In the wake of the Addis Ababa Action Agenda, the OECD Development Assistance Committee (DAC) developed five Blended Finance Principles (hereinafter the Principles) as a standard addressed to donors and other providers of development finance to ensure high quality in blended finance. The Principles were adopted at the DAC High-Level Meeting in October 2017.
The Principles have shaped the policy context and international discussions on how to advance best practices on blended finance and have been referenced under a number of G20 and G7 presidencies. Under the Canadian Presidency in 2018, the G7 committed to “work to implement the OECD DAC Blended Finance Principles including promoting greater transparency and accountability of blended finance operations”. Under the French Presidency in 2019, the G7 supported “the implementation of the OECD DAC Blended Finance Principles for Unlocking Commercial Finance for the SDGs”. Under the Indonesian G20 Presidency in 2022, the Principles informed the “G20 Principles to Scale up Blended Finance”.
Guidance for the Principles was developed and approved by the DAC in 2020 (hereinafter the Guidance) as a tool to support the implementation of the Principles. To ensure the Guidance remains relevant to policymakers and blended finance practitioners, the DAC decided it should be updated on a regular basis incorporating new knowledge, methodologies and approaches in blended finance.
This second edition of the Guidance is the first update. Since the first edition, the blended finance industry has experienced significant growth and evolution. Volumes have increased, new tools have been developed, and blended finance has gained momentum and visibility across the development finance ecosystem. Blended finance – the strategic use of development finance for the mobilisation of additional finance towards sustainable development in emerging markets and developing economies (EMDEs) – is no longer an innovative approach; it is a well-known and widely used method for providers of development finance and the private sector to work together and leverage each other’s resources and knowledge.
Blended finance is no panacea for meeting the financing needs for the Sustainable Development Goals (SDGs) and the goals of the Paris Agreement, but it can help mobilise private investors across the entire development finance value chain, thereby contributing to increase investment in sustainable development in EMDEs. Especially in the current environment of fiscally constrained governments, blended finance can play a critical role in mobilising private finance at scale.
Despite this, evidence, backed by extensive consultation with key stakeholders in the field, highlights several challenges in the use of blended finance:
Blended finance has not scaled as rapidly as hoped and has mobilised relatively limited private finance. It has remained a cottage industry with largely bespoke and fragmented interventions. This is partly because collaboration among stakeholders – including donors, development finance institutions (DFIs) and multilateral development banks (MDBs) – around innovative and scalable approaches in blended finance has been limited. In addition, donors have allocated limited amounts of funding to blended finance.
Assessments of additionality – especially financial additionality – of development finance in blended finance are not always disclosed by providers, nor are their underlying methodologies. This makes it difficult to ascertain if blended finance interventions are additional and have mobilised additional finance beyond traditional development interventions. Lack of transparency particularly around additionality, concessionality and financial performance has challenged accountability and the integrity of blended finance and has hampered the entry of private investors into EMDEs.
The potential of optimising the use of DFI and MDB balance sheets for mobilisation through blended finance remains untapped. The African Development Bank pioneered the Room2Run synthetic risk transfer in 2018; however, since then DFIs and MDBs have not replicated this structure until the Inter-American Development Bank Invest’s Scaling4Impact transaction in 2024. The G20 Independent Review of the MDB’s Capital Adequacy Framework encouraged MDBs to use innovative structures, and several MDBs are now considering or working on securitisation structures.
Blended finance has mobilised a relatively low share of private finance in more challenging areas like education and social sectors, as well as in more risky contexts like those facing high and extreme fragility, conflict-affected contexts, least developed countries (LDCs) and low-income countries (LICs) (although there are examples of co-investments with private investors in LDCs and LICs with significant mobilisation). In addition, local currency financing facilitated by blended finance has been limited to date.
Despite the widespread agreement of common principles for blended finance at the policy level, including the OECD DAC Principles, project- and country-level idiosyncrasies, as well as diverse approaches and capabilities of development actors means that approaches widely vary. This has presented challenges for effective scaling interventions.
The focus of blended finance has mainly been at the transaction level. Systemic changes have not been equally prioritised, and efforts to improve the enabling environment in EMDEs for blended finance to be successful have not been sufficient. Transactions have not been at the scale necessary to mobilise institutional capital, and the speed with which transactions have moved from concept to market has often been far too slow to attract private investors.
This second edition of the Guidance aims to help address these challenges, as well as the significant developments in the field since the first edition. This update is intended to ensure that the Guidance remains useful for donors, policymakers, commercial actors and other stakeholders in blended finance. It includes an updated narrative that acknowledges both the potential and the limitations of blended finance while addressing the main challenges. The Guidance pays particular attention to responding to the international call for mobilising private finance at scale. Ensuring that blended finance lives up to its mobilisation potential requires a stronger focus on the need expressed by private investors for standardised products that emphasise simplicity, efficiency, speed, cost and volume. It also requires more collaboration among donors, DFIs, MDBs and other stakeholders to pool resources, portfolios and ideas on new and more effective approaches, and requires the implementation of higher standards on transparency in blended finance particularly around financial performance, additionality and impact. In addition, the long-term success of blended finance to mobilise more investment in EMDEs also hinges on an integrated approach where technical assistance and other support help build and strengthen enabling environments (including sustainable regulation, investment climate), as blended finance at the transaction level cannot sustainably compensate for the absence of structural and regulatory reforms.
The five OECD DAC Blended Finance Principles remain a solid foundation to ensure high standards in blended finance. The ambition with this second edition of the Guidance is to promote new tools and good practices that will scale blended finance interventions over the coming years and make blended finance part of standard operations for both public and private finance actors: An operationally efficient approach of choice to mobilise private finance at scale for the SDGs and the goals of the Paris Agreement.