Beyond blended finance? Time for more philanthropy-powered co-investment

Philanthropy and catalytic finance

Charitable foundations and other philanthropic capital providers are teaming up with development finance institutions (DFIs) to use their increasingly in-demand form of capital to attract the additional investments urgenty needed to tackle today’s critical development crises – climate change (decarbonisation and adaptation), pollution, environmental damage, biodiversity collapse, inequality, poverty – as framed by the UN SDGs.

For instance, in December 2020, the Rockefeller Foundation, a global US-based charitable foundation, and the U.S. Development Finance Corporation (DFC) signed a memorandum of understanding to ‘End Energy Poverty’, a pledge to attract both philanthropic and commercial investors into DFC-led investments in decentralised clean energy projects in favour of remote communities in low-income countries.

In that same month, the Skoll Foundation, another US-based foundation, announced a USD 10 million investment in WaterEquity, an impact investment fund manager focused on access to water and sanitation in emerging markets. The investment will support WaterEquity’s investments to “unlock” additional investments from institutional investors into water and sanitation loans made by – yet again – the DFC.

And a few months earlier, in June 2020, the European Bank for Reconstruction and Development (EBRD) partnered with the corporate foundation of US investment bank J.P. Morgan to jointly finance micro, small and medium-sized enterprises (MSMEs) in Turkey.

The overarching logic of most of these emergent co-financing partnerships involving philanthropic capital is ‘blended finance’, which became the main logic pursued by DFIs to close the yawning financing gap to achieve the UN SDGs including the fight against climate change: by using concessional capital (i.e. capital provided below commercial terms, including philanthropic capital – the most concessional of all forms of capital) to “de-risk” investments and the business environment in which they are made, ‘blended finance’ would allow concessional finance providers to crowd in the trillions of dollars held by large commercial investors and asset managers in the global financial system.

Reclaiming the word “catalytic”

However, after over a decade of promoting more ‘blended finance’ to crowd in additional investment (from billions to trillions), even its most ardent supporters now insist that it is no silver bullet. In fact, in the final couple of years of the 2020 decade, it became increasingly accepted within international development and development finance circles that our approaches to investment are not fit for purpose and that something more radical than reverse-engineering our current investment models is needed. The near-dystopia of COVID-19 has all but affirmed mainstream acceptance of such calls for radical change.

So why do most of the new forms of co-financing with DFIs still restrict the role of philanthropic capital to the “de-risking” of investments for commercial investors?

That is arguably because while challenged, ‘blended finance’ remains the conventional wisdom through which DFIs see the closing of the SDG financing gap. Until compelling, scalable alternatives are found, philanthropic capital providers who ask DFIs how best to apply philanthropic capital to co-finance their investments will more often than not be presented with ‘blended finance’-inspired ideas.

Another factor for the more restricted role of philanthropy in such co-investing approaches is the difference in political power with DFIs and official development assistance (ODA) providers. As government-backed institutions with access to key government decision makers, DFIs and Multilateral Development Banks (MDBs such as the World Bank) wield major influence when it comes to setting overall financing goals and agendas.

The state has been key in creating and shaping markets, not only fixing them.

Excerpt from “The Entrepreneurial State: debunking public versus private sector myths” (Mazzucato), 2013

In her now-seminal book “The Entrepreneurial State” and subsequent writings, rising economics star Mariana Mazzucato levelled an essential criticism of today’s mainstream economics and finance communities’ framing of the role of the state – a criticism which can arguably be extended to their predominant view of the role of philanthropy.

Whether it is the advent of the internet or the Apple iPhone, Ms Mazzucato underscores how reducing the state’s role to de-risking investments and their enabling environments severely underestimates its role in innovation and risk-taking for the greater good.

Something similar can be said of philanthropic capital: sought after by development finance for its patient, risk-taking capacity, philanthropic capital’s role is often restricted to either supporting ‘blended finance’ transactions aiming to attract additional commercial capital into commercial investments or, as the proponents of “catalytic capital” emphasise, a broader support of enabling environment for business. As with the role of the state, the role of philanthropy in co-financing strategies involving institutional funders seems to have been “captured” by the prevailing ‘blended finance’ logic and limited to de-risking in a manner which appears subservient to business and business conditions.

