BII And BCG Unveil Toolkit To Simplify Blended Finance

In a bid to unleash billions of dollars of private finance for climate action and sustainable development, British International Investment (BII), the UK's development finance institution, and Boston Consulting Group (BCG) have unveiled a new framework to streamline the convoluted structure of blended finance. Their joint report, Scaling Blended Finance, presents a groundbreaking toolkit that provides much-needed clarity and order to a financing model long considered promising but notoriously challenging to access.

Blended finance, bringing together public, philanthropic, and private money to underpin projects within developing markets, has a fundamental part to play in meeting development deficits and tackling climate issues. Nonetheless, amid the promise held within it, blended finance has traditionally under-performed in channeling large volumes of private funding, attracting just an estimated $15 billion in revenue each year. One such de-motivator is complexity—high-cost, custom solutions that frighten off institutional investors looking for easier, plug-and-play deals.

Leslie Maasdorp, BII Chief Executive, stressed the need to rethink blended finance fund design. "Our report highlights how a blended finance fund can be a made-to-measure solution, not a bespoke one that understandably is off-putting to everyone except the most committed impact investors," he stated. The new framework toolset, created in partnership with BCG, is designed to simplify that complexity, providing useful tools that standardize fund design and make it more available to a wider set of investors.

The report describes two main tools at the center of this framework. First is a fund typology that categorizes more than 90% of current blended finance funds into five distinct archetypes. These archetypes are characterized by considerations like purpose of the fund, investor risk appetite, and underlying asset risk profile. By mapping out fundamental structures in the market, this typology enables fund managers to create new funds more effectively, through tested templates that have already been shown to raise capital.

The second key innovation is a scorecard system that provides a standard approach to assessing the structural soundness of blended finance funds. The scorecard evaluates how closely a fund is aligned with investor interests, allowing both concessional (public or philanthropic) and commercial investors to determine the quality and appropriateness of a fund. The tool is designed to promote transparency and trust, allowing for a more transparent conversation between investors and fund managers.

Rich Hutchinson, BCG's Global Head of Social Impact, emphasized the systemically embedded nature of the issue: "Scaling blended finance isn't simply a technical challenge—it's a systems challenge. These tools impose order on that complexity and provide fund managers and investors a common language to drive progress faster." To give it this common framework, BII and BCG hope to leap the industry forward from ad hoc fund development to scalable, replicable solutions.

The project comes at a timely juncture when the developing world and climate-change projects are in desperate need of funding. Conventional commercial capital still skirts these regions because of perceived risks and the lack of marketable financial structures. By introducing a streamlined methodology, BII and BCG aim to significantly reduce the obstacles that have long prevented private capital from flowing into these vital sectors.

Their strategy also answers to increased demand on the part of institutional investors for high-integrity impact investments that support both their financial and sustainability goals. The approach doesn't simply serve impact-first investors, but also attract return-oriented capital by demonstrating how blended forms can be structured to allocate risk appropriately and provide competitive returns.

Apart from technical instruments, the report repositions blended finance as a scalable rather than an experimental or niche approach. It situates blended finance funds as vehicles that, when structured correctly, can direct capital at the necessary scale to achieve the Sustainable Development Goals and climate objectives.

With the assistance of this new set of tools, fund managers can now more effectively design and propose blended funds that are in harmony with investor needs. Investors benefit from a distinct, reliable method for evaluating opportunities, allowing for quicker decision-making and increased assurance in investing.

The partnership between BII and BCG therefore represents a milestone in the development of blended finance. By streamlining design, harmonizing investor incentives, and providing actionable tools, the Scaling Blended Finance approach may usher in a new era of sustainable investing, where private capital takes a leading role in solving the world's most intractable problems.