By Christine Roddy
If you’re new to the impact investing space, you have probably come across the terms “blended finance” or “blended capital” online, in academia, or at networking events. Before we dive into defining this phrase, some context.
In 2015, the United Nations (UN) established the Sustainable Development Goals (SDGs) as a blueprint for solving global challenges like ending poverty and tackling climate change over the next 15 years. The UN estimates the total financing needed is USD 4 trillion annually to achieve the SDGs.
Current levels of development financing are insufficient, with an estimated USD 2.5 trillion annual funding gap to realize the SDGs. USD 2.5 trillion, that’s more than 50 percent! The graph below provides an overview of SDG funding gaps organized by sector:
Why is this important? This means that for the global community to have any chance in achieving the SDGs, new approaches for mobilizing resources need to be developed. That is where blended finance comes in.
What is Blended Finance?
Blended finance is a new concept and there isn’t a standard definition that exists. We find Convergence’s definition the most helpful: “blended finance is the use of catalytic capital from public or philanthropic sources to increase private sector investment in developing countries and sustainable development”.
It’s a structuring approach that allows different types of capital (impact or commercial oriented) to invest alongside each other while each achieving their own objectives (financial, social, or both) that has three characteristics:
- The transaction expects to achieve a positive financial return;
- the transaction contributes towards achieving the SDGs; and
- the public and/or philanthropic parties are catalytic.
Examples of Blended Finance & A Case Study
Blended finance structures can take many forms. The GIIN’s Blended Finance Resource Guide provides helpful examples of different structural examples:
There are myriad different types of blended finance transactions, ranging from social impact bonds to technical assistance grants. The GIIN provides a repository of different examples and case studies if you’re interested in learning more.
We also recently published a case study demonstrating a real-world example of blended finance. Sistema.bio required different kinds of capital to fuel their expansion from Latin America to Kenya in 2017. This included a Series A investment round and technical assistant grants. In addition, a portion of the Series A investment was covered by USAID loan guarantee facility. To find out more, read the article here.
It’s estimated that blended finance has mobilized over USD 124 billion in capital towards the SDGs in developing countries to date. Looking towards 2030, blended finance is going to play a critical role in closing the financing gap for the SDGs.
Featured image credit: YouTube documentary on blended finance “The Road to Addis and Beyond“