In the name of collective action

We believe that systems change requires an effective coalition of key actors – most often including government (…) – and that philanthropy has the potential to have far greater impact by supporting this type of work.

Co-Impact Fund endorsement of “Embracing Complexity: Towards a shared understanding of funding systems change” report (Ashoka, McKinsey and collaborators), 2019

One of the growing realisations to arise from our present-day investment challenge is the understanding that we are dealing with entangled crises, dyed into the very fabric of our way of life. Tackling them will require focusing less on single-sector or single project interventions and more on taking “whole system” approaches to interventions, including wholesale transformations (green cities, circular economies, inclusive policies, etc.).

With so many actors and factors involved, having a catalytic impact needs to take on a broader purpose than mere de-risking: energising and crowding in people, ideas, inspiration, policy, finance into collective action around a common cause. In other words, after being captured by ‘blended finance’ logic, the word “catalytic” needs to be reclaimed to describe something more ambitious, systemic and inclusive when applied to financing.

It must include incentives to break away from sector-specific approaches to form and sustain partnerships or consortia to address entangled problems (for example slum upgrading, food system resilience, plastic pollution); it must support the research and experimentation required to test social innovation to entangled problems and understand any unintended consequences; it must recognise and address systemic barriers that single point solutions may either be uninterested in (“negative externalities”) or even blind to.

Catalysing stakeholders and resources into tackling cross-cutting problems is the purpose of what professor Mazzucato describes as “missions”: concrete, cross-cutting goals with “clear objectives that can only be achieved by a portfolio of projects and supportive policy interventions.”[1]

“Missions” (and their author, Ms Mazzucato) are definitely going places: they are inspiring the strategy of one of Europe’s newest DFIs – the Scottish National Investment Bank – as well as some of the most forward-thinking economic research including the OECD’s “New Approaches to Economic Challenges” and the World Health Organisation’s new Council on the Economics of Health for All, for which Ms Mazzucato will be the inaugural chairperson.

While “missions” were primarily imagined with policymakers in mind rather than philanthropists, they compellingly capture the wider extent to which a long-term (“patient”), un-siloed use of philanthropic capital can fill critical financing gaps to address the entangled problems of our time and be truly catalytic for investment and transformation.

But can philanthropy – a fragmented universe of donors with varied charitable interests and giving amounts dwarfed by government aid and large institutional investors – resist being corralled by bigger co-investment partners into de-risking approaches and make its voice heard?

The answer is, increasingly, yes.

The voice of philanthropy

For one, there is growing acknowledgement within development finance circles that despite the urgency to fill the multitrillion dollar gaps to realise the SDGs, when it comes to investing for good, size is not everything.

For instance, the World Bank-sponsored Global Environment Fund (GEF) has a Small Grants Programme providing grants of between $25,000 and $150,000 for community-based innovation projects. In another example, Nobel prize economics laureate and inaugural chairperson of France’s newly-announced Fund for Innovation and Development Esther Duflo had this to say about the Fund’s role in funding applied policy innovation: “You don’t need millions of dollars. (…) But it’s been very, very difficult to fund, because it’s not something anybody can touch. So there is kind of a big funding gap for small money.”

This can be viewed as an (implicit?) attempt by DFIs and other large institutional donors to replicate the in-principle catalytic strengths of philanthropy. However, philanthropy has also been building its own platforms to spread its own voice.

Philanthropic organisations are coalescing into increasingly influential networks – peer groups (Asia Philanthropy Circle, DAFNE/EFC, Ariadne, WINGS, etc.) and areas of interest (Asian Venture Philanthropy Network, the Network of Foundations Working for Development, EDGE Funders Alliance, etc.). A growing collective force, they are making their perspective heard within international development forums. For instance, the OECD hosts an OECD Centre on Philanthropy, while UN-Habitat’s bi-annual World Urban Forum hosts a dedicated ‘Foundations and Philanthropies Roundtable’.

