Even before the COVID-19 pandemic, more investors were embracing blended finance in sustainable investing and global development funding. Blended finance uses catalytic capital from governments and philanthropies as a way of attracting private sector investments to build the capital required for achieving global targets like the United Nations’ 17 Sustainable Development Goals (SDGs).
With estimates that private external financing of developing economies could plummet by $700 billion in 2020 compared to 2019 levels, the Organisation for Economic Co-operation and Development (OECD) says that the need for collaboration among different types of funders is more acute than ever.
Reporting Challenges in Blended Finance
At the same time, development experts are paying increasing attention to a serious challenge that blended finance faces: a dearth of rigorous reporting and evidence proving the impact that private sector funding has on sustainable development and poverty reduction. One recent Development Initiatives study of projects across 56 development finance institutions, multilateral development banks, and donor agencies found substantial gaps in the reporting of questions like who the ultimate beneficiaries of blended finance projects are and what contribution blended finance investments make in reducing poverty.
Other reporting gaps include the nature of projects being financed—a concern because private sector finance may not always be the most beneficial funding source. For example, the Development Initiatives report explains that private healthcare investments could result in higher costs to patients, not better access to services.
Why does this situation exist? One factor is a lack of standardized frameworks and tools among multiple financial institutions and other funders, making it difficult to measure and compare impact. By definition, blended finance involves a variety of actors, many of whom may need to follow different rules. For example, because some development financial institutions are private entities, they may not have to adhere to the same strict procurement regulations that government agencies must follow, the OECD notes.
Addressing Impact Measurement Gaps
Blended finance network Convergence highlights several benefits to increasing transparency in the field. First, more impact measurement information could help investors understand expected risks and returns, potentially attracting more capital. Second, it could lead to more accountability to stakeholders from the different players involved. Potential funders might also be better equipped to design and implement plans effectively.
To provide better measurement and reporting, development finance experts like the OECD recommend that all blended finance participants adopt a common monitoring and measurement framework. According to Convergence, that should mean agreeing from the onset on expected outcome and assessment methods, with a baseline and end line analysis. Development Initiatives also suggests focusing reporting on a small number of important indicators that can be used across sectors by multiple funders.
Another recommendation Development Initiatives cites is to tap existing reporting standards, rather than trying to reinvent the wheel. For instance, the Tri Hita Karana Roadmap for Blended Finance is a coordinated international framework formed in 2018 to draw private sector capital toward the SDGs.