What is blended finance, and why it matters

Global society is making progress in funding solutions to challenges such as climate change and poverty. By 2025, environmental, social and governance -related investments are expected to more than double to about $50 trillion.^footnote1 This growing wave of sustainable finance is helping fund renewable energy facilities, increase sustainable food production, advance technological breakthroughs and more. The challenge now is to get capital to where it’s needed most, and an approach known as blended finance is helping the public, private and nonprofit sectors collaborate on projects that would otherwise be very difficult to get off the ground.

Blended finance lets investors choose different risk tolerances while all participating in the same project. Often used in real estate transactions, it is also proving to be an effective way to get capital to critical, but hard-to-fund projects. The approach can bring together philanthropy, government funding and private sector investors with different risk and return expectations. Those willing to take more risk can act as a capital cushion for investors who need to take less risk but are interested in financing high-impact projects.

This kind of flexibility is especially important when considering developing nations, where sustainable finance could have an outsized impact on social and environmental issues. Increasingly, the mission for leaders looking to address sustainability and equality issues is to innovate how to get help to where it’s most needed, and in ways that benefit everyone. For example, as of 2021, developed nations lead the way in making the transition to an economy powered by renewable energy sources.^footnote2 To some extent, this is because in developing nations it is more difficult to fund critical projects: Risks are higher, markets are not as mature and there is greater instability to contend with. And yet, developing nations could benefit most from sustainability efforts and economic opportunity. “The world has trillions of dollars to invest, but the question is, can you get it organized?” says Brian Moynihan, chairman and chief executive officer of Bank of America. “We have to mobilize the entire capitalist system to move the needle on challenges this large.”

When the World Bank Group, other development banks and global financial institutions such as Bank of America use their resources not just to make direct loans and other financing structures for development, but to leverage other investors — that’s when capital can start building to a scale equal to the world’s challenges. “A single project can benefit from the combining of different investor risk tolerances and expected rates of return,” Moynihan says. “That’s what blended finance is about. There’s the potential to mobilize vast amounts of capital without sacrificing private capital returns.”

To help move that process along, in 2018 Bank of America announced an initial allocation of $60 million to create the Blended Finance Catalyst Pool, which supports climate resiliency and access to clean energy, affordable housing and water and sanitation. Bank of America co-invests with development banks, foundations, institutional and private equity investors and other financial institutions to scale funding that addresses the SDGs.

Since 2007, Bank of America has provided more than $350 billion to environmental sustainability. Learn more about Bank of America’s commitment to transitioning to a more sustainable economy and its efforts to realize social equality. These include a new goal of mobilizing and deploying $1.5 trillion in sustainable finance capital by 2030 in support of the SDGs.

3/1/2023