The Blended Finance Principles and the Blended Finance Guidance are effective policy tools for donor governments, development co-operation agencies, philanthropies and other stakeholders to design and implement effective and transparent blended finance programmes.
We encourage your ongoing feedback and collaboration to ensure that the detailed Guidance for each Principle continues to reflect agreed upon best-practice standards in the larger blended finance community.
Blended Finance Guidance
In addition to the Principles, a wide-ranging and collaborative process with all stakeholders has produced the Overarching Blended Finance Guidance, with detailed notes for each Principle.
Principle 1: ANCHOR BLENDED FINANCE USE TO A DEVELOPMENT RATIONALE
All development finance interventions, including blended finance activities, are based on the mandate of development finance providers to support developing countries in achieving social, economic and environmentally sustainable development.
1A - Use development finance in blended finance as a driver to maximise development outcomes and impact
The development mandate provides the rationale for deploying development finance through blended finance, as an effective and efficient financing approach towards its policy objectives.
Consequently, the SDGs are at the core of how and why official development finance is used in blended finance.
1B - Define development objectives and expected results as the basis for deploying development finance
Development objectives and expected results should be defined before the deployment of blended finance.
They should be mutually agreed and embraced by all parties, as a key basis for the deployment of blended finance.
The overarching objective for the use of blended finance is the expansion of sustainable, market-based solutions for development financing needs.
1C - Demonstrate a commitment to high quality
High quality in the design and execution of projects financed by development finance, including blended finance, are central to the objective of supporting the development of functioning and effective markets.
Blended finance should be based on high corporate governance, environmental and social standards, as well as internationally recognised responsible business conduct instruments, providing an opportunity for commercial partners to acquaint themselves with quality standards in unfamiliar markets.
Checklist
1.A Does the project maximize development outcomes?
Does the project focus on sectors where maximum development impact can be achieved?
Does the project build incentives that promote public-private co-operation hence balancing expectations on development outcomes vis-á-vis financial risks and returns?
Are the necessary internal skills and capacities developed in order to effectively engage with private sector actors?
1.B Does the project articulate blended finance objectives?
Does the project link with overarching development objectives, in line with the 2030 Agenda and the Paris Agreement?
Does the project align with local policy priorities?
Is the blended finance project the most effective financing approach within a broader development co-operation strategy?
1.C Does the project commit to high quality standards?
Does the project align ESG safeguards to existing international standards (e.g. IFC Performance Standards, PRI, etc.)
Is the process of screening partners and projects according to RBC practices applied? -> OECD Guidelines for Multinational Enterprises
Does the project uphold reporting obligations and promote transparency in each phase of the investment cycle?
Principle 2: DESIGN BLENDED FINANCE TO INCREASE THE MOBILISATION OF COMMERCIAL FINANCE
Development finance in blended finance should facilitate the unlocking of commercial finance to optimise total financing directed towards development outcomes.
2A - Ensure additionality for crowding in commercial finance
Development finance is a scarce and precious resource, and mobilisation of additional funds from commercial investors is indispensable to meet the financing needs of Agenda 2030.
To effectively increase total financing for development, blended finance needs to:
Ensure additionality, by being deployed only for uses where commercial financing is not currently available for deployment towards development outcomes, especially if it involves concessionality;
Have an explicit focus on opportunities to crowd in financing from commercial sources into transactions that deliver development impact.
2B - Seek leverage based on context and conditions
Blended finance should, when appropriate, efficiently leverage commercial finance to achieve development impacts.
Appropriate leverage is context specific and varies across sectors, geographies, and the different stages of the investment life-cycle.
While increasing leverage over time is not necessarily an indicator of increased development impact, it is a sign of increasing market maturity and of successful mobilisation. It also serves as a signal for the need for eventual exit of development finance.
2C - Deploy blended finance to address market failures, while minimising the use of concessionality
Blended finance holds a pathfinder role of bringing commercial financing into sectors and geographies with substantial development finance needs.
In this context, blended finance should be used to overcome barriers to market formation and withdrawn once functioning markets have been established. Pioneering investments may require considerable concessionality but as markets mature, the magnitude of public contributions should decline.
Blended finance should not become a static or permanent approach in a given context, and the use of concessional development finance in blended finance, if any, should be minimized.
