| 1 This paper is published under the responsibility of the Secretary-General of the OECD. The opinions expressed and the arguments employed herein do not necessarily reflect the official views of OECD member countries. This document, as well as any data and any map include herein, are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. The document was authorised for publication by Jorge Moreira da Silva, Director of the Development Co-operation Directorate. Please cite this paper OECD (2021) “The OECD DAC Blended Finance Guidance”, OECD Development Co-operation Directorate, Paris. THE OECD DAC BLENDED FINANCE GUIDANCE © OECD 2021 2 | Foreword Recovering from the current COVID-19 crisis and delivering the 2030 Agenda for Sustainable Development will require all sources of finance, public and private, to be mobilised at greater scale and speed. In developing countries, levels of domestic and external financing had already fallen short of the spending needs to achieve the Sustainable Development Goals (SDGs) and climate objectives before the crisis (OECD, 2020 ). As official development assistance (ODA) plays an indispensable role in [1] supporting responses to the COVID-19 crisis, members of the OECD Development Assistance Committee (DAC) pledged to “strive to protect ODA budgets” (OECD DAC, 2020 ). At the same time, scarce [2] concessional resources will need to be used even more strategically and effectively to catalyse and mobilise private sector resources at a larger scale. Against this backdrop, DAC members at the 2020 DAC High Level Meeting committed to “continue working to find ways to mobilise more official and private resources for sustainable development, including promoting more — and more effective — blended finance, with special attention to [least developed countries]” (OECD DAC, 2020 ). [3] Blended finance is an innovative approach to financing sustainable development that aims to attract commercial capital towards projects that benefit society while also providing financial returns to investors. The OECD (2018 ) defines blended finance as “the strategic use of development [4] finance for the mobilisation of additional finance towards sustainable development in developing countries”. Development banks and development finance institutions (DFIs) play a critical role in blending by deploying instruments and structuring mechanisms to mobilise the private sector. Multilateral development banks (MDBs) provide the largest share of private sector investments through dedicated private sector operations. However, a wider range of diverse actors are engaging in blended finance, from foundations and philanthropic investors to commercial actors, institutional investors, commercial banks, private equity and venture capital funds, hedge funds, and companies (OECD, 2018 ). [4] Blended finance is still a relatively new financing approach in the development co-operation landscape. In light of the increasing risk of fragmentation in blended finance practices and governance, a common policy framework and understanding is crucial to ensure effectiveness. It is against this backdrop that DAC members, at the High Level Meeting on 31 October 2017, adopted the five Blended Finance Principles for Unlocking Commercial Finance for the Sustainable Development Goals (hereafter the “Principles”), shown in Figure 1. Reflecting the development mandate of DAC members, the Principles aim to ensure that blended finance is deployed in the most effective way to address the financing needs for sustainable development by mobilising additional commercial capital and enhancing impact (OECD, 2018 ). The [5] Principles are a policy tool for all providers of development finance — donor governments, multilateral donors, development co-operation agencies, philanthropies and other stakeholders — to undertake blended finance approaches with high-quality standards. They were elaborated in close co-ordination with other international initiatives on blended finance such as the DFI Enhanced Blended Concessional Finance Principles for Private Sector Projects, which are targeted at the operational level (IFC, 2017 ). [6] THE OECD DAC BLENDED FINANCE GUIDANCE © OECD 2021 | 3 The OECD DAC Blended Finance Principles Source: OECD (2018[5]), OECD DAC Blended Finance Principles for Unlocking Commercial Finance for the Sustainable Development Goals, http://www.oecd.org/dac/financing-sustainable-development/development-finance-topics/OECD-Blended-Finance-Principles.pdf. The Principles are