Blended Finance: Addressing the Promise-Performance Gap
Despite a decade of growing attention, blended finance hasn't delivered on its promise to mobilise private capital at scale for sustainable development. The market totalled $18.3 billion in 2024, down from $23 billion in 2023, falling far short of the trillions needed to close the SDG financing gap in emerging markets and developing economies (EMDEs).
The Core Challenge
EMDEs account for 40% of global population and contribute 66% of global GDP growth, yet receive only 5% of the world's $489 trillion in financial assets. Even more striking: global investors allocate just 10% of their portfolios to EMDEs, down from 12% a few years ago. This persistent underinvestment occurs despite EMDEs offering substantial benefits, including expected earnings growth of 19% during 2025-2029 compared to half that in advanced economies over the same period.
Five Structural Barriers
Columbia's research, based on 65 expert interviews across the blended finance ecosystem, identifies five critical obstacles preventing scale:
1. Lack of Transparency: The ecosystem remains markedly opaque, with essential data on pricing, risk allocation, and performance either withheld or inconsistently reported. This information asymmetry fuels uncertainty and inflates costs of capital.
2. Institutional Conservatism: Conservative credit rating methodologies and prudential regulations like Basel III create a "complexity premium" that makes EMDE investments prohibitively expensive, even when actual performance data suggests risks are overestimated.
3. Limited Liquidity: Most blended finance structures involve long-duration, illiquid instruments with no functioning secondary markets, restricting capital recycling and deterring institutional participation.
4. Weak Project Pipeline: A persistent shortage of bankable projects reflects underinvestment in early-stage development and fragmented technical assistance mechanisms.
5. Erosion of Additionality: Many transactions involve concessional support without clear demonstration of market failure, potentially deterring commercial replication.
The Path Forward
The report argues that scaling blended finance requires coordinated action across the ecosystem, not just better deal structuring. Key reforms include:
Transparency Infrastructure: Establishing centralised databases with standardised reporting on transaction-level data
Regulatory Innovation: Updating prudential rules to recognise risk-mitigating features of blended finance
Liquidity Solutions: Creating dedicated exit facilities and secondary markets
Project Preparation: Expanding technical assistance for upstream development
Market Discipline: Implementing strict additionality criteria and coordination mechanisms
A Systems-Level Reset
The report's central message is clear: blended finance needs a fundamental redesign of underlying systems governing information, incentives, and institutional behaviour. This isn't about incremental improvements but about creating the market infrastructure necessary for private capital to flow at scale.
With major initiatives like UAE's $30 billion ALTÉRRA platform and Singapore's $5 billion FAST-P showing momentum, the question isn't whether large-scale blended finance is possible—it's whether the ecosystem can implement the structural reforms needed to make it mainstream.
The evidence suggests that with coordinated leadership across public, private, and philanthropic sectors, blended finance can realise its promise as a powerful enabler of sustainable investment. But only if stakeholders commit to the systemic changes outlined in this comprehensive roadmap.
The full Columbia report provides detailed recommendations for each stakeholder group, from advanced economy governments to credit rating agencies, outlining specific actions needed to transform blended finance from promise to performance.
The Core Challenge
EMDEs account for 40% of global population and contribute 66% of global GDP growth, yet receive only 5% of the world's $489 trillion in financial assets. Even more striking: global investors allocate just 10% of their portfolios to EMDEs, down from 12% a few years ago. This persistent underinvestment occurs despite EMDEs offering substantial benefits, including expected earnings growth of 19% during 2025-2029 compared to half that in advanced economies over the same period.
Five Structural Barriers
Columbia's research, based on 65 expert interviews across the blended finance ecosystem, identifies five critical obstacles preventing scale:
1. Lack of Transparency: The ecosystem remains markedly opaque, with essential data on pricing, risk allocation, and performance either withheld or inconsistently reported. This information asymmetry fuels uncertainty and inflates costs of capital.
2. Institutional Conservatism: Conservative credit rating methodologies and prudential regulations like Basel III create a "complexity premium" that makes EMDE investments prohibitively expensive, even when actual performance data suggests risks are overestimated.
3. Limited Liquidity: Most blended finance structures involve long-duration, illiquid instruments with no functioning secondary markets, restricting capital recycling and deterring institutional participation.
4. Weak Project Pipeline: A persistent shortage of bankable projects reflects underinvestment in early-stage development and fragmented technical assistance mechanisms.
5. Erosion of Additionality: Many transactions involve concessional support without clear demonstration of market failure, potentially deterring commercial replication.
The Path Forward
The report argues that scaling blended finance requires coordinated action across the ecosystem, not just better deal structuring. Key reforms include:
Transparency Infrastructure: Establishing centralised databases with standardised reporting on transaction-level data
Regulatory Innovation: Updating prudential rules to recognise risk-mitigating features of blended finance
Liquidity Solutions: Creating dedicated exit facilities and secondary markets
Project Preparation: Expanding technical assistance for upstream development
Market Discipline: Implementing strict additionality criteria and coordination mechanisms
A Systems-Level Reset
The report's central message is clear: blended finance needs a fundamental redesign of underlying systems governing information, incentives, and institutional behaviour. This isn't about incremental improvements but about creating the market infrastructure necessary for private capital to flow at scale.
With major initiatives like UAE's $30 billion ALTÉRRA platform and Singapore's $5 billion FAST-P showing momentum, the question isn't whether large-scale blended finance is possible—it's whether the ecosystem can implement the structural reforms needed to make it mainstream.
The evidence suggests that with coordinated leadership across public, private, and philanthropic sectors, blended finance can realise its promise as a powerful enabler of sustainable investment. But only if stakeholders commit to the systemic changes outlined in this comprehensive roadmap.
The full Columbia report provides detailed recommendations for each stakeholder group, from advanced economy governments to credit rating agencies, outlining specific actions needed to transform blended finance from promise to performance.
