Blended finance has the potential to transform overlooked markets into investable opportunities.

The United Nations (UN) warns of a roughly US$4 trillion annual shortfall in financing for its sustainable development goals—a gap too large for the public sector to fill alone. Blended finance, which combines public, philanthropic and private capital, can help bridge this divide and unlock progress on global priorities such as poverty reduction, climate action and access to clean energy.

A decade after the UN adopted its 2030 Agenda for Sustainable Development, progress toward many of its goals remains stalled. While some elements of the plan, such as rural electrification, have advanced, insufficient funding has impeded others. Nearly 3.5 billion people live in countries where governments spend more on interest payments than on healthcare or education—leaving little capacity to invest in sustainable development.

At the same time, according to the IMF, global environmental, social and governance (ESG) funds have largely avoided emerging markets. Even though these economies drove the bulk of global GDP growth over the past 10 years, they were allocated only about 6% of global ESG portfolios (Display).

This mismatch highlights a significant untapped opportunity. Blended finance offers a way to gather capital at scale, mobilizing both mainstream investors and those seeking impact. And it charts a path forward: expanding access to underserved markets and growth sectors while offering attractive potential risk-adjusted returns, typically in investment-grade packages.

But first, a quick word on taxonomy.

The Building Blocks of Blended Finance to Bridge the Sustainable Development Gap

Blended finance to bridge the sustainable development gap rests on three types of capital: public, philanthropic and private.

  • Public capital—such as development finance institutions, multilateral banks and government agencies—is usually the first mover. It provides commitments such as guarantees, subsidized loans, anchor investments and policy supports that reduce perceived risk for others.
  • Philanthropic capital—from foundations, donor funds or high-net-worth individuals—is often used to provide early grants, technical assistance or risk-absorbing funds that bridge gaps and unlock innovation. In some frameworks, it’s bundled with concessional forms of public finance under the label “catalytic” or “concessionary” capital. Here, concessional simply means that capital is provided on below-market terms. (In this article, we use “catalytic capital” to mean concessional public or philanthropic funding that accepts below-market economics or first-loss positions to de-risk projects so that private capital can provide the scale.)

Read the full article about the sustainable development gap by Patrick O'Connell and Marie Clara Buellingen at 3BL Media.