The enormous funding gap needed to address the UN Sustainable Development Goals stands at around $3.9 trillion each year. However, there is around $100 trillion of unused private and institutional money seeking returns every year. That’s a big pool of untapped capital out there waiting to be mobilized.

Government officials, NGOs, philanthropic organizations and financial institutions broadly agreed that blended finance structures will play an increasingly prominent role in delivering outcomes aligned to the UN Sustainable Development Goals (SDGs). We have seen a flurry of announcements on new blended finance initiatives. At the Business & Philanthropy Climate Forum at COP 28, three organizations collectively announced $5bn in blended finance commitments which are aimed at unlocking long-term capital of $20 million, turbocharging the climate transition in emerging economies. Then at this year’s World Economic Forum, the Luxembourg government joined the SDG Impact Finance Initiative founded in 2021 by the Swiss government and UBS Optimus Foundation to raise CHF 1 billion in capital towards the SDGs.

But what exactly do we mean by blended finance?

Blended finance is the use of catalytic capital from public or philanthropic sources to increase private sector investment in sustainable development. It allows organizations with different objectives to invest alongside each other while achieving their own objectives (whether financial return, social impact, or a blend of both).

Philanthropic or public capital is used strategically by incentivizing commercial investment with credit support structures, so private investors are offered an acceptable risk/return profile. This encourages them to commit additional private capital, thereby increasing the pool of available development funding. It mobilizes private capital towards high-impact social and environmental projects that may be overlooked by market rate capital. [1]

At UBS Optimus Foundation, we have been thinking about the main trends in blended finance in 2024 and beyond.

More nature, more climate finance

While climate change is one of the most important topics of our time, there is a growing recognition of the need to also urgently take action on biodiversity loss. Solutions harnessing innovation, leveraging science, and implementing technology-driven approaches require vast sums of money. Blended finance structures can fund the solutions that capital markets cannot fund alone owing to their risk/return constraints. Given the urgency of both climate change and biodiversity loss as issues and the need to develop more nature-based solutions, we will see continued demand in blended finance initiatives.

An increased focus on adaptation, (which is much needed, given the climate crisis is already here and many areas are suffering negative impacts already), provides not only greater need for financing, but also greater opportunities to deliver impact at scale.

Outside developed markets, almost half of climate blended finance transactions have been concentrated in sub-Saharan Africa in recent years. Latin America and the Caribbean accounted for around 24 percent respectively. [2]

Looking ahead, South and Southeast Asia are on the front line of climate action, given the urgent need to transition their economies to using more sustainable energy sources plus the increasing threat of biodiversity loss. From fishing communities in the Philippines, our partners Blue Alliance shared some impressive testimonials in this video showing how our early stage blended capital is helping to protect and regenerate coral reefs, increase marine biodiversity, and enhance livelihoods, all while working toward a self-sustainable revenue model.

More philanthropists are seeking to leverage private capital investments

The days of grant making as the only tool in a philanthropist’s toolbox appear to be numbered. Philanthropists are increasingly interested in leaving a lasting and sustainable legacy and are therefore more strategic in their thinking. Being more strategic also means seeking to catalyze private capital investments as this enables them to amplify the impact they can achieve.

By catalyzing private capital investments, philanthropy can multiply its impact quickly and better achieve the UN Sustainable Development Goals. Take for example the SDG Outcomes Initiative: the development finance institution of the UK, British International Investment (BII), and the US equivalent, the Development Finance Corporation (DFC), joined UBS Optimus Foundation in this pioneering blended finance structure to catalyze and amplify the investments from UBS clients and family offices to deliver social and environmental impact across developing countries.

Measurement is Key

Blended finance structures rely on catalytic finance from philanthropists or public funders, and their primary motivation is impact. Therefore, accurate impact data data is vital for both raising and continued engagement of catalytic capital. Without transparent and accurate impact data, engaging catalytic capital is challenging.

That is why trust in impact data is crucial and therefore we believe transparency and accountability are key. We already observe a culture of transparency that is helping to promote the sharing of knowledge, creating accountability, and we invest in and support initiatives which are innovating and scaling accuracy and transparency in data collection and analysis.

With the field evolving we expect to see it coalescing around standards in impact management and measurement. This development will be good to build more trust and help attract more investors to blended finance.

Designing for local needs

Blended finance structures cannot deploy their capital successfully without taking specific local contexts, market conditions, as well as local regulatory and legal frameworks into account.

On the other hand, as more blended finance initiatives look to deploy capital, the conditions for that capital need to be sufficiently flexible to ensure there are enough markets this capital can be deployed into.

In that sense it is important for blended finance funders to do their homework first and design structures that strike a good balance between local relevance and not being too restrictive and narrowly focused on certain markets to the detriment of others.

2024 and beyond

As providers of blended finance solutions, we need to understand the factors that will make them successful.

At UBS Optimus Foundation, we have fully embraced blended finance as a powerful approach to drive more and better impact. In 2024 and beyond, I believe that blended finance is one of the biggest growth areas in philanthropy. Only by integrating tools and business principles to create scalable and innovative solutions to social and environmental challenges, can we create a more accountable, results-orientated system that appeals to philanthropists, including the next generation of donors.

Maya Ziswiler is the CEO of UBS Optimus Foundation

[1] Convergence definition of blended finance.

[2] Convergence Blended Finance Report 2023