In a world where development goals require substantial financial backing, blended finance has emerged as a promising approach to mobilize private investment. However, experts at the World Economic Forum (WEF) in Davos have highlighted that while this strategy shows promise, it must be part of a broader toolkit of support from national and supranational bodies. The discussions underscored the need for more comprehensive strategies to bridge the significant funding gap required to achieve global development objectives.
Blended Finance's Role and Challenges
During the WEF session, key figures such as Nobumitsu Hayashi, Governor of the Japan Bank for International Cooperation (JBIC), Françoise Renaud-Basso, President of the European Bank for Reconstruction and Development (EBRD), Leila Fourie, CEO of the Johannesburg Stock Exchange, and Jon Johnsen, CEO of Danish pension fund PKA, shared their insights on blended finance. In 2023, blended finance deals reached a five-year high of $15 billion, primarily driven by multilateral development banks (MDBs) and development finance institutions (DFIs). Despite this progress, it remains far short of the estimated $4 trillion needed annually to meet development goals.
The Danish SDG Investment Fund, launched in 2018, exemplifies successful blended finance initiatives. By co-investing and assuming early-stage risks, the Danish government managed to attract institutional investors who would otherwise find these investments too risky. The second fund, which closed its first round of funding in November 2024 with €362 million, further demonstrates the potential of this model.
However, challenges persist. Renaud-Basso emphasized that MDBs' assumption of first-loss risk is costly and cannot be scaled up sufficiently to rely solely on blended finance for development goals. Instead, she advocated for a holistic approach, including policy reforms, local capital market development, and risk mitigation measures like reducing currency volatility.
Nobumitsu highlighted JBIC's role in supporting Japanese companies overseas, extending beyond mere investment to include collaboration with foreign governments and national development banks. This includes improving regulatory frameworks and assisting host countries in executing large-scale projects, particularly in clean energy. He also noted the complexities in assessing whether being a first-loss investor genuinely catalyzes additional investment or if projects are commercially viable without such support.
Leila Fourie pointed out that crises often foster greater cooperation between diverse actors. In South Africa, unreliable power supply and the need to transition to renewable energy have led to increased collaboration between public and private sectors, fostering trust and innovation.
Insights and Implications
From a journalist's perspective, the discussions at the WEF reveal that while blended finance offers a valuable mechanism for directing private capital towards development goals, it cannot stand alone. The success of initiatives like the Danish SDG Investment Fund underscores the importance of strategic partnerships and government support. However, the substantial funding gap necessitates a broader approach that includes policy reforms, local market development, and risk management.
Ultimately, achieving global development goals requires not only innovative financial tools but also systemic changes and collaborative efforts across various sectors. The lessons learned from existing models provide a roadmap for scaling up effective solutions, ensuring that future initiatives can bridge the gap between ambition and reality.