2D - Focus on commercial sustainability
Blended finance transactions, particularly those involving concessionality, should be designed to eventually ensure commercial sustainability, including having a clear strategy for the duration of and exit of concessional finance.
In supporting the evolution of nascent and immature markets, there is the need for effective safeguards to ensure optimal resource allocation, maintaining a level playing field and avoidance of market distorsion.
The focus of concessionally should be towards development impact. Blended finance should also ensure competitive approaches and support that includes equal information, requirements and standards be applied to different market participants.
Checklist
2.A Does the project ensure development additionality?
Does the project sets out its development objective, additionality & theory of change?
Are market failures clearly identified?
Is the intervention co-ordinated with the eco-system?
Are development impacts monitored and evaluated?
2.B/2.C Does the project ensure financial additionality?
Does the project identify the main financing gaps?
Does the chosen financial instrument ensure minimum concesionnality?
Is the target mobilisation determined depending on the context?
Do you have a clear view on how to exit once commercial markets are functioning?
2.D Does the project ensure commercial sustainability?
Are the adequate policy, sector and investment frameworks developed?
Does the project ensure coherent approaches amongst all stakeholders?
Do you have a clear understanding of how to monitor and facilitate market development?
How do you ensure that the project is not being deployed in well functioning commercial markets?
Principle 3: TAILOR BLENDED FINANCE TO LOCAL CONTEXT
Development finance should be deployed to ensure that Blended Finance supports local development needs, priorities and capacities, in a way that is consistent with, and where possible contributes to, local financial market development.
Achieving positive development impact means meeting people’s needs. Blended finance can fulfil local development priorities by enabling the financing of businesses that serve local consumers and create decent jobs.
Blended finance should support investments that are aligned with national priorities, as is the case with all development finance interventions.
3B - Ensure consistency of blended finance with the aim of local financial market development
The emergence of efficient local financial markets will be essential to sustainable financing for development.
Hence, blended finance should seek opportunities to work with local financial sector actors, where possible, and should avoid approaches that discriminate against the local financial sector.
3C - Use blended finance alongside efforts to promote a sound enabling environment
A sound enabling environment is a vital condition for mobilising private investment.
Blended finance can be a means of achieving development impact in challenging environments, but it can also be an important complement to reform efforts, and should seek to be supportive of them where relevant.
Checklist
3.A Does the project support local development initiatives?
Does the project include an effective stakeholder consultation process throughout the investment cycle?
Is the project developed in line with national development strategies and including national actors at all stages of the project, as co-owners?
Are additionality assessments conducted based on local considerations, including a comprehensive understanding of local market structure, political environment and sector characteristics to help to identify local market failures?
Is the organizational setting suitable to ensure regular communication and good oversight of the project on the ground?
Is the project benefiting from local monitoring thanks to effective local partnerships? Are local partnerships helping to originate new relevant deals in line with local priorities?
3.B Does the project support local market development?
Does the project contribute to increase capacity of local financial institutions?
Does the project seek to involve local investors? Does it actively seek to provide opportunities for crowding in domestic finance in strategic sectors aligned with national development plans?
Does the project promote local currency financing as a key factor contributing to local financial market development?
3.C Does the project support promotion of sound enabling environment?
Is the project designed to offer a demonstration effect and more broadly contribute to attract further investment?
How is the project contributing more broadly to a favorable investment climate that is essential in attracting and retaining foreign and domestic investments?
Principle 4 FOCUS ON EFFECTIVE PARTNERING FOR BLENDED FINANCE
Blended finance works if both development and financial objectives can be achieved, with appropriate allocation and sharing of risk between parties, whether commercial or developmental. Development finance should leverage the complementary motivation of commercial actors, while not compromising on the prevailing standards for development finance deployment.
4A - Enable each party to engage on the basis of their respective development or commercial mandate, while respecting the other’s mandate
All parties need to have a stake in the success of the transaction.
The objective of blended finance is not to change the motivation of commercial or development actors, but to create opportunities for investments that yield both development and commercial returns, and thus that can be supported by commercial finance.
Conversely, development actors should not compromise on their standards – as well as relevant international standards – for the design, terms and execution of interventions.
4B - Allocate risks in a targeted, balanced and sustainable manner
Mobilising commercial finance in a sustainable manner requires addressing the riskreturn profile of a transaction through balanced and sustainable risk allocation between development and commercial parties, whether through concessional or non-concessional instruments.
