It is generally agreed that public resources will not be sufficient to meet the investment gap required to achieve the Sustainable Development Goals (SDGs). Achieving the SDGs requires a massive increase in capital flows to developing countries on a scale that requires close coordination between public and private actors.

Luckily, recent years have seen significant increases in private capital flow directed at emerging markets. Yet, the financing required to achieve the SDGs remains largely unmet by current Foreign Direct Investments (FDI) inflows, especially in least developed countries. To put private capital to work towards achieving the SDGs, private capital needs to be directed to projects, sectors, and/or geographies where private sector investors typically do not venture because they are deemed unattractive from a risk-return perspective. In other words, while there are investment opportunities, few match the risk-return expectations of the private sector investors.

Governments play a role in meeting this risk-return perspective. They can finance technical assistance that grows facilities and companies in earlier stages of development and thereby link them to investors and mitigate risk through technical assistance. Governments also have a key role to play by establishing an enabling environment in which investments can flourish as well as assisting in the development and growth of investible initiatives that enable the allocation of more private capital towards achieving the SDGs.

Blended finance is another way through which governments, public sector, and philanthropic organisations can improve the risk-return profile of investments. Although such structures have been in use for many years, the label ‘blended finance’ is relatively new. Its introduction has triggered a strong interest in deploying this concept in support of development. In this report, blended finance is defined as the leveraging of public funds to catalyse private-commercial capital. In essence, the structure blends capital which has a development mandate with capital which does not, in a way that makes the SDGs more investable.

This report looks at how public sector actors can use blended finance to mobilise private capital by addressing risks that deter private sector investors from making such investments. This is possible given the different mandates, missions, risk appetites, and return expectations – both financial and impact – of each actor.

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This report was written by Enclude, the capital advisory arm of Palladium's Impact Investing business, for a project financed by the Ministry of Foreign Affairs of the Netherlands.