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Blended Finance
Blended finance is the use of catalytic capital from public or philanthropic sources to increase private sector investment in sustainable development. The three criteria for blended finance are: leverage (use of development finance and philanthropic funds to attract private capital); impact (investments that drive social, environmental and economic progress); and returns (financial returns for private investors in line with market expectations, based on real and perceived risks).
The rationale for blended finance is to trigger investments with high development impact potential that would otherwise not attract commercial lenders because of the investments’ (perceived) unfavorable risk-return profile. Blended finance is a structuring approach that allows organizations with different objectives to invest alongside each other while achieving their own objectives (whether financial return, social impact, or a blend of both). The main investment barriers for private investors addressed by blended finance are (i) high perceived and real risk and (ii) poor returns for the risk relative to comparable investments. Blended finance creates investable opportunities in developing countries which leads to more development impact.
There are different blended finance instruments used to address the risk-return profile of investments for private investors and therefore channel commercial money into initiatives with positive development outcomes. Blending also can also entail the structuring of one or several instruments together. The main instruments used by the SDC are equity (simple fund investments), first-loss engagements (structured fund investments), loans (interest free or impact-linked loans), outcome payment schemes (social impact incentives (SIINC), outcomes Fund, outcomes procurement), and technical assistance. The different instruments are described in more detail on the page PSE Format Navigator.
Despite the almost universal recognition that blended finance is an important element of achieving the SDGs, progress in increasing volumes of blended finance into SDG relevant sectors has been slow. According to the 2020 joint UNCDF-OECD report on Blended Finance in Least Developed Countries, only 6% of private finance mobilised by official development finance is invested in LDCs, a percentage that has remained constant over the past three years. The focus of SDC’s blended finance engagements is therefore particularly geared towards attracting (more) private finance to LDCs, as well as sectors traditionally underserved by private capital, namely social sectors. In this regard, the pioneering of blended finance innovations such as SDC’s social impact incentives (SIINC) and impact-linked finance (ILF) initiatives are important contributions of SDC in the field of blended finance.
While using blended finance, it is important to follow internationally recognised principles. In particular, it is crucial to always properly assess each blended finance transaction in terms of leverage and additionality. More information on additionality assessment can be found in Annex VII of the PSE Handbook and on the respective shareweb page.
Working Aids
Roots of Impact
Impact-Linked Finance holds a huge potential for public and catalytic funders to enable high-potential enterprises to optimize for impact and strengthen their commercial viability. It helps these enterprises attract private sector investment and significantly increase their positive impact. This Primer elaborated by Roots of Impact with the support of SDC outlines the Impact-Linked Finance approach, describes its characteristics, modalities, and design principles, and thus helps public and catalyic funders to seize the opportunity.
SDC and Roots of Impact
Premium payments for real impact achieved can systematically close the gap between demand and supply. With Social Impact Incentives (SIINC), social enterprises are empowered to raise large amounts of investment and to grow sustainably while creating positive social impact at scale. This whitepaper gives an overview of the rational behind SIINC and what to consider when setting up such an initiative.
Relevant News
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07 Sep 2023
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15 Mar 2023
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02 Dec 2022
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11 Oct 2022
 07 September 2023
The Swiss Agency for Development and Cooperation (SDC) has expanded its Private Sector Engagement (PSE) portfolio over the past years. In 2021, it introduced the Investment Credit designed to facilitate direct investments into structured funds or granting impact-linked loans. This credit aims to foster innovation, and leverage private finance to achieve the Sustainable Development Goals (SDGs), with a specific focus on Least Developed Countries (LDCs) and underserved sectors. Managed by the Competence Centre for Engagement with the Private Sector (CEP), this credit has already approved two investments in 2022 and 2023, respectively. As of 2024, 4.9 million CHF is available for investment, enabling the development of 1-2 ventures aligned with SDC’s objectives at the thematic or country levels. The SDC Investment Credit represents a strategic initiative to foster private sector investments for the SDGs. By leveraging private finance and embracing innovative ventures, SDC is committed to driving meaningful impact in LDCs and underserved sectors, while adhering to relevant criteria for investment selection and measurement
15 March 2023
Since 2020, the Annex 2 exercise, carried out as part of the annual reports of SDC’s operational units, provides a picture of SDC’s Private Sector Engagement (PSE) portfolio. As a modality, PSEs are implemented across all of SDC’s priority topics and they are diverse in terms of objectives and private sector partners. By comparing data from SAP with information entered by operational units, we get an understanding of the universe of PSE projects SDC is engaged in. Last year, the Annex 2 database allowed SDC, for the first time, to report to the OECD on mobilizing private sector funding. You can find the overview here.
02 December 2022
The evaluation found that overall programmes such as PES and SIINC LATAM, which promote both the social impact of small- and medium-sized enterprises and support a conducive social entrepreneurship ecosystem are highly relevant in the Latin American region. This report includes the management report of SDC. Link to the report
11 October 2022
Four Case Studies about some of SDC’s innovative Private Sector Partnerships (PSE) were just published. They portray 1) Social Impact Incentives (SIINC), 2) Impact-Linked Finance Fund (ILFF), 3) Catalytic Market Facility Aceli Africa (Aceli), and 4) Product Development Partnerships (PDPs). The Case Studies provide an easy to read (and well-layouted) introduction to those projects and mechanisms and can also be shared outside of SDC.
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