*This blog post is part of a new series that will look at the impact of blended finance, including key opportunities and challenges for achieving, measuring, and disclosing the impact of blended finance transactions. Go to the bottom of the page for other blogs from the series. *

Blended finance aims to unlock greater volumes of private investment for sustainable, market-based solutions aligned to the Sustainable Development Goals (SDGs), including poverty reduction, reduced inequalities, and climate action. But as blended finance increasingly becomes an important part of the development finance landscape, there’s been a renewed focus on impact measurement and reporting, with many development practitioners asking:

What development impact can blended finance achieve and how effectively can it do so?

The call for evidence

The growing calls for better impact measurement and reporting in blended finance are part of a global trend towards promoting greater accountability and improving – and proving – the effectiveness of development finance more broadly.

There have been multiple standards and initiatives to support better impact measurement and reporting for development finance, including the DCED Standard, the OECD Social Impact Investing Initiative, IFC’s new Operating Principles for Impact Management, and the recently updated Impact Reporting and Investment Standards (IRIS+).

Better impact measurement and management are critical to the practice of blended finance – and all forms of development finance – for three key reasons:

• Benchmarking: Understand where and how blended finance has been deployed to establish common expectations of development impact and financial returns.
• ‘Better blending’: Determine efficient levels – and types – of concessionality as well as effective pathways to impact to improve vehicle design and implementation.
• Accountability: Contribute to a results-based culture that demonstrates accountability to stakeholders, from funders to beneficiaries, and minimizes ‘impact washing’.

However, to date, reporting on the development impact of blended finance transactions has been limited.

Understanding the impact of blended finance

It is important to recognize that blended finance is a structuring approach, not a development activity. Blended finance structures allow different types of capital (whether impact or commercially oriented) to invest alongside each other while achieving their own objectives (whether financial, social, or a blend). Additionally, blended finance approaches can be deployed across a broad range of development activities – from increasing the resilience of smallholder farmers to supporting sustainable power generation. It can therefore be hard to measure the impact of blended finance transactions in a standardized way.

Good practice blended finance vehicles have a clear theory of change with measurable impact outcomes. Theories of change outline the pathway(s) to development impact for a specific development activity, identifying how development activities (e.g., providing finance to farmers) lead to outputs (e.g., credit to purchase seeds), outcomes (e.g., improved harvests), and ultimately impact (e.g., higher incomes and better livelihoods).

The figure below outlines the theory of change of the Private Infrastructure Development Group (PIDG), a group of blended funds and blending facilities (“companies”) supporting pioneering infrastructure projects in the poorest and most fragile countries.

Figure 1: Private Infrastructure Development Group Theory of Change (adapted from here).

We believe there are two levels of impact of blended finance transactions – impact related to the underlying activities financed and impact of the blended finance approach itself. At the core, blended finance supports the theories of change of underlying development activities financed. However, the impact of blended finance as an approach can be additionally characterized with the following metrics:

• Mobilization: Unlocking additional capital for the SDGs, beyond current, insufficient levels of official development assistance and private investment flows
• Sustainability: Reducing the share of capital from concessional sources over time until markets no longer required subsidized finance
• Replication: Demonstrating the viability of new markets and new business models to private investors
• Financial Additionality: Addressing market failures, delivering financing to areas where investments are not yet viable

Making impact measurement in blended finance more effective

As it matures, the blended finance community is beginning to adopt more consistent measurement of unique blended finance metrics such as additionality, mobilization, and leverage as well as more transparent practices around reporting on impact outcomes.

To build more evidence to support ‘better blending’, development impact should be:

1. Tracked, reported, and communicated. Impact outcomes should be regularly measured and disseminated, and include a baseline and endline analysis where possible. Metrics should be specific and measurable, and flow directly from the theory of change.

2. Standardized. Standardization is key to benchmarking and learning. The multiplicity of actors with various objectives and different understanding of what development impact is makes it hard to agree on a common theory of change and framework for assessing results across blended finance. The Tri Hita Karana Roadmap for Blended Finance is one example whereby donor governments and other blended finance stakeholders are engaging in a coordinated effort to increase standardization around impact.

At the end of the day, blended finance should be exclusively driven by the objective of mobilizing additional sources of financing to achieve greater amounts of development impact. Therefore, impact measurement and reporting – both metrics unique to blended finance and metrics specific to the underlying activities – must be an integral part of blended finance, not an add-on. Each blended finance transaction should be clear about its development objectives and target impact outcomes.

Other blogs from our impact series:

• The state of impact metrics in blended finance
• How WaterEquity harnesses blended finance for impact in the water and sanitation sector
• Blended finance 2.0 must address transparency and accountability
• Blended finance in action: how Jibu brings clean water and economic opportunity to thousands

By Justice Johnston, former Manager at Convergence