The OECD Development Assistance Committee (DAC) defines blended finance as “the strategic use of development finance for the mobilisation of additional finance towards sustainable development in developing countries” (OECD, 2018[1]). The definition emphasises the mobilisation of commercial finance with the aim of growing the total pool of finance available for sustainable development in developing countries (Figure 1). Development finance refers to public and private finance deployed with a development mandate. Additional finance refers to commercial finance that does not have an explicit development purpose and that has not primarily targeted development outcomes in developing countries (OECD, 2018[1]). The development finance used in blended finance transactions can be both concessional and non-concessional.
OECD DAC Blended Finance Guidance 2025
Note: Blended finance occurs when development finance, either concessional or non-concessional mobilises non-concessional commercial finance that does not have a development mandate to finance sustainable development in ODA-eligible countries. Commercial finance and development finance can come from public and or private sector actors.
Source: OECD (2018[1]), Making Blended Finance Work for the SDGs, https://doi.org/10.1787/9789264288768-en.
The OECD DAC definition of blended finance distinguishes finance by purpose rather than by source and moves away from the emphasis on public/private actors to highlight development/commercial financial flows. It is broader than the definition used by multilateral development banks/development finance institutions (MDBs/DFIs)1 in that it does not depend on concessionality as a pre-requisite for blending. An important implication is that it does not consider the mobilisation of development finance as blended finance. Using concessional funding – e.g. official development assistance (ODA) – to mobilise finance for example from the balance sheet of MDBs and DFIs does not increase the total pool of finance available for sustainable development as MDBs’ and DFIs’ balance sheets already have a development mandate. It is worth noting that MDBs and DFIs typically have a dual mandate, both development and commercial, which has implications for their risk taking. This is not covered in this Guidance.
Rationale for using blended finance
The main rationale for using blended finance is to mobilise private finance for investment in sustainable development. In the OECD definition, the term “mobilisation” (or leveraging) refers to the ways in which specific mechanisms stimulate the allocation of additional financial resources to particular objectives; it requires a demonstrable causal link between finance made available for a specific project and the leveraging instrument used (Benn, Sangaré and Hos, 2017[2]). Development finance in blended finance is used to mitigate risks, whether perceived or real, to mobilise private finance. Perceived risks can arise from, for example, investors’ lack of information about market conditions or low availability of transaction-level data; improved access to market and transaction data can change perceived risks over time and reduce the gap between actual and perceived risk.2 Real risks that the private sector cannot manage may be mitigated with development finance including various levels of concessional finance over continuous transactions to mobilise private investors. The potential to mobilise private finance is context-specific and will depend on market maturity (Figure 2). Less mature markets are viewed as riskier whereas markets with higher maturity are typically viewed as less risky.
Trailblazing. Blended finance can be a trailblazer and support new market creation. This can be in geographical terms, such as in low-income countries and/or contexts facing high or extreme fragility or conflict where the scope for commercial investment is more limited, and higher volumes of concessional finance are needed to support development priorities.3 These markets are more delicate; often small in size and highly informal; carry higher levels of environmental, social and governance and business integrity risks; have a limited pipeline of private investment opportunities, are prone to bespoke and custom processes, and have high levels of volatility, making transactions with commercial actors more difficult (Basile and Neunuebel, 2019[3]). However, trailblazing can also take place in more mature markets in terms of, for example, supporting new technology or early-stage interventions, proof of concept, new climate solutions and new templates. Trailblazing interventions will often be associated with relatively limited mobilisation of private finance due to the nature of the higher risks and limited bankable investment opportunities, and they will typically also involve higher levels of concessionality to attract private finance (for the same reasons MDBs and DFIs often use concessional finance from donors to de-risk and mobilise their own balance sheets in these contexts). Chapter 6 contains case studies on trailblazing.
Mobilisation at scale. In more mature markets, with more solid market infrastructure, higher levels of stability and lower risk, and larger pipelines of investment opportunities, blended finance can more easily be scaled and in turn enable higher levels of mobilisation of private finance with lower or no concessional finance needed. These markets are typically found in middle-income and upper middle-income countries. It is important to note that market creation can also happen in more mature markets, for example when securitisation brings a new asset class to the market that over time becomes familiar to investors and can be replicated by others without requiring development finance (Principle 2 further explores this issue).
