone's business’

The private sector track of the conference, the FFD4 International Business Forum, had a stated objective to “scale up private investment for sustainable development in developing countries”. 

UN secretary-general António Guterres (pictured) told business leaders: “Development is everyone’s business. And the private sector is an essential partner in helping countries climb the development ladder, and achieve the Sustainable Development Goals.”

Business leaders at the International Business Forum insisted private sector actions could only bear results alongside government efforts – and mobilising private sector investment was among the main topics addressed by world leaders at the conference, alongside burning topics such as tax and debt.

Governments had agreed to an outcome document, known as the “Compromiso de Sevilla” or Seville Commitment, prior to the conference – in negotiations that involved watering down some of the most ambitious commitments, and consensus on the text could only be found after the US withdrew its participation to negotiations and pulled out of the conference.

• Read more: The Editor’s Post: Blue economy tries to stay afloat as Americans snub UN conference

The Compromiso calls for “robust action” to tackle the lack of investment towards the SDGs. “Despite increased attention to innovative finance instruments such as blended finance and adoption of sustainable business and finance legislation, investment in sustainable development has not reached expectations, nor has it adequately prioritised sustainable development impact,” the text says.

In addition to commitments to support blended finance investments, the document specifically mentions its intention to “promote the take-up of impact investing, such as impact funds, thematic bonds, and investment lenses, in line with national circumstances”, and calls for building a supportive environment for social entrepreneurship, including facilitating access to markets and finance.

Amit Bouri, CEO of the Global Impact Investing Network, said on Linkedin: “At the UN’s International Business Forum alongside FfD4, impact investing is gaining traction as a core strategy to align private capital with global development priorities.

“This recognition marks an important step in moving from general interest in sustainable finance to outcomes-driven investment approaches that are intentional, accountable and measurable.” 

Header image: a Colombian farmer beneficiary of a USAID programme that aimed to give farmers in coca-growing areas alternatives to the illegal drug trade. USAID was one of the biggest providers of catalytic capital for blended finance globally, but it was dismantled by the US government ealier this year. Credit: USAID.

Portrait of António Guterres credit: Cancillería Argentina.