Blended Finance’s Second Act: The OECD Renews Guidance to Effectively Align Development Goals and Investment Returns

A decade after blended finance entered the global lexicon, the challenges it was meant to address have multiplied – and so has its relevance. Public budgets are tightening, debt levels are climbing, and political priorities are shifting inward. In this context, several donors have announced cuts in the budgets allocated to official development assistance (ODA), including France, Germany, the United Kingdom and the United States. After reaching a peak of USD 223 billion in 2023, the OECD projects a 9 to 17 percent drop in ODA in 2025. This comes on top of a 9 percent drop in 2024. The outlook beyond 2025 remains highly uncertain but the political context does not bode well.

Yet, financing needs across the developing world are greater than ever. From climate adaptation to energy access, from health system improvement to biodiversity protection, the financing gap to achieve the Sustainable Development Goals (SDGs) is now estimated at more than USD 4 trillion annually. Moreover, governments in developing countries, grappling with mounting fiscal pressure and soaring debt service costs, are facing painful trade-offs – often at the expense of essential development spending.

In that context, blended finance can play a crucial, catalytic role, helping traditional co-operation deliver more for the SDGs. The main idea is to use development finance to lower the risk-return profile of investments in developing countries to facilitate the flow of commercial capital towards currently less investable sectors and regions. By expanding the investable universe, blended finance allows investors to pursue financial returns in high-impact projects in emerging markets that would otherwise remain out of reach.

In practice, blended finance can take many forms: concessional loans or guarantees that mitigate risk for private investors, first-loss tranches in structured collective investment vehicles (CIVs) that enhance the risk-return profile for private investors or technical assistance that makes projects bankable. The goal is not to subsidise private investors but to optimise the allocation of risk and return so that commercially viable investments can advance in sectors or markets that would otherwise remain underfinanced.

Large asset managers already recognise blended finance as an opportunity to gain exposure to high-impact, high-growth markets while managing risk: BlackRock, the world’s largest asset manager, has co-designed – and invested in – several blended finance CIVs. JP Morgan, Allianz or Mirova are also leading private actors in this space. Moreover, the investment opportunity presented by developing countries from investors, particularly institutional, is at a high.

However, while volumes of private finance mobilised by development finance interventions have grown steadily, the current pace of mobilisation still falls well short of the scale needed to close the financing gap. Most private finance is mobilised by multilateral development banks (MDBs), highlighting how much room there is for bilateral actors to scale up their use of blended finance and deliver on their respective development commitments.

Global Momentum, Against the Odds

Paradoxically, as traditional aid models are put under pressure, recent global discussions and events show a strengthened commitment to deliver on a renewed development finance architecture.

Earlier this year, close to 60 Heads of State and Government gathered in Sevilla for the Fourth International Conference on Financing for Development (FFD4) – happening once every ten years, the last edition of the event had produced the Addis Ababa Action Agenda. Although it took place on a challenging backdrop for development, the Conference gathered more than 15,000 attendees and succeeded in turning concern into revived determination to reshape the development finance architecture – including through effective private finance mobilisation and more focused blending efforts. The international conversation seems to have entered a new phase: one centred less on whether blended finance should be used, and more on how to use it well.

This sense of renewal is expected to carry through to COP30 in Belém, where the Baku-to-Belém Roadmap will be presented. The roadmap calls on “all actors to work together to enable the scaling up of financing to developing country Parties for climate action from all public and private sources to at least USD 1.3tn per year by 2035.” Effective private finance mobilisation by development finance providers – bilateral providers especially – is essential if leaders want to maintain credibility in their climate diplomacy. It should not only be about setting goals but also about engineering the financial mechanisms needed to reach them.

The OECD’s Push to Move From Renewed Ambition to Concrete Action

Through its Development Assistance Committee (DAC) and Community of Practice on Private Finance for Sustainable Development (CoP-PF4SD), the OECD sets standards and provides practical guidance on how to measure mobilisation, structure blended finance transactions and assess their development impact.

On 22 September, OECD Secretary-General Mathias Cormann launched the OECD DAC Blended Finance Guidance 2025, an update of the initial Guidance published five years ago. The document offers both strategic advice and practical insights for policymakers and practitioners seeking to use blended finance more effectively. It takes stock of the evolution of the blended finance ecosystem, draws on lessons learned and numerous stakeholders’ feedback. As Mary-Beth Goodman, OECD Deputy Secretary-General, put it, “the OECD DAC Blended Finance Principles have become a go-to reference internationally and have contributed to ensuring high quality in blended finance. Updating the Guidance ensures that it remains fit for purpose both for policy makers and for practitioners in blended finance.”

To mobilise private finance at scale, the Guidance puts forward several instruments and approaches that we now know emphasise the efficiency, simplicity, speed, cost and volume that institutional investors such as pension funds and insurance companies require:

• Securitisation, which can scale mobilisation by transforming a diversified pool of assets into securities with credit ratings that meet a range of investors’ risk-return preferences.
• Guarantees (particularly unfunded), which have proven an effective instrument to mobilise private finance at scale by sharing risks with limited use of development finance.
• Structured funds (2- and 3-tier), which have been identified as an effective instrument that can be standardised and replicated to scale mobilisation.
• Green, social, sustainable and sustainability-linked (GSSS) bonds, which have proven to be a powerful tool to drive financing at scale towards green or social projects, or to incentivise sustainability outcomes.
• The 2025 Guidance includes case studies on the instruments listed above but also on other thematic areas such as local currency finance, enabling environments, and transparency. Those are explicitly designed so that policymakers can replicate effective designs rather than reinvent from scratch.

Making blended finance work at scale is not only a technical challenge – it is a political one. Delivering on global commitments for climate and development will require donor governments to back their words with strategic risk-taking, institutional alignment and measurable accountability. The OECD’s renewed guidance provides the tools, it is now up to political leaders to use them – turning fiscal constraint into financial innovation, and ambition into lasting impact.

About the Authors

Paul Horrocks is Head of the Private Finance for Sustainable Development Unit at the OECD Development Co-operation Directorate. Paul is leading work on policies aiming at encouraging greater private sector investment into developing countries, in particular mobilisation approaches, such as blended finance, that governments can adopt in order to reach scale and development impact.

Paul has extensive senior experience in leadership positions having been a Senior Executive at the Australian Federal Treasury, working on the domestic infrastructure market as well as providing policy advice during Australia’s G20 presidency on international policy challenges. Senior experience in the European Institutions in Brussels, having worked on such key initiatives such as the deepening of European capital markets in response to the 2008 financial crisis.

Paul has degrees from the University of Swansea and of Liverpool as well as an Executive MBA from Vlerick Business School in Belgium. He also provides executive teaching at the Oxford University and the Maastricht School of Management.

Noémie Benfella is a Junior Policy Analyst within the Private Finance for Sustainable Development Unit at the OECD Development Co-operation Directorate. Noémie contributes to development finance research aiming to bridge the gap between policy and action – including through the promotion of effective blended finance mechanisms.

Prior to joining the OECD, Noémie worked for France’s public sector within the French Ministry for the Ecological Transition and France’s public financial institution Caisse des Dépôts. She also has experience working for the United Nations on the Sustainable Development Goals and the 2030 Agenda.

Noémie has a master’s degree in international development from Sciences Po Paris’ School of International Affairs.