Note: LDCs: least developed countries; LICs: low-income countries; FCAS: fragile and conflict-affected states; MICs: middle-income countries; UMICs: upper middle-income countries. Stylised graphic for illustrative purposes only. It is important to note that also mature markets may regress, and sectors may become risky again, necessitating blended finance and re-entry of development finance providers. It is also important to note that market building can also take place in more mature markets, for example when securitisation brings a new asset class to the market.
The temporary nature of blended finance. A critical feature of blended finance is that it is intended to intervene only temporarily in a market with the purpose of enabling access to commercial finance and hereby making further blended finance redundant. Permanent or long-term concessional/non-concessional development finance discourages private investors from entering markets on commercial terms and may create dependency traps. Establishing commercial sustainability, building markets, reducing the level of concessionality over time and exiting blended finance as soon as feasible are, therefore, critical guiding principles.
The catalytic or market-building purpose of blended finance and the reduced need for concessional and non-concessional development finance over time is illustrated in a stylised manner in Figure 3. Effective catalysation or market building would be consistent with a pattern of increasing mobilisation of commercial finance and a decreasing need first for concessional finance and, later, a decreasing need for non-concessional finance until development finance is no longer needed (OECD, 2018[1]). Subprinciple 2.C further elaborates on this dynamic.
Notes: The figure is a stylised representation of the evolution of the composition of financing sources for successive blended finance transactions in a hypothetical sector and geographic context. Effective catalysation would be consistent with a pattern of increasing mobilisation of commercial finance and a decreasing need for – hence use of - concessional and non-concessional development finance over time.
Source: OECD (2018[1]), Making Blended Finance Work for the Sustainable Development Goals, https://doi.org/10.1787/9789264288768-en.
Enabling environment. An enabling environment is an additional critical factor for blended finance. A perfect enabling environment would not require blended finance interventions in the first place, and a sound enabling environment is therefore vital for long-term mobilisation of private investment. Blended finance cannot compensate for an unconducive enabling environment, but it can help create new markets and support and deepen existing ones. The relationship between blended finance and the enabling environment is thus mutually reinforcing and complementary. This dynamic is elaborated in Principle 3.
Financial structures and instruments
Blended finance transactions refer to the use of financial instruments to crowd in private finance. Commercial finance can be mobilised by deploying development finance in the form of debt instruments, equity instruments, risk sharing and management approaches and grants (Figure 4). As such, blended finance is not an instrument in itself but the strategic deployment of a variety of instruments to change the investment profile of a given transaction, including with respect to risk and/or return characteristics, in a way that additional commercial finance is mobilised.
Note: CIVs: collective investment vehicles; SPVs: special purpose vehicles; TA: technical assistance.
Source: Based on OECD (2018[1]), Making Blended Finance Work for the Sustainable Development Goals, https://dx.doi.org/10.1787/9789264288768-en; Publish What You Fund (2024[4]), What Works: How to Measure and Disclose Private Capital Mobilisation to Increase Private Investment and Close the SDG Financing Gap, https://www.publishwhatyoufund.org/app/uploads/dlm_uploads/2024/10/What-Works.pdf.
The standard financial instruments that can be used to mobilise private finance are debt and equity investment, guarantees and insurance, as well as grants.
Debt instruments include loans, bonds and credit lines, among others. DFIs, for example, routinely lend to enterprises or projects to finance projects in emerging markets and developing economies, as well as arrange loan syndications. Syndication mobilises private finance by strengthening investors' confidence in projects or companies, often alongside MDBs/DFIs and facilitates sharing of due diligence knowledge and eases the transaction for the B-lenders.4 Development banks provide credit lines to local financial institutions that mobilise private finance. Private investors can leverage the due diligence capacity of development actors, and the presence of development actors may also increase investors' confidence overall. This benefit is amplified when development finance providers take riskier positions – for example when they provide subordinated loans or serve as anchor bond holders – as this can mobilise commercial finance.
Equity instruments, for example collective investment vehicles that are either structured so that all investors are exposed to the same risk-return profile (pari passu) or designed to cater to different risk-return profiles for different investor types. Equity (as well as debt positions) in special purpose vehicles (SPVs) of public-private partnerships (PPPs) can crowd-in private finance.
Guarantees in blended finance usually provide non-payment cover for an underlying debt obligation while insurance provides protection against either political or commercial risks (Garbacz, Vilalta and Moller, 2021[5]). Hedging is used to protect investors against foreign exchange risk and thereby attract private investors.
Grants and technical assistance in blended finance are typically deployed when development impact needs to be supported by specific project capacity or feasibility studies, and these instruments work catalytically by creating enabling environments that facilitates mobilisation.
