Bridging the financing gap for greater development impact through scaling blended finance: barriers, opportunities and pathways

The financing gap for achieving the Sustainable Development Goals exceeds US$ 4 trillion per year. The climate-related financing gap compounds the size of the problem. Public funds are not sufficient to meet this gap. Private sector action is required. The imperative to scale blended finance has never been greater than now. 

Trust & Clarity

Despite its promise, blended finance struggles to reach transformative scale. Islands of success have been achieved, which often do not get replicated. Trust and clarity are often mentioned as a requirement for building investors’ confidence. Understanding the barriers to scale and how blended mechanisms can improve development impact is critical for shaping future policy – one which can deliver real results for the people and the planet.

1. Limited pipeline of bankable projects, which are investment-ready

Shortage of high-quality, investment-ready projects in the developing economies is a key constraint that limits achieving scale. Despite a high demand for financing infrastructure, climate, and social investments, the supply of “bankable” projects remains low. Weak project preparation capacity, limited feasibility studies, underdeveloped regulatory frameworks, and unclear revenue models undermine investors’ confidence.

This means that private investors perceive a scarcity of investable opportunities, while governments see investors as highly risk-averse. Project-preparation facilities that exist are both fragmented and too small relative to the investment needs. Without a stronger pipeline of investment ready projects, blended finance struggles to achieve scale, despite investors’ interest or donor support.

2. High perceived risk 

Emerging markets are typically considered high risk particularly with regards to higher political, macroeconomic, currency, and regulatory risks. However, the key challenge is often the perceived risk rather than real risk, especially among institutional investors who are typically unfamiliar with emerging markets. In order to reduce risk, investors tend to price in risk premium, which may render otherwise viable projects unattractive.

In sectors (e.g. social and climate-related investments) where commercial returns could be below market expectations, the likelihood of risk-return mismatch is higher. In such sectors, blended finance can help reduce risk through first loss guarantees, concessional finance and other risk reduction instruments. These risk mitigation tools can bring an investment's risk-return profile in line with private investors' appetite, and thereby unlock private investment for development and climate goals. Using these more effectively in combination with technical assistance or grants can help enhance trust, clarity and flexibility, which are critical for such investments. 

3. Complex deal structures, bespoke models and high transaction costs

Evidence shows that blended finance transactions can be quite bespoke, customized and involve structures with multiple layers, such as concessional finance, guarantees, technical assistance and commercially-priced capital. The structuring and execution of these transactions can be costly, time-consuming and may discourage replication.

Institutional investors prefer standardised, scalable products. They find small, customised deals operationally unattractive, time-consuming and hence costly. Without greater standardisation and scale, blended finance risks remaining a niche tool rather than a mainstream asset class.

4. Coordination failures, competing institutional expectations

Typically, blended finance projects involve multiple players such as public sector bodies or donor agencies, development finance institutions (DFIs), philanthropic foundations, impact investors, and commercial investors. These actors differ in mandates, incentives, risk appetites, decision-making timelines, and fiduciary obligations.

Private investors may require decisions faster, while donor agencies may take months or even years. DFIs consider financial sustainability as a priority, whereas public donors focus on inclusion, development outcomes and climate results. This may lead to a mismatch of mandates and expectations. The role of a seasoned facilitator in harmonising expectations and mandates is critical. Improved coordination through joint platforms, harmonised documentation, and shared impact frameworks can enable unlocking scale.

5. Small size of blended finance vehicles and instruments

The small size of most blended-finance instruments (like blended debt or equity funds) is another key barrier. Large institutional investors like pension funds or insurance companies are typically unwilling to enter such small deals.

This results in a structural mismatch: donor capital is spread thinly across many small initiatives, rather than being pooled strategically to achieve scale. This limits both mobilisation potential and development impact. 

Pathways to Addressing Constraints: Making Blended Finance More Effective

1. De-risking, aligning risk–return profiles
Blended finance can help calibrate the risk-return equation for private investors by offering guarantees, subordinated capital, or first-loss protections, which can reduce multiple kinds of risks.

2. Building replicable structures
Moving away from bespoke deals towards standardised fund structures can significantly reduce transaction costs. This is often not easy, but scale may require such approaches. Three-tiered funds potentially de-risked with portfolio guarantees can attract investors to engage with diversified vehicles, hence increasing scalability. Equally important is the need to design products that can provide transformational development impact, which lies at the heart of blended finance.

3. Aggregate for scale using themed fund vehicles
Pooling concessional resources into larger funds that meet the development and climate needs while also reaching the minimum thresholds of investors can be an appropriate step. In some cases, larger vehicles can be constructed which are based on themes (like green transition, SME finance, climate adaptation, etc.) of multiple countries and can offer scale as well as diversification, hence improving attractiveness for the investors.

4. Strengthening project preparation, enabling country platforms
The flow of private capital can be mobilised by expanding project-preparation facilities, technical assistance windows, and country-level investment platforms which can help design better and viable projects. When blended finance is paired with upstream policy reforms, such as regulatory improvements or tariff-setting transparency, the structural risk profile improves, over time, this can help reduce reliance on concessional capital and attract more private, repeat investors.

5. Improving transparency, governance and measurement
For reducing perceived investor risk and building investor trust, clear mechanisms for reporting on impact, additionality, and financial performance are key – not just to the fund shareholders but more widely with the ecosystem. Equally important are robust governance frameworks to clarify the role of concessional finance, which can prevent over-subsidization and enhance private capital mobilization.

Bringing it all together

Private investment in climate and development initiatives is miniscule in emerging markets. Blended finance has significant potential to mobilise private capital for delivering development and climate-related impact, if some of the critical constraints can be addressed. These constraints are not merely financial, but also include gaps in project pipelines, perceived risk and pricing, institutional fragmentation, and structural mismatches in fund sizes.

By enhancing trust and clarity, when used effectively, blended finance instruments can help reduce investor risk, strengthen pipelines of bankable projects, and create replicable financial structures that can deliver development impact. Scaling up requires stronger coordination among donors, DFIs, and private investors, hence enhancing the role of experienced facilitators who can think globally but act locally. 

Through strategic deployment, blended finance instruments can be a huge catalyst for bridging financing gaps and achieving transformative climate and development impact. 

For more information, please contact: mehnaz.bhaur [at] gopa.eu (mehnaz[dot]bhaur[at]gopa[dot]eu)