Top questions on blended finance
May 30, 2025
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9 min read
Christiane Würdemann
Head of Emerging Markets Energy Transition
Mirova
Gautier Quéru
Managing Director Natural Capital
Mirova
Sebastien Duquet
Head of Relations with Development Finance Institutions
Mirova
There is a significant investment gap in different sustainability sectors, including Natural Capital1 and Energy Transition Infrastructure, especially in emerging markets, which cannot be filled solely by public funding. While public money remains essential, private capital must also play role. As some governments are reducing their budget to development aid, the need of private capital mobilization for financing the climate transition in emerging markets is even more important. Blended finance is particularly well-suited to address this investment gap, as it aims to maximize the catalytic of public money and encourages private sector mobilization.
What’s blended finance and how does it differ from traditional financing methods?
Blended finance is the use of catalytic or concessional capital from public or philanthropic sources to increase private sector investment in sustainable development2. It is a structuring approach that allows organizations with different goals to invest alongside each other while achieving their own objectives (whether financial return, social impact, or a blend of both). Blended finance creates investable opportunities mostly in developing countries, which leads to more development impact.
Although blended finance encompasses various structures (such as guarantees, insurance, and technical assistance), the most prevalent form is a layered investment vehicle. Such a vehicle aims to attract capital from a diverse array of investors, including private institutional and impact investors, government-supported development finance institutions (DFIs), and both private and public donors, each possessing distinct risk-return profiles and impact objectives.
The layered investment vehicle concept is what sets blended finance apart from traditional financing methods. It typically features multiple tranches, with capital organized into senior, [mezzanine], and junior layers. Senior investors, such as private investors, contribute substantial capital, while mezzanine and junior investors bring expertise and absorb initial losses - if any -, enabling larger, more risk-averse investors to participate.
Moreover, blended finance is explicitly focused on achieving specific development goals, such as poverty alleviation, healthcare access, and sustainable environmental practices. This alignment with social objectives distinguishes it from conventional methods, fostering a commitment among stakeholders to tackle complex global challenges collaboratively.
Did you know?
Concessional capital: A critical component in Blended Finance
Concessional capital, also known as catalytic capital, refers to financial resources provided at terms that are more favorable than those available in the open market. This can include lower interest rates, extended repayment periods, or grants that do not require repayment. Concessional capital is typically sourced from government agencies (sometimes via Development Finance Institutions), or philanthropic organizations and is used to de-risk investments in high-impact projects, particularly in developing countries. By offering these more attractive terms, concessional capital helps to mitigate the perceived risks associated with investing in sectors such as renewable energy, sustainable agriculture, and infrastructure development. It serves to attract private sector investments by improving the risk-reward profile of funds or projects that might otherwise be deemed too risky or unviable under standard market conditions.
How can blended finance be structured to align the incentives of different stakeholders effectively?
The multi-tranche approach can be structured to align incentives among various stakeholders by effectively distributing risk and returns through blended finance.
Senior investors, such as institutional investors, pension funds, insurance companies, and development banks, contribute significant capital while providing expertise, which attracts additional investments. These investors typically require market financial returns with a low-risk profile and seek to diversify their portfolios by investing in real assets that are uncorrelated with other asset classes. While many senior investors are also interested in the positive impacts of the fund, they require an appropriate risk-return profile as well.
Junior investors play a crucial role of absorbing the first losses incurred by the fund, providing partial risk protection that makes it feasible for larger, more risk-averse investors in the senior tranche to participate. Junior investors are typically foundations, high-net-worth individuals and organizations such as national development agencies, climate funds, or private foundations. These investors prioritize environmental and social impacts over financial returns, making them willing to accept higher risks and lower returns.
Typically, the different risk-return profiles of the tranches is reflected in a cashflow waterfall guiding the allocation of cash distribution to the specific tranches (e.g. the senior tranche is repaid first). Ultimately, the layered structure brings additionality to the market, as it encourages private investors to enter sectors and geographies they typically would not consider.
What actions can be taken to enhance the impact of blended finance in supporting investments in Natural Capital and Energy Transition Infrastructure in emerging economies?
Investing in critical areas such as renewable energy, agriculture, and infrastructure in emerging markets is often seen as risky. Factors such as uncertainty about returns, limited track record, and extended repayment periods can deter private investors from participating. Blended finance offers a promising solution to these challenges by providing a framework that shares risks and enhances the attractiveness of investments in these vital sectors.
Nevertheless, it remains crucial to continue our efforts to promote its broader diffusion, particularly by:
- Strengthening regulatory frameworks: It is essential for governments to establish clear guidelines for blended finance. By creating a transparent and supportive regulatory environment, policymakers can encourage investor engagement by ensuring that blended finance is viewed as a development tool rather than as securitization.
- Mobilizing advocacy and research: Stakeholders in the private sector, including asset managers, investors, and the academia, must mobilize resources to conduct research and raise awareness of the potential benefits of blended finance. Effective advocacy can showcase successful case studies and best practices, illustrating the positive impact of blended finance on investment outcomes. Collaborative initiatives aimed at developing thought leadership and sharing insights can create a more informed investment community, ultimately attracting additional capital into blended finance projects.
- Increasing fund size: To overcome the limitations of funds below 200 million USD, it is necessary to encourage the formation of larger funds. This could be achieved by promoting public-private partnerships and incentivizing collective investments, thus enabling better resource pooling and increased investment capacity.
