As the gap between the poorest people and the rest continues to widen, the international development community has become increasingly focused on the need to raise additional volumes of finance to fulfil the ambitious goals set out in the Sustainable Development Goals, including the underpinning principle to leave no one behind. A key trend across aid donors has been to turn to private sector actors as the source of such finance, including through innovative investment structures such as blended finance.
However, this is not always being done with due consideration of available evidence on the impact that such private sector involvement may have on sustainable development outcomes and on poverty reduction in particular. Our discussion paper assesses the theories of change put forward by 12 key blended finance actors alongside impact data and information published by 56 development finance institutions, multilateral development banks and donor agencies involved in blending, and finds that a number of gaps in logic and transparency exist. If addressed, these would enable us to demonstrate whether and why investing ODA in blending can be an effective use of aid resources.
Poverty is a complex phenomenon and so eradicating it will require a wide range of actions. Blended finance can be an important tool to facilitate the positive contribution of private finance to sustainable development and poverty reduction, but before scaling up investments, the assumptions around how its impact will materialise must be addressed.
This paper recommends that in order to take the conversation forward donors should focus on a small number of fundamental questions – ‘who benefits?’, ‘how?’ and ‘when?’ – and on how existing reporting standards can be harnessed to facilitate the collection and use of the necessary data to answer them. The questions put forward in the conclusion revolve around the intended and unintended impact that investments have on the poorest and most marginalised people – thus ensuring that their progress remains at the core of ODA allocation decision-making.