The Economics of Blended Finance

Projects with high societal impact--such as biodiversity conservation and climate change mitigation--often offer financial returns that are too low, or too risky, to attract private capital. Under such circumstances, it can be difficult to raise adequate financing for these projects. A potential solution is blended finance, that is, the blending of concessional funding (e.g., from governments, multilateral development banks, or philanthropies) with private capital. We present a model that shows how blended finance can improve the risk-return profile of private investments and hence serve as a catalyst for private capital investments in projects with high societal impact.