Blended Finance
Executive Summary
Key Takeaways
- ✓ Blended finance is the structured use of concessional capital to mobilise additional commercial capital toward a climate or development outcome that commercial capital alone would not finance on its own.
- ✓ The concessional layer most commonly absorbs first-loss risk or provides a guarantee, changing the risk profile, and therefore the pricing, of the commercial capital sitting alongside it in the structure.
- ✓ A blended finance structure's effectiveness is measured partly by its mobilisation ratio, the commercial capital mobilised per unit of concessional capital deployed, though this measures financial leverage rather than the underlying climate outcome's cost-effectiveness.
- ✓ A blended finance model should represent each capital layer's specific terms and position explicitly, rather than collapsing the structure into a single blended return figure.
Definition¶
Blended finance is the structured use of concessional capital to mobilise additional commercial capital toward a climate or development outcome that commercial capital alone would not finance.
How the Concessional Layer Functions¶
The concessional layer most commonly absorbs first-loss risk or provides a guarantee, changing the risk profile, and therefore the pricing, of the commercial capital sitting alongside it. This is the specific mechanism by which blended finance makes an otherwise sub-commercial investment viable for commercial participants.
Why It Matters to the Financial Model¶
See Climate Investment Models for how each layer of a blended structure should be modelled explicitly, with its own position in the return waterfall, and Climate Finance Overview for the capital sources that typically provide the concessional layer.
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Related Pillars¶
Related Technical Guides¶
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Frequently Asked Questions
What is blended finance?
The structured use of concessional capital, most commonly from a development finance institution, multilateral development bank, or dedicated climate fund, to mobilise additional commercial capital toward a climate or development outcome that commercial capital alone would not finance.
How does the concessional layer typically function in a blended finance structure?
Most commonly by absorbing first-loss risk or providing a guarantee, which changes the risk profile, and therefore the pricing, of the commercial capital sitting alongside it, making the overall structure investable for commercial participants who would not otherwise participate.
How is blended finance effectiveness measured?
Partly through the mobilisation ratio, the commercial capital mobilised per unit of concessional capital deployed, though this measures financial leverage rather than the underlying climate outcome's cost-effectiveness, which requires a separate metric such as cost per tonne abated.
How should a blended finance structure be represented in a financial model?
With each capital layer's specific terms and position in the waterfall represented explicitly, rather than collapsed into a single blended return figure that obscures how the concessional layer's terms affect what the commercial layer actually earns.
References
Related Articles
Climate Finance & Climate Financial Modelling
Climate finance is the mobilisation and allocation of capital toward mitigation, adaptation, and transition activity, and climate financial modelling is the discipline of representing that activity's cash flows, risk, and concessionality in a financial model. This page is the hub for the Knowledge Centre's climate finance content: how sustainable, green, and transition finance are distinct but related capital allocation frames, how a climate investment model differs from a standard project or corporate model in its treatment of concessional capital and additionality, how physical and transition climate risk are quantified at portfolio and entity level, and how carbon markets, climate-sector investment, and institutional governance practice build on these foundations as this domain expands.
Climate Finance Overview
Climate finance draws on a distinct set of capital sources, multilateral development banks, dedicated climate funds, development finance institutions, sovereign wealth funds, and private capital, each entering a climate investment at a different point on the concessionality spectrum. This guide maps the main sources and instruments, and sets out how concessionality varies across the capital stack, as the foundation for the more specific climate financial modelling, sustainable finance, and climate investment model guides that follow it.
Climate Investment Models
A climate investment model represents a capital structure that frequently blends concessional, catalytic, and commercial capital toward a climate outcome, and requires an explicit return waterfall showing how each layer's terms interact rather than a single blended internal rate of return. This guide covers how to model concessional and catalytic capital layering, additionality-conditioned eligibility for specific capital tranches, and the return waterfall a blended structure actually produces for each participant.