embedded in the international development architecture and recognised as the de facto practice to follow when applying blended finance. The Principles have been referenced under a number of Group of Twenty (G20) and Group of Seven (G7) presidencies. Under the Canadian Presidency, G7 leaders committed to “work to implement the OECD DAC blended finance principles including promoting greater transparency and accountability of blended finance operations” (G7, 2018 ). [7] In the G20 Osaka Declaration, leaders recognised that blended finance “can play an important role in upscaling our collective efforts” (G20, 2019 ). Under the G7 French Presidency in 2019, the G7 leaders [8] further highlighted their support “to mobilize additional resources for development and help increase the impact of existing resources” and their support for “the implementation of the OECD DAC Blended Finance Principles for Unlocking Commercial Finance for the SDGs” (G7, 2019 ). Along with these declarations, [9] the Principles also have shaped the blended finance policy context and discussions to advance blended finance best practices among partners such as the United Nations, the European Union and the World Economic Forum. Following the adoption of the Principles by the DAC, the Blended Finance Guidance was developed to help donors put the Principles into practice. The Blended Finance Guidance was approved by the DAC in September 2020. All relevant, higher-level commitments made by DAC members in relation to development co-operation apply to blended finance in the same way they do to other financing approaches. These include, among others, commitments on ODA financing targets, leaving no one behind, development effectiveness and untying aid as well other DAC principles and standards, notably the Guiding Principles on Managing for Sustainable Development Results, the DAC Principles for the Evaluation of Development Assistance, and the DAC Quality Standards for Development Evaluation. THE OECD DAC BLENDED FINANCE GUIDANCE © OECD 2021 4 | Acknowledgements This publication was prepared by the OECD Development Co-operation Directorate (DCD) headed by Director Jorge Moreira da Silva. Paul Horrocks, Head of the Private Finance for Sustainable Development Unit, managed and led the work to develop this publication, with strategic leadership of Haje Schütte, Senior Counsellor and Head of Financing for Sustainable Development Division. This publication was drafted by Valentina Bellesi and Faty Dembele. The core team responsible for drafting the underlying Detailed Guidance Notes included Wiebke Bartz-Zuccala (Guidance Notes on Principles 2 and 4); Irene Basile (Guidance Note on Principle 5); Valentina Bellesi (Guidance Notes on Principles 1 and 5); Priscilla Boiardi (Guidance Note on Principle 1 and 5); Faty Dembele (Guidance Note on Principle 3), Jarrett Dutra (Guidance Notes on Principle 4); Marie Fuchs (Guidance Note on Principle 2); Weronika Garbacz (Guidance Notes on Principles 3 and 5); Natalia Lemanska (Guidance Note on Principle 3); Astrid Manroth (Guidance Notes on Principles 2 and 4); Lasse Moller (Guidance Note on Principle 3); and Esme Stout (Guidance Notes on Principles 1 and 5). The quantitative analysis relied on OECD statistics on private finance mobilised by official development interventions, kindly provided by Cécile Sangaré and Tomas Hos. The authors would like to thank the following OECD colleagues who took the time to review and provide comprehensive feedback on the Detailed Guidance Notes: Rafael Duque Figueira, Thomas Boehler and Megan Grace Kennedy-Chouane. The OECD is grateful for the support, expertise and insights provided by the following Senior Strategic Reviewers: Nancy Lee, Senior Policy Fellow at the Center for Global Development; Cameron Khosrowshahi, Director, Invest Initiative at USAID; Kay Parplies, Head of Unit, Investment and Innovative Financing at the European Commission; and Christian Novak, Professor of Practice at McGill University Institute for the Study of International Development. The OECD is also grateful for the active contribution of experts during the physical and virtual workshops and consultations, including Gunnel Axelsson Nycander (Act Church of Sweden); Milena Bertram (Finance-in-Motion); San Bilal (European Centre for Development Policy Management); Louise Böhm (Entrepreneurial Development Bank, FMO); Tihana Bule (OECD); Alex Chirmiciu (European Bank for Reconstruction and Development); Nerea Craviotto and Jan Van de Poel (Eurodad); Andrew