Existing assets or exposures can be securitised, which allows institutional investors to share risks and returns of a portfolio of developmental projects or loans, for example by taking a portfolio of loans that were issued directly by an MDB or a commercial bank and packaging these into tranches of bonds with different repayment priorities and risk profiles. Securitisation can thus transform existing investments into liquid investible products that are recognisable by international capital markets and can attract institutional investors. Doing this successfully may require blended finance, but the effect is not only to redistribute the risk (“re-risking”), but also to transform complex investments in EMDEs into products that are digestible by the international capital markets. The use and characteristics of the financial structures and instruments5 are further elaborated in Principle 2.
The blended finance ecosystem
The blended finance ecosystem has grown in recent years, both in the number of actors and in complexity. It involves a wide and diverse set of actors with different mandates, risk-return preferences and incentives. As illustrated in Figure 5, there are largely three categories of actors: 1) providers of development finance; 2) providers of commercial capital; and 3) other stakeholders (some of which are implementors and/or managers of blended finance projects and programmes).
Development finance providers include:
Bilateral donors. Bilateral donors play a critical role in the blended finance community as: policymakers in development co-operation; custodians of ODA; direct implementers of blended finance programmes; owners or shareholders of bilateral DFIs; shareholders of MDBs; and key actors in policy dialogues with partner countries and other institutions and organisations relevant to blended finance transactions (e.g. regulatory authorities in developed countries).
Other providers. Other providers of development finance into blended finance include all owners and/or custodians of finance with a development mandate and who deploy development finance into blended finance transactions. Other providers exclude donors but include MDBs, DFIs, philanthropic foundations, etc.
MDBs and DFIs. MDBs and DFIs are a distinct subset of “Other providers”. They play an important role as providers of development finance through the provision of direct loans, mezzanine finance and equity investment (both concessional and market-based) in EMDEs. They are also implementers of blended finance interventions. MDBs and DFIs are particularly adept at mobilising at scale, given the size of their balance sheets. Those with in-country presence also have a comparative advantage of understanding the local context. MDBs and DFIs mobilise private finance and use blended finance in different ways. Some MDBs (e.g. European Investment Bank, World Bank) are providers of concessional development finance. MDBs with private sector operations (e.g. International Finance Corporation) provide commercial finance. Some MDBs (e.g. African Development Bank) do both. These different types of MDBs will have different perspectives on blended finance.
Commercial finance providers include:
Private investors. Private investors play a key role as partners in blended finance transactions, as sources of both finance and expertise. They are mobilised through the deployment of development finance, and it is critical for the success of each transaction that they agree to the division of responsibilities between the partners in blended finance deals. It is also critical for the success of future mobilisation of private finance that private investors agree to maintain a high level of transparency regarding both the financial and impact details. Providers of commercial finance also include public institutions such as pension funds and wealth funds with a commercial mandate.
Other stakeholders include:
Other implementing actors. Blended finance is implemented by a range of different organisations apart from MDBs and DFIs. Donors and other providers of development finance sometimes use civil society organisations (CSOs) and funds as intermediaries to implement blended finance programmes and projects. Other implementing actors also include technical assistance providers and/or facilitators.
National governments in partner countries. National governments play a critical role in blended finance by creating an enabling environment, ensuring co-ordination among stakeholders and aligning investments with national development priorities. National governments also often provide risk mitigation and public contributions (for example counter-guarantees, co-financing or PPPs), and are responsible for key regulations for example in relation to financial market development.
Notes: CSO: civil society organisation; MDB: multilateral development bank; DFI: development finance institution; SWF: sovereign wealth fund. Stylised graphic. It is important to note that providers of development finance are key drivers in the blended finance ecosystem and work to mobilise other stakeholders in addition to providers of commercial capital.
New actors have emerged that play new roles in relation to blended finance interventions. One such actor is export credit agencies which are increasingly focusing on the Sustainable Development Goals and climate goals. Also, CSOs have traditionally been watchdogs of the use of blended finance but are becoming increasingly active partners in blended finance transactions together with private companies and DFIs. The broader ecosystem has provided new opportunities for blended finance to leverage the capabilities, competencies and skills of new players. As blended finance starts to enter mainstream financial systems, more institutions could play a role for blended finance to fulfil its potential. For example, credit rating agencies, which play a critical role in capital markets, are important for the rating of blended finance structures. New and better methodologies for rating such structures could have a significant impact on mobilising more private investors into blended finance transactions. The dynamics around the various objectives of actors in the blended finance ecosystem is further elaborated in Principle 4.