The ability of development finance providers to effectively and efficiently allocate, take and manage risk is therefore central to blended finance.
4C - Aim for scalability
Both the magnitude of development financing needs and its relevance for commercial financing, make scalability an important factor in ensuring blended finance reaches its potential.
Development finance providers should collaborate through standardisation and harmonisation, including on programme approaches, where possible, so as to encourage the increase in scale and scalability of blended finance.
Whereas tailor-made transactions will continue to be required, notably in more challenging markets and in proof of concept investments, development finance providers should share lessons learned and best practices in order to support scalability over time in these markets or sectors, wherever possible.
Checklist
4.A Engaging each party on the basis of their respective mandate
Do you have a clear understanding of the mandates, objectives and risk-return profiles of each actor involved in blended finance?
4.B - Allocate risks in a targeted, balanced and sustainable manner
Do you understand and assess the different types of underlying risks, in country- and sector-specific contexts?
Are different methodologies for risk assessments applied at each level of blending as a basis to determine the optimal blending instrument and concessionality level?
Does the project bring in local entities so as to improve risk allocation in blended finance?
Does the project adjust the mix between concessional and commercial finance as risks evolve along different stages of the project lifecycle?
Does the project strengthen capacity in donor agencies to assess and verify balanced risk allocation in blended finance?
4.C - Aim for scalability
Does the project promote transparency, data availability, and knowledge sharing?
Are the incentives set for scaling up through appropriate and targeted mobilisation objectives for MDBs/DFIs?
Are whole-of-government approaches and improved collaboration between MDBs and DFIs promoted?
Does the project make sufficient funding available for early stage project preparation to accelerate the creation of a pipeline of bankable projects, as well as for creating an enabling environment
Is the replication of successful blended finance instruments and standardisation of instruments encouraged?
Principle 5 MONITOR BLENDED FINANCE FOR TRANSPARENCY AND RESULTS
To ensure accountability on the appropriate use and value for money of development finance, blended finance operations should be monitored on the basis of clear results frameworks, measuring, reporting on and communicating on financial flows, commercial returns as well as development results.
5A - Agree on performance and result metrics from the start
Since inception, development and commercial actors taking part in blended finance operations should adopt a common monitoring and evaluation framework.
Performance and result metrics should be applied to both direct engagement of donors in blended finance and to intermediated operations, while specific reporting arrangements may be tailored to context.
Establishing a common set of key performance indicators should be a priority to ensure a transparent, harmonised and comparable assessment of results, thereby also providing a common framework of intervention for all parties to a given blended finance operation.
5B - Track financial flows, commercial performance, and development results
In order to assess the effectiveness and efficiency of blended finance operations, the financial and development performance of all parties should be assessed against predefined and agreed upon metrics.
These should cover development finance, additional commercial finance mobilised (including financial returns), and the results achieved on development objectives.
5C - Dedicate appropriate resources for monitoring and evaluation
Adequate systems should be put in place to allow the monitoring and evaluation of the development interventions supported through blended finance.
Donors should align on a common understanding of blended finance assessment methodologies to ensure consistency in data collection and reporting.
5D - Ensure public transparency and accountability on blended finance operations
Information on the implementation and results of blended finance activities should be made publicly available and easily accessible to relevant stakeholders, reflecting transparency standards applied to other forms of development finance.
Besides accountability, external communication on blended finance performance is instrumental in mobilising further commercial capital, by improving the availability of market information and the quality of risk assessment for the efficient pricing of investments.
Checklist
5.A Agree on performance and result metrics from the start
Does the project adopt a theory of change for a blended finance mechanism as a whole?
Was the initial agreement on reporting for results using a common set of key performance indicators reached?
Does the project adopt a common monitoring and evaluation framework?
5.B Track financial flows, commercial performance, and development results
Does the project ensure financial transparency, while avoiding the pitfalls?
Does the project promote better reporting on development results, improved data collection and quality assurance processes?
5.C Dedicate appropriate resources for monitoring and evaluation
Does the project empower the internal capacity for learning and accountability?
Does the project promote collaboration as integral to the partnership?
Are differentiated approaches applied to monitoring and evaluation?
5.D Ensure public transparency and accountability on blended finance operations
Does the project establish the enabling conditions for transparency?
Does the project enable policy learning through accumulation of evidence and lessons learnt from monitoring and evaluation?