Davidson (Moody’s Investor Services); Amy Dodd (Development Initiatives); Yves Ehlert (European Development Finance Institutions); Andrew Hohns (Mariner Capital); Djedjiga Kachenoura (Agence Française de Développement); Megan Grace Kennedy-Chouane (OECD); Anja Kramer (KfW Development Bank); Theo Ib Larsen (Ministry of Foreign Affairs of Denmark); Alessandro Maffioli (Inter-American Development Bank); Astrid Manroth (OECD); Giulia Massobrio (International Trade Union Confederation); Nadia Nikolova (Allianz); Kay Parplies and Andreas Fischer (European Commission); Jesper Persson (European Investment Bank); Bettina Prato (International Fund for Agricultural Development); Julia Prescott (Meridiam); Kruskaia Sierra-Escalante (International Finance Corporation); Lori Scott (MacArthur Foundation); Drew Smith (Global Affairs Canada); Peter Sullivan (Citibank); Tim Turner (African Development Bank); Philippe Valahu (Private Infrastructure Development Group); Max von Bonsdorff THE OECD DAC BLENDED FINANCE GUIDANCE © OECD 2021 | 5 (Ministry of Foreign Affairs of Finland); and Mohan Vivekanandan and Alvino Wildschutt-Prins (Development Bank of Southern Africa). The report also benefitted immensely from comments and insights sent by experts and practitioners during the various consultations, workshops and interviews undertaken by the OECD Secretariat, in particular the following organisations: the Act Church of Sweden, the Asabe Shehu Yar'Adua Foundation, the Asian Venture Philanthropy Network (AVPN), the Association of Development Financing Institutions in Asia and the Pacific (ADFIAP), the BC.lab (Colombia), Bangladesh University of Textiles, Cordaid Investment Management, Development Bank of Southern Africa (DBSA), Eurodad, European Centre for Development Policy Management (ECDPM), Finance & Sustainability (Italy), Frontier Markets, the Giti Group (Indonesia), the Health Finance Institute, the International Trade Union Confederation (ITUC), the Lady Lawyer Foundation, the Latin American Venture Philanthropy Network (Latimpacto), the Ministry of Finance of Mauritania, the Ministry of Foreign Affairs of Indonesia, the Ministry of Foreign Affairs of Greece, the Ministry of Foreign Affairs of Spain, the National Water Commission of Mexico, the Private Infrastructure Development Group (PIDG), Roots of Impact, Saïd Business School, SUED (Kenya), the Southern African Venture Capital and Private Equity Association (SAVCA), TXC Investment Management Company, the University of Oxford (United Kingdom), and the University of Dhaka (Bangladesh). The OECD also thanks all participants attending webinars and consultation rounds. The workshops and web-consultations conducted are listed here: • 23 May 2019: Physical one-day workshop on the Guidance Note on Blended Finance Principle 4 • 10 October 2019: Physical one-day workshop on the Guidance Note on Blended Finance Principle 2 • 30 January 2020: Physical workshop on the Guidance Note on Blended Finance Principle 5 (during OECD Private Finance for Sustainable Development Days) • 15 April - 15 July: Public written consultation on Blended Finance Guidance Notes on Principles 1-5 • 14 May 2020: Web-consultation on Blended Finance Principles 2, 4 and 5 with the Latin American Venture Philanthropy Network (LatImpacto) – via Zoom • 27 May 2020: Web-consultation on the Guidance Note on Blended Finance Principle 5 – via Zoom • 3 June 2020: Web-consultation on the Guidance Note on Blended Finance Principle 1 – via Zoom • 17 June 2020: Web-consultation on the Guidance Note on Blended Finance Principle 3 – via Zoom • 29 June 2020: Web-consultation on the Guidance Note on Blended Finance Principle 3, specifically targeted to civil society organisations – via Zoom. THE OECD DAC BLENDED FINANCE GUIDANCE © OECD 2021 6 | Reader’s guide Structure and purpose of the Blended Finance Guidance The Blended Finance Guidance outlines policy recommendations as well as practical steps and elements that should be considered to facilitate the design and implementation of blended finance programmes. The Guidance also provides good practice examples (for illustrative purposes) and key references for blended finance implementers to follow. The ultimate objective of the Guidance is to contribute to enhancing the growth and improving the quality of finance that is mobilised and invested in sustainable development of developing countries. This Guidance first presents the blended finance context and latest trends. It then introduces the OECD DAC