The OECD DAC Blended Finance Principles
The OECD DAC Blended Finance Principles highlight key elements needed to implement blended finance effectively. The foundation (Principle 1) anchors blended finance to a development rationale. The three pillars are intended to guide implementation, focusing on mobilising commercial finance (Principle 2), tailoring blended finance to the local context (Principle 3) and on effective partnering for blended finance (Principle 4). The overarching theme across all these elements is monitoring blended finance for transparency and results (Principle 5). For blended finance to be effective, all five principles must be adhered to. Lastly, the importance of the enabling environment for blended finance is presented as the foundation of the principles.
Notes: Blended finance cannot compensate for the lack of a sustainable enabling environment (e.g. policies, regulation, investment climate, capital market development). They are mutually reinforcing and complementary, and blended finance should be combined with support to establishing an enabling environment.
The five principles are interlinked and underpin each other. For example, Principles 3 and 4 both share commonalities on the enabling environment and in finding effective partners for local capital market development. Principles 1 and 5 are deeply interconnected and ensure that blended finance delivers real, measurable impact: whereas principle 1 sets the intention by asking why we are using development finance in specific deals (the development rationale), Principle 5 asks if the intended impact was achieved and can be proved (through effective monitoring and evaluation). Principle 1 also shares commonalities with Principle 3 around country ownership and local context. The Guidance observes these interlinkages and cross-references are provided throughout the document.
Guidance for donors and other development finance providers
Principle 1: Anchor blended finance to a development rationale
According to Principle 1, as in all development finance interventions, all blended finance activities should be based on the mandate of development finance providers to support developing countries in achieving social, economic and environmentally sustainable development. Principle 1 has three subprinciples:
1.A. Use development finance in blended finance as a driver to maximise development outcomes and impact. Donors have agreed to use development finance as a driver to maximise development outcomes and impact. This should be achieved by establishing ambitious development objectives in line with the 2030 Agenda, the goals of the Paris Agreement or other relevant frameworks. Blended finance should be considered within a broader financing and development co-operation strategy and should only be deployed where it is most effective and appropriate to achieve specific development outcomes and results.
1.B. Define development objectives and expected results as the basis for deploying development finance. Donors should agree on ambitious and realistic development objectives and expected results from the start, based on a theory of change and jointly with the stakeholders involved in the blended finance transaction, and work to build institutional capacity and incentives to co-operate with commercial partners effectively.
1.C. Demonstrate a commitment to high quality. Donors, together with all other stakeholders in blended finance operations, should demonstrate a commitment to the highest level of quality, integrity and transparency by integrating environmental, social and governance considerations into investment decisions, and by observing the highest level of responsible business conduct (RBC), building RBC expectations into their relationships with blended finance partners. Sustainability performance should be promoted through transparency and accountability.
Principle 2: Design blended finance to increase the mobilisation of commercial finance
According to Principle 2, development finance in blended finance should facilitate the unlocking of commercial finance to optimise total financing directed towards development impacts. Principle 2 has four subprinciples:
2.A. Ensure additionality for crowding in commercial finance. Donors should promote that blended finance interventions have the highest standard of additionality at both the transaction level and the systemic level; that additionality is core to all blended finance operations, and that it is assessed, documented and publicly disclosed. At the same time, donors should work for a more harmonised approach towards defining/interpreting and assessing additionality in blended finance. Also, additionality assessments and assumptions should be evaluated to enable continuous learning.
2.B. Seek leverage based on context and conditions. Donors should ensure that the design of blended finance transactions is anchored in the specific development objective taking into account context-specific drivers of leverage/mobilisation. For scaling mobilisation, donors should identify the most efficient and effective instruments and structures while considering the risk-adjusted return requirements of investors, including institutional investors, and their preference for replicable products that emphasise simplicity, efficiency, speed, cost and volume. Examples of instruments and structures that have demonstrated the ability to mobilise at scale and build markets include securitisation, guarantees, structured funds and bonds. For smaller scale opportunities with relatively higher transaction costs, lack of collateral and weak financial markets, instruments and structures that have proven effective include funds, risk sharing and liquidity facilities, guarantees, equity, revenue-based financing, and technical assistance to help businesses and projects become investable.
