This op-ed was originally published in Impact Alpha.
As President Trump begins his second term, uncertainty pervades climate, development, and sustainable finance communities. His first few days in office have already seen an order to withdraw from the Paris Agreement and a 90 day pause on foreign assistance. If history is any guide, we can expect further rollback in climate action and a retreat from the multilateralism critical to advancing the Sustainable Development Goals.
At the same time, we have already seen unprecedented cuts this year in development aid in other countries such as the Netherlands and Germany.
Amidst this uncertainty, one tool stands out as uniquely resilient: blended finance. Designed to mobilize private capital by de-risking investments in sustainable development in emerging markets, blended finance has proven itself in recent years to be an adaptable and resilient approach, particularly in challenging political and economic climates.
The blended finance market has witnessed unprecedented growth in recent years, signaling a maturing ecosystem that is increasingly capable of mobilizing private capital at scale. In 2023, private sector capital flows to climate blended finance deals grew by almost 200%. That same year witnessed the emergence of multiple “whale deals”—transactions exceeding $1 billion—demonstrating that the sector can consistently blend billions and attract private investment. This marks a watershed moment for blended finance, showcasing its ability to operate at a scale and sophistication necessary to meet today’s global challenges.
New players
Recent landmark transactions highlight this evolution, demonstrating how innovative financial structures are unlocking billions in private capital for critical development needs. For example, The SDG Loan Fund, closing at $1.11 billion, leveraged catalytic capital from FMO and the MacArthur Foundation to unlock private investment for energy and agriculture in emerging markets, while ALTÉRRA, a $30 billion global investment fund focused on climate solutions, was launched with $5 billion in catalytic capital specifically allocated to support the global south.
Meanwhile, Singapore’s FAST-P initiative aims to raise $5 billion for green and transition projects in Asia. This trend marks a significant evolution and indicates that blended finance has reached a level of scale and utility where it can weather political, social, and economic storms. Even as COP29 concluded in late 2024 without significant consensus, delegates appeared to agree on one point: achieving global climate goals will require increased participation from the private sector.
Multilateral development banks (MDBs), development finance institutions (DFIs), and foundations remain central players. But the entry of new actors such as insurance companies play an enabling role in driving the creation of larger scale innovative structures that make blended finance more versatile and resilient. For instance, Respira utilized a Voluntary Carbon Credit Insurance product developed with Howden Group to mitigate risks like fraud and regulatory non-compliance, enabling the scaling of reforestation projects and securing $510 million in investments.
Institutional investors, including pension funds, are also beginning to incorporate blended finance as a tool to meet sustainable investment mandates, enabling greater participation in high-impact projects. PensionDanmark, with over €40 billion in assets under management, has invested in blended finance funds across agriculture, energy, and financial services sectors to support sustainable development. Similarly, Swedish pension provider Skandia has committed $100 million to the SDG Loan Fund, targeting key sectors for climate transition in developing countries. The result is an ecosystem that not only continues to grow but becomes increasingly adaptive to changing circumstances.
Filling the void
Historical precedent highlights why blended finance is likely to maintain its momentum. In the wake of a global pandemic, escalating geopolitical conflicts, natural disasters, inflationary pressures, and mounting debt burdens – a period when global climate and development finance came under pressure – blended finance mechanisms stepped into the void. While public budgets shrank, blended finance vehicles were able to mitigate investment risks in critical sectors like renewable energy and infrastructure.
We anticipate that as development aid constricts, the need for blended finance will only grow. More restrictive policy environments will only amplify the need for tools that can overcome barriers to investment in developing markets. Blended finance is specifically designed to counteract prohibitive conditions, using public and philanthropic funds to reduce risks and incentivize private sector participation. This de-risking function makes blended finance particularly well-suited to ensuring that critical investments in climate resilience and sustainable development continue even in the face of political headwinds.
This pivotal juncture demands immediate action. The international community must seize this moment to double down on blended finance as a critical tool for global development. Governments, DFIs, and philanthropic organizations should enhance their support for blended finance mechanisms, prioritizing the standardization and scaling of successful models. Private investors, too, have a vital role to play, leveraging these mechanisms to align their portfolios with sustainable outcomes while achieving attractive returns.
While political uncertainty may test the resilience of global development efforts, it also highlights the enduring value of innovative financing models. By embracing blended finance as a cornerstone of climate finance and sustainable development, we can ensure that progress continues—regardless of the political landscape.