Blended Finance Principles and their policy context and summarises the core policy guidance for each of the five Principles. For each, it provides an overview of the Principle, policy guidance, a checklist to guide implementation of the Principle, and examples of good practice. This Guidance Overarching Note builds on underlying Detailed Guidance Notes drafted for each of the five Blended Finance Principles: • OECD DAC Blended Finance Principle 1: Detailed Guidance Note • OECD DAC Blended Finance Principle 2: Detailed Guidance Note • OECD DAC Blended Finance Principle 3: Detailed Guidance Note • OECD DAC Blended Finance Principle 4: Detailed Guidance Note • OECD DAC Blended Finance Principle 5: Detailed Guidance Note Not only is blended finance changing quickly, but innovative financing instruments are being deployed and thus, new practices and approaches can also develop quickly. These five underlying Detailed Guidance Notes will be updated to reflect new developments and best practice examples in blended finance, as well as to incorporate new research, evaluation reports and other knowledge, including from the OECD DAC Network on Development Evaluation (EvalNet) Working Group on Evaluating Blended Finance and from the Community of Practice on Managing for Sustainable Development Results. The Detailed Guidance Notes have been developed over the last three years through extensive consultation processes (detailed in the Acknowledgments) that involved blended finance experts from DAC donors, DFIs, MDBs, private investors and asset managers, partner countries, civil society organisations, and other participants of the OECD DAC Community of Practice on Private Finance for Sustainable Development. The Guidance Notes further build on prior OECD research, namely results of the 2018 survey on blended finance funds and facilities in Basile and Dutra (2019 ) and Basile, Bellesi and Singh [10] (2020 ); “Blended Finance in the Least Developed Countries 2019” (OECD/UNCDF, 2019 ); and [11] [12] “Blended finance in fragile contexts: Opportunities and risks” (Basile and Neunuebel, 2019 ); detailed [13] sectoral work on water and sanitation (OECD, 2019 ) and a forthcoming work on agriculture; and an [14] OECD Development Co-operation Working Paper on blended finance evaluation (Winckler Andersen et al., 2019 ). [15] THE OECD DAC BLENDED FINANCE GUIDANCE © OECD 2021 | 7 Target audience This overarching Guidance Note is primarily for policy makers and development finance actors interested in seizing the opportunities presented by blended finance while following good practice approaches. As different actors in the development finance space have different levels of knowledge and engagement on blended finance, this Guidance Note introduces the five OECD DAC Blended Finance Principles and Guidance. Practitioners and other development finance actors can access further technical guidance in the Detailed Guidance Notes. This Note aims to support development finance actors at different stages in their blended finance activities, for example: • A minister wishes to begin a blended finance programme and would like to be aware of what are considered best practices in terms of delivery. • A donor is considering establishing a blended finance programme and would like to undertake an analysis and evaluate whether a blended finance programme is indeed the optimal solution. • A donor is committed to ensuring the delivery of a blended finance project and wishes to embed best practices, although the operational staff involved might not have had exposure to blended finance. • A civil society organisation or think tank wishes to monitor and analyse developments of the development finance system or assess results of often complex arrangements such as blended finance programmes. Finally, this Guidance and the Detailed Guidance Notes can also be used to support those actors that have well-established blended finance programmes but wish to further explore and develop a specific element, such as transparency or risk management. How to make use of the Guidance For effective implementation by the DAC of the Blended Finance Principles, this Guidance should be complemented with the underlying Detailed Guidance Notes, which provide further background, evidence and tools to effectively deploy blended finance approaches. The Detailed Guidance Notes also include examples that show real case practices in the implementation of each Principle. The discussion of each Principle also concludes with a checklist