Catalyzing Capital for the Transition toward Decarbonization: Blended Finance and Its Way Forward

This paper explores blended finance both in principle and in practice based on extensive literature review and case studies of blended finance vehicles. Specifically, the paper examines the role and application of blended finance for decarbonization in developing countries, organizing them around five themes: 1) changing features of climate finance, where we observe a shift from a model of direct investment to a layered mechanism with thicker and lengthened value chains; 2) governance of blended finance, focusing on how blended vehicles originate, structure, and function; 3) transparency, which has significant implications on monitoring and evaluation, scalability, and impact; 4) additionality, whose interpretation and application need to be broadened to improve the quality and effectiveness of climate finance; and 5) transformative impact, which every blended finance vehicle strives to achieve but with various interpretations and applications. The paper investigates, and draws insights from, three cases: the Global Energy Efficiency and Renewable Energy Fund (GEEREF), the Climate Public Private Partnership (CP3), and Climate Investor One (CI1). The paper concludes with a proposed research agenda that can assist in enhancing the potential for blended finance.