Emerging Insight: Blended finance: When to use which instrument?
2 May 2022
Blended finance is an approach that combines different types or sources of capital, such as public and private ones. The rationale behind using blended finance structures is that it creates the conditions that enable more capital to be allocated to development goals, or that such capital is deployed more efficiently. As the financing gap to address the Sustainable Development Goals cannot be met exclusively with traditional sources, blended finance provides a potential to achieve development goals.
However, as an emerging field, blended finance has a multitude of mechanisms that are not always known by development practitioners. A research project by the Initiative for Blended Finance at the University of Zurich seeks to clarify when each blended finance instrument could be used to obtain the most efficient outcomes. The first research paper of this project was published last February.
The research reviewed 33 blended finance transactions, such as impact bonds and guarantees, and considered 12 questions that were key in identifying when to use each instrument. The paper provides insights on the reasons for using specific blended finance instruments. For instance, outcomes-linked instruments are a better fit when a demonstration effect is sought, whereas debt or equity instruments are more suitable for crowding-in traditional investors, as these are more established mechanisms.
Besides providing a framework for practitioners to select the relevant instrument, the publication also highlights areas for improvement, including the need to involve the final beneficiaries of the interventions in the decision-making and design processes.
At the ILO’s Social Finance, we work with blended finance instruments at various levels, including as sustainability advisor of an investment fund (AATIF), as well as developing an impact monitoring system for Sweden’s guarantee instrument and exploring how an impact bond can be used to reduce child labour. Find out more about our work with innovative finance in this thematic page.
However, as an emerging field, blended finance has a multitude of mechanisms that are not always known by development practitioners. A research project by the Initiative for Blended Finance at the University of Zurich seeks to clarify when each blended finance instrument could be used to obtain the most efficient outcomes. The first research paper of this project was published last February.
The research reviewed 33 blended finance transactions, such as impact bonds and guarantees, and considered 12 questions that were key in identifying when to use each instrument. The paper provides insights on the reasons for using specific blended finance instruments. For instance, outcomes-linked instruments are a better fit when a demonstration effect is sought, whereas debt or equity instruments are more suitable for crowding-in traditional investors, as these are more established mechanisms.
Besides providing a framework for practitioners to select the relevant instrument, the publication also highlights areas for improvement, including the need to involve the final beneficiaries of the interventions in the decision-making and design processes.
At the ILO’s Social Finance, we work with blended finance instruments at various levels, including as sustainability advisor of an investment fund (AATIF), as well as developing an impact monitoring system for Sweden’s guarantee instrument and exploring how an impact bond can be used to reduce child labour. Find out more about our work with innovative finance in this thematic page.