Fixing Blended Finance
A Blueprint for Scaling Sustainable Development
Blended finance has long been hailed as the key to unlocking the trillions of dollars needed to close the Sustainable Development Goals (SDG) funding gap. Yet, the reality is sobering:
The blended finance market reached $15 billion in annual flows in 2023, a five-year high, but the SDG funding gap has grown to a staggering $4.2 trillion.
So, what’s the fix? A dynamic panel of global leaders in finance and development convened at the 2025 World Economic Forum to discuss solutions. Here’s how they see it happening.
Reforming Multilateral Development Banks:“Go as far as we can”
Odile Renaud-Basso, President of the European Bank for Reconstruction and Development (EBRD), didn’t mince words about the reforms needed to mobilize private capital at scale.
“We need to go as far as we can in bringing private sector [investors] without guarantees in our markets.”
Her reasoning is pragmatic: guarantees are expensive and unsustainable at scale. “You will never have the scale to have guarantees for the trillions we are looking for,” she warned. Instead, MDBs need to focus on transparency and quality project preparation to lower perceived risks for private investors. “The gap between the risk perception and the reality of the risk is huge,” Renaud-Basso emphasized, pointing to the need for MDBs to publish more data on losses and project outcomes.
She also advocated for a shift from project-by-project approaches to “country platforms,” where MDBs work with governments to develop strategic plans and investment pipelines. This ensures efficiency, clarity, and scale.
Scaling Trust: “Somebody has to move first”
For Jon Johnsen, CEO of Danish pension fund PKA, the key to scaling blended finance is trust. “Somebody has to move first,” he said, reflecting on PKA’s partnership with the Danish government in the Danish SDG Investment Fund. The fund combines government-backed first-loss guarantees with private capital to de-risk investments in emerging markets.
Johnsen highlighted the unique role of pension funds in this space.
“Pension funds have a very long-term perspective on investments, and that gives them a special angle.”
But trust is what makes the model work. He explained that the government trusts that PKA won’t “go too far” to get returns. In turn, PKA trusts that the government will succeed in setting up a team that works like a private equity setup.
Johnsen is optimistic this model could be scaled globally if other governments and MDBs step up with first-loss guarantees and risk-sharing mechanisms. His personal goal for next year? “I’ll get more pension funds in Denmark to invest in the SDG fund so it can be even bigger.”
Innovating for Emerging Markets: Success on the ground builds trust
Nobumitsu Hayashi, Governor of the Japan Bank for International Cooperation (JBIC), took a pragmatic approach. “We need success on the ground in order to build trust,” he said. Without tangible results, potential investors and host countries remain skeptical.
Hayashi shared JBIC’s approach to tackling the unique challenges of emerging markets. In Southeast Asia, for instance, JBIC works with governments to improve regulatory frameworks alongside project development. “We set up working teams with the government, with the government agencies and with Japanese companies, so that as we develop a certain real project, we advise those governments to improve their regulatory framework so that, hopefully, when the project is ready, the framework is also improved,” he explained.
Hayashi also highlighted JBIC’s willingness to take risks on innovative projects, such as a closed-loop geothermal system in Germany. Commercial banks are still reluctant to invest, but JBIC got in because Japanese companies were the sponsors.
“Hopefully, the second or third project will be fully commercialized.”
Fixing Market Perceptions: The qualitative overlay is overrated
Leila Fourie, CEO of the Johannesburg Stock Exchange (JSE), zeroed in on a critical barrier to scaling blended finance: credit rating agencies. “The qualitative overlay that rating agencies apply…is overrated,” she declared.
Fourie pointed out that emerging markets are penalized by outdated perceptions of risk. She highlighted that default rates for emerging markets are 3.5%, with recovery rates of 70%, comparable to global averages. Yet, emerging markets are paying, on average, 25% on their debt.
The consequences are dire: reliance on hard currency debt and a vicious cycle of escalating costs. Fourie called for more objective, data-driven assessments and faster re-ratings for countries that address their debt problems. She called for “credible and quantitatively based ratings”.
South Africa’s Blueprint: “A coalition of the willing”
Fourie also shared lessons from South Africa, where public and private sectors are collaborating to tackle power and infrastructure challenges. She credited the country’s recent progress to “a coalition of the willing” built on trust and aligned incentives.
South Africa’s reforms include tax incentives for renewables, regulatory changes to encourage infrastructure investment by pension funds, and innovative financial products like green and transition bonds. The JSE has also launched a private placement platform to standardize terms for private equity infrastructure deals.
“We’ve had 46 new projects, many of which are in the renewable space, starting to seek funding.”
Fourie sees South Africa as a model for other emerging markets. “What we are creating at the tip of Africa is a blueprint that other emerging markets can leverage,” she said.
The Path Forward: We need a grander design
Fixing blended finance requires bold, systemic change, but the solutions are within reach.
As the session drew to a close, moderator Sara Pantuliano challenged the panelists to name one thing they hoped to see by next year. Their answers reflected a shared commitment to scaling solutions:
- Get more pension funds involved.
- Build trust through success on the ground.
- Reform credit rating agencies and scale infrastructure funding in emerging markets.
- Expand partnerships with private investors and develop more country platforms.
Watch the Full Session
Session Speakers
- Odile Françoise Renaud-Basso, President, European Bank for Reconstruction and Development (EBRD)
- Hayashi Nobumitsu, Governor, Japan Bank for International Cooperation (JBIC)
- Sara Pantuliano, Chief Executive, ODI Global
- Jon Johnsen, Chief Executive Officer, PKA
- Leila Fourie, Group Chief Executive Officer, Johannesburg Stock Exchange
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Disclaimer: This article uses various LLMs to transcribe, summarize, and proof-read. All content for the article was hand-curated and checked for quality.
