How Philanthropists and Impact Investors Can Engage in Blended Finance

Blended finance is emerging as a powerful approach to mobilize private investment by combining it with catalytic capital to address market gaps and scale impact. While philanthropists and investors are increasingly looking to leverage blended finance models, many remain uncertain about how to engage effectively. 

Roots of Impact in collaboration with the Center for Sustainable Finance and Private Wealth organized a webinar bringing practitioners and investors together to explore how different actors across the capital spectrum can engage in blended finance. What value does it bring from a de-risking and impact enhancement perspective? How can it be used to unlock capital for high-impact companies and projects that would otherwise be difficult to finance? What role can the different actors play in facilitating blended finance models? 

The session also explored opportunities beyond investing in standardized blended funds, and focused on the importance of aligning incentives for better outcomes.

What the session highlighted: 

• The different types of blended finance and the various opportunities for philanthropists and private investors to engage. 
• Alternative ways to engage, beyond standardized blended funds
• How to define success and the factors that drive it

Questions from the session

Wondering if you had any experience using voluntary certification schemes (e.g. Fairtrade, Rainforest Alliance, FSC) to support outcome-based structures?

Yes, there is experience in this space, and it is changing significantly. While there are concerns around the integrity and quality of voluntary certification and credits, there are also an increasing number of companies and projects that are built around the revenue streams generated through these mechanisms. In some cases, without this revenue stream, the projects would not happen.

However, there is a need to be cautious because these projects can become heavily dependent on credit prices and existing commitments. More broadly, certification and carbon finance can provide a source of funding that fundamentally changes the economics of projects, making activities that are environmentally or climate-positive financially viable.

Considering the different types of risk that required blended finance, what are the minimum characteristics of the business model or development goal that it has to be to attract concessional/philantropic capital? There are mature or early stages models to prioritize to cover all?

There is no single set of minimum characteristics—it depends on the specific situation and, importantly, the type of risk that blended finance is intended to address.

Blended finance can be particularly useful for macro-level risks that an entrepreneur or project has little control over, such as political instability, currency risk or changes to the tax regime. Guarantees or first-loss capital can help address these risks and make investments viable in markets where conventional investors may otherwise be unwilling to invest.

It can also address implementation risk, where a business or project has significant impact potential but there is uncertainty over whether it can successfully execute its plans. In these cases, catalytic capital can support technical assistance, incentives and advisory support to improve execution and impact.

However, blended finance cannot compensate for a fundamentally weak business model. Traditional due diligence remains important to assess the scalability and viability of the business from both a commercial and impact perspective. For example, if the market itself is too small, concessional capital will not solve the underlying problem.

The key is therefore to distinguish between perceived/structural risks that blended finance can address and fundamental business risks that it cannot. The amount of concessional capital also needs to be carefully calibrated: enough to address the relevant risk and unlock investment, but not so much that the business becomes unnecessarily over-subsidised.

Note: The speakers did not give a definitive preference for prioritising mature versus early-stage models. Their response instead focused on the specific risk being addressed and whether catalytic capital can meaningfully address that risk.

In which sectors is blended finance commonly used or where is it most applicable?

Blended finance has been used across multiple sectors. The largest concentration of blended finance deals in recent years has been in climate and energy, but it is also used across SMEs in the agricultural space, health and education. Historically, blended finance was primarily used for infrastructure financing, but newer developments have expanded its application to high-impact enterprises. It can be particularly relevant for sectors or business models that are inherently difficult to finance and where catalytic capital can help make the investment viable.

I get two different questions from my family members depending on their generation.  Older gen: "Why don't we just stick to traditional investment (which we know how to do well), and do traditional philanthropy with the (high) proceeds from investments?  From the younger generation: "Doesn't blended finance just enrich the businessmen for which we remove risk by taking the junior layer of capital?"  Can you help me with the answers?

The emergence of impact investing reflects the recognition that investment itself can be a highly effective way to create impact, rather than relying solely on traditional investments followed by philanthropy. However, there are limits to what impact investing alone can achieve. Some business models and sectors have risk-return characteristics that prevent them from attracting sufficient investment, which is where blended finance becomes necessary.

Blended finance allows catalytic capital—a subsidised form of capital—to help bring high-impact opportunities to life or scale them. This provides a way to use the full spectrum of capital, rather than treating investment and philanthropy as two separate approaches.

On the concern that blended finance simply makes investors richer by absorbing their risk, the speakers emphasised that catalytic capital should come with conditions. Providers should not simply provide patient, flexible and low-cost capital and leave it to investors to decide how it is used. Instead, the capital should be structured around clearly defined conditions and impact objectives.

From a broader perspective, traditional investment and philanthropy alone are not sufficient to close the sustainable development gap. Blended finance can embed impact incentives directly into investment structures, allowing market-based organisations to achieve impact at scale,