Furthermore, philanthropic actors have been emboldened to overcome their traditional reluctance to engage more directly with governments. The Bill & Melinda Gates Foundation – which alone accounts for over half of all philanthropic giving to developing countries – is well respected within international policy circles, esepcially in matters of public health. Other charitable foundations work in strategic partnership with governmemts, such as Big Win Foundation working with central governments in selected African countries, or Bloomberg Philanthropies with cities and subnational governments.

This being said, for all philanthropic capital’s potential to act as a catalyst – providing patient, risk-taking, multipurpose, flexible capital –, much of philanthropy remains stuck in its traditional ways: bound to a narrow set of charitable causes; short-term availability (typically one- to five-year grants); restricted to a single project as opposed to a programme and a portfolio of projects; and still somewhat risk-averse (grant recipients – often nonprofit organisations reliant on consistent fundraising – do not want projects to “fail” and risk losing future funding).

There are two notable areas, nonetheless, in which the full potential of philanthropy is being actively explored by disruptive philanthropists and their advisors. These areas offer a space within which philanthropists can self-determine their co-investing role beyond de-risking.

Systems change, climate change: early comer, late comer

The first area is the maturing conversation on systems change, the mainstream application of system thinking into development programming and, crucially, the rapidly evolving conversation on how to fund systems change. This is an area where philanthropy’s knowledge, networks and self-determined strengths can empower it to shape its role within the necessary co-investments required for transformation.

While people are still actively searching for a consistent approach to funding systems change – my current thinking on where this is headed here – philanthropic circles have had a head start, followed by the global ecosystem of social entrepreneurs (powered by networks like Ashoka and more recently Catalyst 2030), further boosted by the loud calls for greater social and climate justice – quintessential systemic issues.

However, this cutting-edge exploration of systems change has now made its way into more institutional areas of international development, most impressively at the EU’s EIT Climate-KIC and the UN Development Programme (UNDP) through its global network of UNDP Accelerator Labs. Certain international development sectors (water and sanitation, public health) have also invested great interest in this approach to programming.

The other area in which philanthropy’s full potential is being called upon to come into its own is the fight against climate change.

In a global effort that is already loudly criticised for not attracting enough finance – such criticism typically targeted at governments, international development agencies, DFIs and companies –, philanthropic circles have arguably been some of the slowest to make meaningful changes. According to Active Philanthropy, a global philanthropy advisor on climate change, of the total estimated USD 2 trillion dollars per year of global philanthropic giving, a mere 5% is believed to be explicitly allocated to climate change.

However, shifts in attitudes are finally accelerating within philanthropic circles, shaken into action by the growing body of evidence of climate change and inspired by the efforts of a small number of trailblazing foundations and philanthropists.

There is now a growing number of climate-focused philanthropic funder collaborations (the ClimateWorks Foundation, the Funder Commitment on Climate Change, etc.), as well as increasing mobilisation within philanthropic circles to recognise the cross-cutting effects of climate change on their philanthropic causes. If you add to this the sweeping public conversation in the U.S. (still by far the largest source of philanthropic funds) and Western countries in general over intersectionality and systemic inequalities – gender, racial, economic – climate action is called to be seen through the lens of “climate justice”.

Taken together, this accelerating engagement on both systems change and on the cross-cutting nature of climate change is inspiring philanthropic donors to better understand interconnectedness, systemic barriers and ultimately, motivating more risk-taking, collaborative efforts and multisectoral interventions — needs that play to the strengths of grantmaking philanthropy.


There is no doubt that humankind currently stands at a liminal moment, challenged to “build back better”. And as our economic and investment models show their limitations in addressing our entangled crises, we may be entering into a phase when innovative forms of co-investment – powered by philanthropy and less restricted to de-risking of commercial investments – start making their appearance.

The mood for a “Great Reset” provides the opportunity; work on systems change and climate change, the clarity of purpose; philanthropic circles and networks, the influence.  

Next, the confidence?

[1] Missions: a beginners guide – IIPP policy brief, December 2019 (Mazzucato, Gibb)


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