2.C. Deploy blended finance to address market failures while minimising the use of concessionality. Donors should ensure that market failures are identified and processes and measures are in place to analyse the reasons for, and level of, concessionality in each blended finance transaction. Concessionality should be well-targeted, minimised and of a temporary nature, i.e. for demonstration or proof of concept, to avoid unduly distorting markets and to create the conditions for commercial replication and scalability. Good practice includes using competitive selection processes like tender processes, calls for proposals and open access programmes, in combination with financial modelling where appropriate. Concessional finance should be made available to all implementing entities on equal terms, for example by using open tenders or pooling concessional funds across donor agencies to enhance equal treatment. Reporting on concessionality should be co-ordinated and harmonised where possible and in a transparent manner including for implementing partners, based on a set of standardised key parameters. Levels of concessionality of individual investments should be publicly disclosed.
2.D. Focus on commercial sustainability. Donors should ensure that blended finance is time-bound and deployed with a commercial sustainability (replicability) perspective. They should also combine blended finance with support to accompanying policy and regulatory reforms to help establish an enabling environment with sustainable underlying market fundamentals if deemed necessary. Exit strategies should be incorporated both at the transaction level and at the market level, and concessional blended finance should be systematically reduced and completely withdrawn once commercial sustainability has been demonstrated or when it is assessed that commercial sustainability will never be achieved.
Principle 3: Tailor blended finance to the local context
According to Principle 3, development finance should be deployed to ensure that blended finance supports local development priorities in a way that catalyses the development of a robust enabling environment and supports the deepening of local financial markets. Principle 3 has three subprinciples:
3.A. Support local development priorities. Donors should ensure that blended finance interventions are aligned with broader national priorities, policies, plans and local investment blueprints, and that consultations are undertaken with relevant stakeholders, for example through country platforms. Country ownership should be promoted through inclusive stakeholder engagement. Aligning blended finance with local development priorities and ensuring country ownership enhances the likelihood of achieving transformative and sustainable outcomes. Local policies, plans and investment blueprints typically include integrated national financing frameworks, Nationally Determined Contributions, national biodiversity strategies and action plans, national adaptation plans, sector plans, and other relevant long-term strategies
3.B. Ensure consistency of blended finance with the aim of local financial market development. Donors should structure blended finance approaches with the aim of promoting local currency financing and deepening local financial markets, where appropriate. This includes focusing on de-risking hard currency investments through, for example, hedging solutions, first-loss guarantees and foreign exchange liquid facilities, as well as support to multilateral development banks and development finance institutions to facilitate greater local currency lending. Efficient, inclusive and robust financial markets are essential in channelling financial resources towards sustainable outcomes in emerging markets and developing economies.
3.C. Use blended finance alongside efforts to promote a sound enabling environment. Donors should integrate blended finance strategies with efforts to promote robust and sound enabling environments. Technical assistance should be used for building local institutional capacities and for creating the necessary policy, institutional, regulatory, legal and financial foundations that address structural obstacles faced by both domestic and international investors. Support to the development of a pipeline of investable opportunities at local level should be integrated as a critical part of these efforts.
Principle 4: Focus on effective partnering for blended finance
According to Principle 4, blended finance works if both development and financial objectives can be achieved, with appropriate allocation and sharing of risk between parties, whether commercial or developmental. Development finance should leverage the complementary motivation of commercial actors while not compromising on the prevailing standards for development finance deployment. Principle 4 has three subprinciples:
4.A. Engage each party based on their respective mandate. All stakeholders should engage in blended finance transactions based on their respective mandates, regulatory regimes and legal obligations. Donors must understand and respect private investors’ key objectives and concerns, which typically include risk-adjusted returns and liquidity. Likewise, private investors must understand and respect the objectives, needs and mandates of development finance providers which typically include impact-adjusted returns, transparency, monitoring and reporting requirements, and development outcomes. Donors should engage with all relevant stakeholders in the blended finance ecosystem, including non-traditional partners such as credit rating agencies and civil society organisations. At the same time, transaction costs should be considered when deciding on the number of partners in blended finance deals. Transaction costs are a key concern for scalability, and while partnering is necessary to de-risk transactions, it is important to ensure that blended finance transactions have the fewest number of actors needed to complete the transaction. Each additional partner in a transaction should bring an additional value that justifies the added complexity of adding an additional partner to the transaction.
4.B. Allocate risks in a targeted, balanced and sustainable manner. Donors should understand and assess the different types of underlying country-, context-, sector- and transaction-specific risks and ensure that risks are allocated between development finance and commercial finance in a targeted, balanced and sustainable manner. Before de-risking private investors, attempts to restructure the risks (“re-risking”) should be undertaken, for example through tranching. Development finance should only cover the risks that private investors cannot manage and only provide risk sharing where “re-risking” is impossible and where no or limited market solutions are available (e.g. through insurance or guarantees). A differentiated risk analysis is required for each blended finance transaction, and as risk profiles change during the life cycle of an investment, providers should be open to adopt new financial instruments that allow improved matching of risk profiles and investors’ risk preferences over time. Local entities should be brought in wherever possible to improve risk allocation in blended finance and reduce foreign exchange risk.