How we take action
Our network and credentials in Blended Finance
Mirova has been active in the space of blended finance for many years. It has been part of several leading network and initiatives, giving access to up-to-date market information and also giving the opportunity to share experience on concrete examples.
CONVERGENCE BLENDED FINANCE
Mirova has been part of many workshops / publications with Convergence. This includes:
- Mirova participated to a ASIFMA | ICMA | Convergence Webinar: Scaling Blended Finance in Asia in June 2024.
COLUMBIA UNIVERSITY
Mirova has established a partnership with Columbia University Business School (the “Sustainable Investing research Initiative” – SIRI) and has already published two papers about blended finance:
- About the global use of Blended Finance (Blended Finance by Caroline Flammer, Thomas Giroux, Geoffrey M. Heal : SSRN); and
- About the use of blended finance in the financing of Biodiversity projects (Biodiversity Finance by Caroline Flammer, Thomas Giroux, Geoffrey M. Heal : SSRN).
OTHER INITIATIVES
- Global Donor Platform for Rural Development: Mirova is part of the Thematic Working Group on Sustainable/Blended Finance for Food Systems created in 2024, to align on good practices.
- Blended Finance Taskforce: Mirova shared its good practices with the Blended Finance Task force, which outlined several Mirova’s blended finance vehicles.
- EIB ‘Investing in Nature’ Workshops: Mirova presented blended finance structure as part of a series of workshops organized by the European Investment Bank.
What innovative financing mechanisms are emerging in blended finance?
Emerging innovative financing mechanisms in blended finance include:
- The rating of the senior tranche, a key element for enabling private investors to immediately materialize the benefits of the protection coming from catalytic junior investors.
- Risk-sharing mechanisms, where innovative risksharing arrangements, such as guarantees and insurance products, help mitigate risks for private investors, making it easier to invest in high-risk sectors.
- The liquidity of the senior tranches, which enables private investors to benefit from liquidity agreements.
- Performance-based incentives that reward investors based on the achievement of specific project outcomes, aligning financial returns with developmental impact.
What are the latest initiatives, reports and announcements?
The landscape of blended finance continues to evolve, showcasing significant initiatives, reports, and collaborations aimed at mobilizing capital for sustainable development. In 2024, Convergence produced a report on the state of Blended Finance containing a comprehensive analysis, further enhancing its contributions to the field.
Recently, the Investor Leadership Network (ILN) published the "Blended Finance Best Practice Booklet: Case Studies and Lessons Learned“, which includes contributions from the GISD Alliance and is supported by the UN-Convened Net-Zero Asset Owner Alliance and the Glasgow Financial Alliance for Net Zero. This report underscores blended finance as a crucial tool for mobilizing private capital to achieve the Sustainable Development Goals (SDGs), showcasing case studies that highlight the impact of combining private and public resources. However, it notes that blended finance has not yet mobilized the expected capital, indicating a need for greater contributions to sustainable development.
COP28 saw the introduction of ALTÉRRA, an innovative $30 Bn climate investment fund geared to drive substantial investments into pivotal projects on a global level. Established by the UAE, ALTÉRRA seeks to mobilize $250B globally by 2030 to create a fairer climate finance system. $5 billion is earmarked for the Global South through ALTÉRRA Transformation, a distinct branch of ALTÉRRA3.
BII and BCG4 recently released a report titled "Scaling Blended Finance: Practical Tools for Blended Finance Fund Design" which provides a typology and scorecard for blended finance funds to better align with investor needs and mobilize private capital effectively.
With the upcoming Fourth International Conference on Financing for Development in 2025, there is an opportunity to catalyze a transformation in financing that prioritizes the urgent actions needed to achieve the SDGs and combat climate change. Key stakeholders active in the blended finance ecosystem must continue their advocacy efforts and call on governments to establish clear guidelines for blended finance. By pushing for this urgent framework, these stakeholders can help ensure an effective and sustainable approach to this important financial tool.
Did you know?
Blended Finance’s Main Actors
The International Finance Corporation (IFC) has been active in promoting blended finance through various initiatives that connect private investors with projects in emerging markets, particularly in renewable energy and sustainable infrastructure.
The World Bank has been supporting blended finance through various programs that leverage both concessional and commercial financing to enhance renewable energy access in developing countries.
Convergence, the global network for blended finance, plays a vital role in facilitating the mobilization of private capital. Founded to increase investments in emerging markets, it provides its members with access to valuable data on blended finance transactions, market analysis, and networking opportunities.
The Global Impact Investing Network (GIIN) also contributes to this dialogue through its annual reports, which provide insights into market trends and the effectiveness of blended finance strategies.
Mirova is a founding member of the Investor Leadership Network (ILN), launched at the G7. The ILN is an open and collaborative platform for leading investors interested in addressing sustainability and long-term growth.
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1 Finance flows to nature-based solutions need to nearly triple from current levels of US$200 billion to US$542 billion annually by 2030, and quadruple to US$737 billion by 2050. Source: UNEP, State of Finance for Nature report, 2023.
2 Source: Convergence, 2024. https://www.convergence.finance/blended-finance
3 Source: ILN, Blended Finance - Best Practice Case Studies And Lessons Learned, 2024. Available at the following link https://gisdalliance.org/news/release-blended-finance-best-practice-booklet-case-studies-and-lessons-learned
4 British International Investment and Boston Consulting Group.
The mentioned perspectives reflect the opinion of MIROVA at the date of this document and are likely to change without notice.
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