OECD DAC Blended Finance Guidance 2025

1. Principle 1: Anchor blended finance use to a development rationale 

Abstract

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.

Guidance messages for Principle 1

Subprinciple 1.A. Use development finance in blended finance as a driver to maximise development outcomes and impact.

• Root blended finance to ambitious development objectives, in line with the 2030 Agenda, the goals of the Paris Agreement, or other development frameworks.

• Deploy blended finance when it is more effective and appropriate than other financing approaches within the broader development co-operation strategy.

Subprinciple 1.B. Define development objectives and expected results as the basis for deploying development finance.

• Agree on ambitious and realistic development results, jointly with the stakeholders involved in the blended finance transaction.

• Build institutional capacity and incentives to co-operate with commercial partners effectively.

Subprinciple 1.C. Demonstrate a commitment to high quality.

• Leverage responsible business conduct (RBC) standards to identify partners and projects.

• Apply environmental, social and governance (ESG) safeguards throughout the project lifecycle.

• Promote sustainability performance through transparency and accountability.

Context and trends

Since 2020, the international community’s growing commitment to the Sustainable Development Goals (SDGs) and the goals of the Paris Agreement has affirmed the relevance of anchoring blended finance interventions to a development rationale. Recognition of the importance of a development rationale even extends beyond the development community to include the growing role of impact investing, regulation encouraging greater responsible business conduct (RBC) and an increase in non-financial reporting. In addition, the significant advancements in environmental, social and governance (ESG) risk management, RBC practices and corporate reporting, such as the EU Sustainable Finance Disclosure Regulation, witnessed over the past years have positive spillover effects that contribute to higher quality blended finance operations (ISO Update, n.d.[1]; European Union, 2019[2]).

Anchoring blended finance to a development rationale has remained foundational

The practice of anchoring blended finance to a development rationale has established itself as the foundation of blended finance and is core to any blended finance transaction. Several evaluations indicate how blended finance is being leveraged with the purpose of meeting the SDGs and/or the goals of the Paris Agreement (Deloitte, 2020[3]; OECD, 2021[4]; WB-IEG, 2020[5]; EBRD, 2022[6]; Convergence, 2023[7]). The 2024 official development assistance (ODA)-eligibility assessment of Development Assistance Committee (DAC) members’ private sector instrument vehicles indicates how these vehicles base their strategies on the SDGs and the Paris Agreement and generally include the promotion of economic development and welfare of partner countries as a central element in the investment strategies (OECD, 2024[8]).

Uneven targeting of development objectives

While evidence shows that blended finance is generally anchored to a development rationale, the targeting of development objectives has been uneven. OECD data show that private finance mobilised via official development finance has targeted specific SDGs that mainly relate to developing production sectors, economic infrastructure and climate action, i.e. sectors/investments that are easier to commercialise. Shares of mobilised private finance targeting SDGs related to social sectors are relatively smaller. In terms of financing climate action, as explored in OECD (2023[9]), private finance mobilised tends predominantly to target initiatives on climate change mitigation, instead of adaptation, and focus on upper middle-income countries (UMICs). The uneven targeting of the SDGs is further illustrated by the evidence that blended finance funds and facilities focus on a limited number of SDGs, mainly SDG 9 (industry, innovation and infrastructure) and SDG 8 (decent work and economic growth) (OECD, 2022[10]).

The updated Guidance below reflects that Principle 1 has established itself as the foundation of blended finance and is core to any blended finance transaction. It also reflects that blended finance is most suitable for sectors that are relatively easy to commercialise.

Guidance for Principle 1

Subprinciple 1.A. Use development finance in blended finance as a driver to maximise development outcomes and impact

Root blended finance to ambitious development objectives, in line with the 2030 Agenda and the goals of the Paris Agreement

To ensure development impact, donors should formulate the strategic ambition and policy objectives for blended finance and integrate blended finance into overarching development objectives in line with the SDGs, the Paris Agreement, Nationally Determined Contributions, national adaptation plans or similar strategic development frameworks. Where appropriate, donors should support partner countries in developing robust, investable development frameworks. These investment frameworks can also address climate change and its interlinkages to development. For instance, as the impacts of climate change grow more severe and frequent, greater adaptation action is increasingly urgent. Donors and other development finance providers have a pivotal role in providing and mobilising finance flows to support adaptation in developing countries, through blended finance. The OECD has developed separate guidance to explore and identify good practice in development co-operation activities to increase the amount of financing for adaptation by unlocking private finance.1

Blended finance is not equally suitable for all SDGs and should mainly target sectors with investment opportunities and clear potential for commercial viability. Donors and other providers may prioritise SDGs that have the ability to catalyse other positive development effects. Effective prioritisation and sequencing can accelerate progress towards sustainable development by facilitating the realisation of positive spillovers and limiting negative trade-offs.

