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July 29, 2022updated 02 Aug 2022 11:40am

Blended finance: Investors flag serious shortfalls

During a private round table last month, market participants outlined frustrations over trying to arrange blended finance deals with the IFC and other official agencies.

By Vibeka Mair

Blended finance
UN secretary general António Guterres says multilateral development banks are at least partly to blame for the lack of sufficient action on climate. (Photo by Fabrice Coffrini/AFP via Getty Images)
  • During a private round table hosted by Capital Monitor in June, investors recounted experiences of working with the official sector on blended finance deals.
  • The International Finance Corporation competes with investors rather than helping mobilise their capital for developing countries, says one of the organisation’s former executives.
  • Blended finance deals are too complex, slow and cumbersome to do, and more transparency is needed, say both investors and a development finance executive.

“Collective suicide.” That is how the UN secretary general summed up climate inaction in a video message to governments at the Petersberg Climate Dialogue in Berlin on 18 July. In a week when temperature records were smashed in Asia and Europe, António Guterres said multilateral development banks (MDBs) and their respective sovereign shareholders were at least partly to blame for the inertia. 

During the UN-hosted talks, seen as a key precursor to Cop27, he accused MDBs, including the World Bank, of not being fit for the purpose of delivering investment and assistance to expand renewable energy and build climate resilience in developing countries. He called on developed countries to demand that MDBs “change their tired frameworks and policies to take more risk”.

Guterres’s points reflect complaints raised by investors and the wider finance sector about MDBs and the development finance institution (DFI) sector, as Capital Monitor reported in December. Some also argue that the current blended finance model risks exacerbating inequality in emerging markets.

When it comes to blended finance – combining official aid with other public or private capital to support sustainable development in emerging countries – investors say they do not see deals of sufficient scale, quality and returns. They also complain such transactions are too complex and time-consuming, particularly when MDBs are involved, given their multiple shareholders.

A widely held view is that DFIs must do more if the private capital going into blended finance is to expand significantly. Aggregate blended finance flows from 2010 to September 2021 total just over $160bn, according to Canadian blended finance body Convergence. That compares to the $130trn claimed as being committed to achieving net-zero emissions.

On 8 June, Capital Monitor hosted a behind-closed-doors round table to discuss the obstacles facing blended finance. The event took place as part of the Future of Climate Finance conference organised by Capital Monitor and New Statesman. Participants included the deputy CEO of a European asset manager, the managing partner of a boutique impact investment fund, executives from two major US banks, an executive from a multilateral development body, and the CEO of a blended finance consultancy.

IFC: setting a bad example?

The International Finance Corporation (IFC), the private sector-focused arm of the World Bank, is a prime example of some of the issues at hand, according to the experience of one consultant – a former IFC executive – speaking during the session.

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The World Bank, arguably the most prominent MDB globally, lays claim to being the biggest multilateral funder of climate investments in developing countries. And the IFC says it plays a leadership role among DFIs and other MDBs on the topic of blended finance, and chairs a DFI working group on blended concessional finance, comprising more than 20 DFIs.

But the consultant suggested the IFC uses its position to compete with private investors for deals rather than working with them to channel capital into developing markets.

“The folks on the investment side of the IFC really see themselves as kind of competing with private equity folk,” she said. They might, for instance, look to do deals of $10-15m in equity, but “that’s not the role that a DFI really needs to play in the market”, she added, “because you should be able to get $15m from the commercial side”.

Because of the IFC’s success in dealmaking, countries and companies “have a hard time getting its attention”, and it does not tend to welcome their approaches, she said.

Yet the IFC is not the only offender in this respect, the consultant said. She recounted the story of a client, a clean energy fund, that has raised $100m through a listing on a European stock exchange. Prior to doing so, the fund had approached four DFIs for capital, including the IFC, said the consultant. It was “given every possible excuse” for not making an allocation, such as “it’s too small”, “it’s too soon” or “it’s a first-time fund”.

What’s more, the consultant said, the DFIs took nine months to provide those explanations for not making an investment of just $5-10m in clean energy in a region in the Global South where it was badly needed.

“I’m sorry to say that in the last four years my stories to tell about DFIs are not particularly good,” she added.

When Capital Monitor asked the IFC if it had any comment on such concerns, a spokesperson did not address them directly. He said the institution encouraged the growth of the private sector in developing countries by creating new markets, mobilising other investors and sharing expertise.

In the year to 30 June, the IFC recorded an all-time high of $32.8bn of commitments, including $12.6n for its own account, of which a record $4.4bn went into climate finance, the spokesman said.

“Slow and cumbersome”

Nonetheless, other round-table participants also recounted negative experiences of dealing with DFIs, often citing the length of time and difficulty of getting deals done.

One was a senior executive at a European asset manager. While blended finance deals had enabled her firm to launch new investment strategies and educate investors about opportunities on issues such as natural capital preservation, she said, the process had been frustratingly slow.

“It’s so cumbersome,” she added, citing a $250m deal that took five years to complete as her firm struggled to agree with a DFI on the de-risking structure. An executive from a US bank on the round table agreed DFIs were too slow to approve deals.

Blended finance deals are overly complex and take a great deal of patience, possibly putting investors off, conceded an executive from a DFI. A key issue is that every vehicle is so bespoke, he said. Whereas some markets, such as green bonds, have reached the “replication stage” whereby tailored agreements are not required for every deal, that has not yet happened in blended finance.

This helps explain why so little private sector money is invested alongside DFIs and the reluctance among institutional investors to work with the official sector (see chart above). He agreed that his sector needed to tackle “this ridiculously low deal flow that we’re seeing”.

Data reported by MDBs for 2016-19 showed that they directly mobilise around 40 US cents of private capital for every $1 of their own resources deployed, found a report by Convergence published in October last year.

Blended finance: a lack of transparency

Another issue is a lack of transparency around how successful blended finance deals are, including on how much capital is crowded in, said the DFI executive. It is hard to judge whether these transactions are helping to bring development finance into mainstream investing, he added.

He said his organisation was assessing every transaction it had done as to whether it brought in additional investors and thus whether his DFI should have been at the table in that instance.

Investors would certainly welcome more transparency around countries’ budget commitments to blended finance.

The senior executive at a European asset manager said she wanted to see more governments reporting on the amount of such lending being done: “At a country level it has to be more nationally defined. We don’t have the full story of the share of blended finance from [G20] countries.”

Ultimately, whether investors invest is down to whether they feel the return will be worth the risk they are taking or indeed whether they feel they can assess the risk appropriately.

A round-table participant from a boutique blended finance fund said his organisation’s conversations with financial market participants were often difficult. “A lot of people say ‘we love what you guys do, but it’s too concessionary; too risky’. Or ‘I can’t measure it’.”

To expand the blended finance market, it appears that greater transparency, larger deal sizes and more efficient negotiations would help. Whether both sides – particularly the MDBs – are willing to make more concessions is another matter.

Capital Monitor is hosting the Webinar series, Making Sense of Net Zero. Find out more information on

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