4.C. Aim for scalability. Donors should aim for scalability in blended finance whenever and wherever possible. This includes: enhancing co-ordination and collaboration in the ecosystem; setting incentives for scaling through appropriate and targeted mobilisation objectives for multilateral development banks, development finance institutions and other providers; promoting transparency, data availability and knowledge sharing; making sufficient funding available for early-stage project preparation and creation of pipelines of bankable projects; creating an enabling environment; encouraging replication of successful blended finance instruments and developing new instruments; enabling standardisation and adhering to high quality standards; promoting whole-of-government approaches and improved collaboration and co-ordination between donors, multilateral development banks and development finance institutions.
Principle 5: Monitor blended finance for transparency and results
According to Principle 5, to ensure accountability on the appropriate use and value for money of development finance, blended finance operations should be monitored on the basis of clear results frameworks, measuring, reporting and communicating on financial flows, commercial returns and development results. Principle 5 has four subprinciples:
5.A. Agree on performance and results metrics from the start. Donors, private investors and other stakeholders in blended finance should agree on performance and results metrics from the start of a blended finance transaction. This should be based on a well-defined theory of change developed by the donor, or other providers, and agreed upon by the partners involved. A set of key performance indicators should be agreed as a first step to track progress along the theory of change, and a shared framework for data collection should be selected together with the private investors in the blended finance transaction. Methodologies might include benchmarking, surveys and interviews, particularly with local end beneficiaries. Sufficient resources for all parties involved should be reserved for monitoring, reporting and evaluations, and technical assistance should be provided if needed. Also, a common monitoring and evaluation framework should be adopted. Existing tools and frameworks, such as the OECD-UNDP Impact Standards for Financing Sustainable Development and other regulatory or market standards, should be leveraged to minimise fragmentation in reporting practices and ensure better alignment across the measurement of blended finance initiatives.
5.B. Track financial flows, commercial performance and development results. Donors should track, monitor and disclose financial flows, commercial performance and development results of blended finance transactions against the predefined and agreed metrics. This should also include reporting on mobilised private finance using agreed-upon methodologies.
5.C. Dedicate appropriate resources for monitoring and evaluation. Donors should allocate sufficient financial, technical and human resources for monitoring and evaluation of blended finance operations and promote collaboration among partners via joint evaluations to ensure better harmonisation of approaches as well as mutual capacity development and learning. This includes monitoring and evaluation of both financial performance, development outcomes and additionality assumptions. Impact measurement should consist of mixed methods where relevant, combining a quantitative approach with a qualitative one, to collect complementary insights from quantitative figures. Donors should ensure that evaluation takes place both ex ante and ex post.
5.D. Ensure public transparency and accountability on blended finance operations. Donors should commit to the highest possible standards of public transparency in blended finance operations based on the principle of full disclosure of all data and information as the point of departure. Transparency is critical for accountability, replication and efficiency and effectiveness in capital mobilisation and donors should therefore ensure that both financial and impact-related data in blended finance transactions are made publicly available. A key part of this responsibility is to provide high-quality data on financing deals, including private capital mobilisation.
Guidance for private investors and other commercial finance providers
This update of the OECD DAC Blended Finance Guidance is meant to ensure it remains fit for purpose in a changing landscape of development finance. Several key issues in relation to private investors and other commercial finance providers have been highlighted during the consultations around the update. The private sector is critical to help meet the financing needs of the emerging markets and developing economies (EMDEs). Achieving the Sustainable Development Goals and the goals of the Paris Agreement in EMDEs cannot be done with public funds alone. It requires massive private investments as well as the skills and disciplines of private sector actors. Blended finance structures address risk-return dynamics and create investible opportunities where private capital might not initially go alone. Private investors are critical partners in blended finance, and the guidance below is meant to invite them to stay engaged, discover new investment opportunities in EMDEs, highlight regulatory and systemic barriers to address them, and continue to partner with providers of development finance to increase the flow of sustainable investment in EMDEs.
