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Achieving the United Nations SDGs will require massive investment in developing countries. Blended finance, which combines concessional public funds with commercial funds, can be a powerful means to direct more commercial finance toward impactful investments that are unable to proceed on strictly commercial terms.

Blended finance has grown in the past decade. In 2021 it represented an aggregated financing of over USD160 billion, with annual capital flows averaging approximately USD9 billion since 2015.

One of the most compelling aspects of blended finance is that it uses relatively small amounts of donor funding to rebalance a project's risk profile.

With this small infusion of concessional funding, pioneering investments become attractive to private investors. In emerging markets, the flow of private capital is constrained by investors' perceptions of high risks and low returns.

When investors perceive a high risk, either because of pioneer nature of a project or a challenging environment, they tend to expect commensurately high returns.

A version of this article appears in the print on May 12, 2022, of The Himalayan Times.