Deploy blended finance when it is more effective and appropriate than other financing approaches within the broader development co-operation strategy

Donors should consider blended finance within a broader financing and development co-operation strategy and support its deployment where it is most effective and appropriate to achieve specific development outcomes and results. Blended finance is one approach in a broader toolkit of development co-operation approaches for private capital mobilisation. It should be used when minimum conditions are in place that facilitate private capital mobilisation and where some concessional or non-concessional development finance may still be required to mobilise private finance that would otherwise not be forthcoming (this is elaborated further under Subprinciple 2.C) As such, it should be deployed when its comparative advantage and value-added relative to other tools are clear, based on ex ante assessments taking into account alternative financing approaches. The assessment of the effectiveness of the blended finance approach should consider both the expected development outcomes and a comparison in terms of “costs” including the fiscal implications for the partner country. Increased emphasis on mobilisation and blended finance should not detract from support for sustainable development objectives where commercial opportunities, and by extension the scope for blended finance, are more limited.

Subprinciple 1.B. Define development objectives and expected results as the basis for deploying development finance.

Agree on ambitious and realistic development results, jointly with the stakeholders involved in the blended finance transaction

Donors should ensure that the objectives and expected results of blended finance are clearly articulated, measurable and communicated to all stakeholders at the outset (this reflects development additionality which is elaborated under Principle 2). Establishing a theory of change is a practical method for ensuring that interventions target the achievement of specific development objectives. Actors with different mandates can have a different approach and rationale behind their involvement in blended finance. Clarifying expectations and ensuring mutual understanding in an open dialogue with all partners is therefore key to ensuring effective partnerships. Before entering a blended finance operation, all actors should clearly understand and articulate how the particular investment is expected to lead to outputs, outcomes and eventually development impact. This should include assessments of expected impacts before investments (ex ante), throughout the duration of the investment (ongoing) and evaluating (ex post) the outcomes and impact of completed investments. This is elaborated further under Principle 5. Also, Chapter 6 of the Guidance contains case studies that illustrate how different actors have developed and applied a theory of change in blended finance interventions.

Build institutional capacity and incentives to co-operate with commercial partners effectively

Organisational capacity – including the staff’s technical expertise to structure, manage and execute blended finance transactions – is important to improve the adoption of blended finance across donor agencies. Internal organisational capacity and incentives are fundamental ingredients for both defining realistic development objectives and for engaging with the private sector. Donors, in particular, and other providers are therefore encouraged to continuously build internal capacities and ensure that the proper incentives are in place to effectively engage with private sector actors.

Subprinciple 1.C. Demonstrate a commitment to high quality

Leverage responsible business conduct standards to identify partners and projects

Donors and other providers should observe the highest possible level of responsible business conduct (RBC) and build RBC expectations into their relationships with blended finance partners. RBC standards set an expectation that all businesses – regardless of their legal status, size, ownership or sector – avoid and address the negative impacts of their operations while contributing to sustainable development in the countries where they operate.

International RBC standards including the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct (OECD, 2023[11]), the UN Guiding Principles on Business and Human Rights (UNHCR, 2012[12]) and the ILO Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy (ILO, 2023[13]) can provide reference points to help blended finance providers screen potential partners against RBC criteria, communicate clear expectations on RBC and use their leverage to promote and support the implementation of RBC standards throughout the project cycle. Donors and other stakeholders can refer to the forthcoming Guidance on RBC and Development Co-operation (OECD, forthcoming) for support on how to embed RBC expectations into blended finance operations.

Importantly, international RBC standards are based on meaningful stakeholder engagement, including with those that are or may be impacted by blended finance projects (see Principle 3). RBC standards also promote continuous improvement, over disengagement, using a risk-based approach to risk mitigation. This can be particularly relevant for strengthening the capacity of local private sector partners, including financial intermediaries (OECD, 2024[14]).

Apply environmental, social and governance safeguards throughout the project lifecycle

While blended finance-supported projects aim to deliver sustainable development outcomes, they can be associated with adverse impacts on people and planet, including through their supply chains. Embedding ESG safeguards throughout the project life cycle helps to identify, prevent and mitigate such adverse impacts.

Several internationally recognised standards and frameworks have been developed to support investors, DFIs and blended finance partners in integrating ESG safeguards into their risk management processes. These include the International Finance Corporation’s Performance Standards (IFC, 2012[15]), the Principle of Responsible Investing (PRI, 2006[16]) and the Equator Principles (Equator Principles, 2020[17]). It is worth noting that some funds and investors apply their own proprietary tools or may adapt them on an ad-hoc basis, depending on the characteristics of each blending project and on the requirements of the investors involved (Basile, Bellesi and Singh, 2020[18]).

The OECD has developed tailored guidance on risk-based due diligence for project and asset finance transactions, to hep align existing ESG development finance safeguards frameworks with internationally recognised standards of RBC (OECD, 2022[19]). This includes stakeholder engagement, a risk-based approach to impact mitigation, addressing impacts in project supply chains and, when appropriate, providing for co-operation in remediation.