Opportunities and risks in emerging markets and developing economies
EMDEs come with unique risks and opportunities. They offer high growth potential, diversification of investments and undervalued assets as well as rich opportunities for sustainable investments. However, market inefficiencies and risks in EMDEs are unique and may sometimes require risk-sharing in the short to medium term to attract private investments.
Financial instruments and market development
The private sector should continue to develop financial instruments and markets. Currently, insufficient capital is being allocated to developing countries due to a range of factors. Platforms and indices play an important role in facilitating the flow of private capital to EMDEs. Presently, there are limited market indices with frontier market and sustainable development exposure. While development finance providers and governments can provide platforms, such as green exchanges on stock exchanges, the private sector should continue to provide financial solutions such as green, social, sustainability and sustainability-linked bond indices or frontier market funds which can be replicated and packaged to interested investors on these platforms.
The role of donors in bringing private investors into emerging markets and developing economies
Donors can increase the use of blended finance to scale the mobilisation of private finance into EMDEs when needed in the short to medium term to overcome investment barriers, build markets and demonstrate that EMDE assets are investible.
Instruments and mechanisms should be standardised to meet the needs expressed by private investors. Donors, in collaboration with their development finance institutions (DFIs) and multilateral development banks (MDBs), can work to increase the use of instruments and mechanisms that are standardised and tailored to institutional investors’ preferences for replicable – scalable - products that emphasise simplicity, efficiency, speed, cost and volume. Securitisation, guarantees, structured funds and bonds are examples of instruments and mechanism that could be used more frequently. Standardisation is key to avoid complex structures in blended finance, and more efforts are needed to standardise blended finance instruments and mechanisms wherever possible to reduce complexity and cost of due diligence (e.g. through joint due diligence) thereby facilitating replicability and scale, for example as proposed by the Hamburg Sustainability Platform.6
Transparency and a level playing field
Donors can work to increase transparency in blended finance. Transparency is critical to attract more private investment to EMDEs and avoid crowding out private investors. Capital market players require clear data on financial risk and project viability before investing and transparency helps private investors assess market opportunities and price the risks. Evidence indicates that the risk in EMDEs perceived by private investors is often higher than the real risk. The opening of the Global Emerging Markets Risk Database (GEMs) is a case in point, as the data showed that the risk in EMDEs had been overrated. Donors, in collaboration with DFIs and MDBs, can work to increase transparency in blended finance to help private investors better assess market opportunities and price the risk with a view to re-direct more private investments into EMDEs. Increased transparency around blended finance would also help avoid private investors from being crowded out of markets in EMDEs by development finance providers.
The private sector can play an important role in increasing transparency when investing in emerging markets. Transparency and the development of data can help close information gaps. As better investment track records develop, providing adequate information can further support market development and future investment. Moreover, quality data will encourage other market participants to enter the EMDE investor space, in particular low-risk investors such as institutional investors that can provide scale.
Donors can work to ensure a level playing field in blended finance. Maintaining efficiency, integrity and fairness depend on a level playing field for all actors in blended finance. Donors, in collaboration with DFIs and MDBs, can work to level the playing field by ensuring that offers to private investors particularly of concessional finance are made public and that the allocation of concessional finance is based on transparent mechanisms with equal access for all, for example by using open, competitive bidding processes. Establishing a repository of concessional finance offers by donor agencies, DFIs and MDBs could be considered as part of such efforts.
Clearly identified time frames for deal flows need to be in place to attract and retain the interest of private investors. A steady flow of deals reduces opportunity costs, limits frictions in transactions, builds confidence and makes deals more attractive. However, development finance actors may have longer lead time in preparing deals and undertaking due diligence. A clear understanding of development actors’ time frame should, therefore, be established to attract and retain the interest of private sector deal teams.
Moving development finance assets to private investors
Development finance assets can be investible with appropriate structures, accessibility measures and occasional risk mitigation. Assets in EMDEs originated by MDBs and DFIs have proven investable for institutional investors – even without concessional finance to share the risk, as evidenced by the ILX (ILX Fund, n.d.[6]). More of these assets should be offered to private investors. MDBs and DFIs are already moving further into the co-investment, securitisation and significant risk transfer space, with several transactions witnessed in recent years. Donors, in collaboration with DFIs and MDBs, can work to increase the use of originate-to-share and originate-to-distribute models of MDBs and DFIs to enable private investors – both international and local – get more exposure to development finance assets.
Development finance is scarce; it must be used appropriately, cautiously and phased out over time. This is particularly the case for concessional finance, which represents a direct subsidy to private investors in blended finance deals. A key principle of blended finance is to minimise the use of concessional finance when crowding in private investors. Donors and other providers of development finance continuously assess the need for concessional finance in blended finance interventions and adjust (reduce) the level whenever possible until commercial sustainability is achieved through market building.
Financial regulation and the enabling environment
Private investors can highlight regulatory frictions in the financial system to be addressed by policymakers and regulators. Financial regulations such as Basel III, Solvency II and other major regulations on lending practices and cross-border investments from global private investors can create unintended barriers to investments in EMDEs. Private investors should actively engage with regulators and policymakers in relevant fora to ensure that regulations do not disproportionately increase the cost of capital in EMDEs, limiting much needed investment in sustainable development. The financial regulation that has been tightened in developed markets can have secondary, unintended impacts, for example on infrastructure investments in EMDEs, even if a project itself has a strong investment profile. Private sector investors should highlight these frictions in the financial system so that policymakers and regulators can be informed and explore ways to address the high cost of capital that is imposed on EMDEs.
References
[3] Basile, I. and C. Neunuebel (2019), “Blended finance in fragile contexts: Opportunities and risks”, OECD Development Co-operation Working Papers, No. 62, OECD Publishing, Paris, https://doi.org/10.1787/f5e557b2-en.
[2] Benn, J., C. Sangaré and T. Hos (2017), “Amounts Mobilised from the Private Sector by Official Development Finance Interventions: Guarantees, syndicated loans, shares in collective investment vehicles, direct investment in companies, credit lines”, OECD Development Co-operation Working Papers, No. 36, OECD Publishing, Paris, https://doi.org/10.1787/8135abde-en.
[5] Garbacz, W., D. Vilalta and L. Moller (2021), “The role of guarantees in blended finance”, OECD Development Co-operation Working Papers, No. 97, OECD Publishing, Paris, https://doi.org/10.1787/730e1498-en.
[6] ILX Fund (n.d.), ILX Fund SDG-Focused Emerging Market Private Debt, https://www.ilxfund.com/#about.
[1] OECD (2018), Making Blended Finance Work for the Sustainable Development Goals, OECD Publishing, Paris, https://doi.org/10.1787/9789264288768-en.
[4] Publish What you Fund (2024), What works: How to measure and disclose private capital mobilisation to increase private investment and close the SDG financing gap.
← 1. The DFI Working Group (2017) defines blended finance as “combining concessional finance from donors or third parties alongside DFIs’ normal own-account finance and/or commercial finance from other investors, to develop private sector markets, address the SDGs, and mobilise private resources”. For more information, see: https://documents1.worldbank.org/curated/en/856201613568586386/pdf/The-Why-and-How-of-Blended-Finance.pdf.
← 2. The opening in 2024 of the Global Emerging Markets Risk Database (GEMs) is a case in point. It revealed that the risk of investing in emerging markets businesses is significantly lower that commonly perceived. The GEMs database revealed that the average default rate for low-income countries was 6.3% for 1994-2023 against an implied country sovereign rating-based default rate of 14.2%, and that the default rate for lower middle-income countries was 4.4% against an implied rate of 14.6%. The findings challenge the conventional wisdom that investments in corporations or private sector projects in low-income countries are excessively risky. According to Galizia and Lund, the GEMs statistics show that the risk is much lower than based on sovereign credit ratings (see https://www.ifc.org/en/insights-reports/2024/reassessing-risk-in-emerging-market-lending for more information). For a discussion about the importance of the GEMs data in relation to showing that the development finance asset class is investible see OMFIF (available here: https://www.omfif.org/btn_03-24_ilx/).
← 3. Chapter 6 contains case studies on blended finance in contexts facing high or extreme fragility.
← 4. B-lenders are private sector participants in syndicated loans led by MDBs/DFIs (known as A‑lenders). B‑lenders are typically commercial banks, institutional investors and other private lenders. The B‑loan structure helps mobilise private capital in EMDEs by offering preferred creditor status, strong due diligence and risk mitigation provided by the A‑lenders, and exposure to high-risk markets.
← 5. For more information and examples on all the blended finance structures and mechanisms, see: “Making Blended Finance Work for the SDGs” (available at: https://doi.org/10.1787/9789264288768-en).
← 6. The Hamburg Sustainability Platform (later renamed SCALED) is an international, multistakeholder public-private Blended Finance Coalition, led by Germany, that aims to alleviate structural challenges to blended finance through standardisation and centralised capital formation to scale blended finance. See more at: Hamburg Sustainability Platform. See also: SCALED | Scaling Capital for Sustainable Development.