Promote sustainability performance through transparency and accountability

Although Principle 5 provides more in-depth guidance on transparency and results, it is worth noting that high quality should be maintained throughout, including a commitment to learning from the results of blended finance operations. Aside from the obligation to report to external stakeholders and informing social and commercial performance management, the evaluation of blended finance interventions can help prioritise the right strategies moving forward (Winckler Andersen et al., 2019[20]).

In addition, blended finance partners can strengthen accountability by establishing channels for reporting grievances and enabling remediation. Through well-functioning grievance mechanisms, donors and partners can become aware of and respond to sustainability risks and use their leverage to encourage remediation by enterprises and blended finance partners.

References

[18] Basile, I., V. Bellesi and V. Singh (2020), “Blended Finance Funds and Facilities - 2018 Survey Results Part II: Development Performance”, OECD Development Co-operation Working Papers, No. 67, OECD Publishing, Paris, https://doi.org/10.1787/7c194ce5-en.

[7] Convergence (2023), “Evaluating the Impact of Blended Finance”, Convergence’s Case Study Portfolio Revisited, https://downloads.ctfassets.net/4cgqlwde6qy0/1SOmftYUTGImcd73rxzGRw/13143f0cdd4dbf51cc31758de05d9e0b/CS_Impact_v8.pdf.

[3] Deloitte (2020), “A path ahead - Lessons learned on Blended Finance”, United Nations Multi-Partner Trust Fund for Sustaining Peace, https://mptf.undp.org/sites/default/files/documents/2024-02/convocatoria_bf_lessons_learned_vf_en.pdf.

[6] EBRD (2022), Blended finance, a true catalyst for change?, https://www.linkedin.com/posts/isabelblanco-sustainablefinance_blended-finance-a-true-catalyst-for-change-activity-7307804237390827521-XZ0h/.

[17] Equator Principles (2020), , https://equator-principles.com/about-the-equator-principles/.

[2] European Union (2019), “REGULATION (EU) 2019/2088 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL”, on sustainability‐related disclosures in the financial services sector, https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32019R2088.

[15] IFC (2012), IFC’s Performance Standards on Environmental and Social Sustainability, https://www.ifc.org/en/insights-reports/2012/ifc-performance-standards.

[13] ILO (2023), Tripartite declaration of principles concerning multinational enterprises and social policy (MNE Declaration), https://www.ilo.org/publications/tripartite-declaration-principles-concerning-multinational-enterprises-and-3.

[1] ISO Update (n.d.), International Standards in Process, https://www.iso.org/iso-update.html.

[8] OECD (2024), Converged Statistical Reporting Directives for the Creditor Reporting System (CRS) and, https://one.oecd.org/document/DCD/DAC(2024)40/ADD3/FINAL/en/pdf.

[14] OECD (2024), Pathways Towards Effective Locally Led Development Co-operation: Learning by Example, OECD Publishing, Paris, https://doi.org/10.1787/51079bba-en.

[11] OECD (2023), OECD Guidelines for Multinational Enterprises on Responsible Business Conduct, OECD Publishing, Paris, https://doi.org/10.1787/81f92357-en.

[9] OECD (2023), Private Finance Mobilised by Official Development Finance Interventions, OECD Publishing, Paris.

[10] OECD (2022), Blended finance funds and facilities: 2020 survey results, OECD Publishing, Paris, https://www.oecd.org/content/dam/oecd/en/publications/reports/2022/06/blended-finance-funds-and-facilities_05511bbb/fb282f7e-en.pdf.

[19] OECD (2022), Responsible business conduct due diligence for project and asset finance transactions.

[4] OECD (2021), “Evaluating blended finance instruments and mechanisms: Approaches and methods”, OECD Development Co-operation Working Papers, No. 101, OECD Publishing, Paris, https://doi.org/10.1787/f1574c10-en.

[16] PRI (2006), What are the Principles for Responsible Investment?, https://www.unpri.org/about-us/what-are-the-principles-for-responsible-investment.

[12] UNHCR (2012), uiding Principles on Business and Human Rights: Implementing the United Nations “Protect, Respect and Remedy” Framework., https://www.ohchr.org/en/publications/reference-publications/guiding-principles-business-and-human-rights.

[5] WB-IEG (2020), “The International Finance Corporation’s Blended Finance Operations”, Findings from a Cluster of Project, https://ieg.worldbankgroup.org/sites/default/files/Data/Evaluation/files/IFC_blended_finance.pdf.

[20] Winckler Andersen, O. et al. (2019), “Blended Finance Evaluation: Governance and Methodological Challenges”, OECD Development Co-operation Working Papers, No. 51, OECD Publishing, Paris, https://doi.org/10.1787/4c1fc76e-en.

Note

← 1.  The OECD Guidance on Blended Finance for Climate Change Adaptation focuses on framing the role of blended finance for adaptation and covers key adaptation sectors and areas with the highest additional financing need for adaptation, such as agriculture and water. The Guidance explores the use of traditional and innovative financing instruments with the potential to amplify the resources towards climate adaptation and provides concrete and practical recommendations on how to deploy different blended finance approaches across key adaptation sectors more effectively.