to remind the user of the tasks that should be undertaken to implement that Principle. Each Principle should be considered as a core element to be addressed when approaching blended finance, with the underlying sub-principles providing further guidance. Thus, the Principles and Guidance Notes should not be seen in isolation, as they are interconnected and build on a coherent principle- and value-based approach to blended finance. It should be noted as well that the Guidance should not be seen as a replacement for effective due diligence, although it should assist in ensuring that key elements are identified and addressed. THE OECD DAC BLENDED FINANCE GUIDANCE © OECD 2021 8 | Principle 1: Anchor blended finance use to a development rationale Figure 1. OECD DAC Blended Finance Principle 1 PRINCIPLE 1: ANCHOR BLENDED FINANCE USE TO A DEVELOPMENT RATIONALE All development finance interventions, including blended finance activities, are based on the mandate of development finance providers to support developing countries in achieving social, economic and environmentally sustainable development. Use development finance in blended finance as a driver to maximise 1A development outcomes and impact Define development objectives and expected results as the basis for 1B deploying development finance 1C Demonstrate a commitment to high quality Source: Invalid source specified., OECD DAC Blended Finance Principles, http://www.oecd.org/dac/financing-sustainable- development/development-finance-topics/OECD-Blended-Finance-Principles.pdf Policy guidance The OECD DAC Principle 1 focuses on the need to anchor blended finance use to a development rationale. The imperative to anchor blended finance to a development rationale is at the core of the blended finance agenda and is recognised by the Tri Hita Karana (THK) Roadmap for Blended Finance (Tri Hita Karana Sustainable Development Forum, 2018 ). Likewise, the Kampala Principles on Effective Private Sector [16] Engagement in Development Co-operation emphasise that effective partnerships with the private sector must focus on maximising development outcomes in line with the Sustainable Development Goals (SDGs) and national development priorities. THE OECD DAC BLENDED FINANCE GUIDANCE © OECD 2021 | 9 Sub-principle 1A - Use development finance in blended finance as a driver to maximise development outcomes and impact Link blended finance to overarching development objectives in line with the 2030 Agenda and climate objectives Donors can play a catalytic role in mobilising the private sector and are mandated to achieve social, economic and environmentally sustainable development. To ensure such roles and mandates, donors should formulate the strategic ambition and policy objectives for blended finance and link them to overarching development objectives. Donors’ blended finance objectives should be rooted in international and regional agreements on sustainable development. Examples of such agreements include, at international level, the United Nations (UN) 2030 Agenda on Sustainable Development (UN, 2015 ) and the Addis Ababa Action [17] Agenda (UN, 2015 ) and, at regional level, Agenda 2063 of the African Union (2015 ). [18] [19] As concerns individual blended finance projects, implementing a robust theory of change ensures that interventions target the achievement of specific SDGs. Before entering into a blended finance operation, all actors should clearly understand and articulate how the particular investment is expected to lead to outputs, outcomes and eventually development impact. In setting development impact objectives and developing the theory of change, parties should apply the EvalNet Glossary of Key Terms in Evaluation and Results Based Management, given its widely accepted, flexible and cross- thematic nature (OECD, 2002 ). 1 [20] Align the objectives of blended finance to local policy priorities To the maximum extent practicable, the development objectives of blended finance should be aligned with development strategies of the partner country and linked to its SDG targets. Investors should work closely with partner countries to consolidate local ownership and capacity, respecting each country’s policy space, absorption capacity and ownership to implement policies for sustainable development (OECD, 2011 ; GPEDC, 2019 ). Further information on how to align blended finance to [21] [22] local policy priorities is provided in the Detailed Guidance Note on Principle 3. This is particularly important in least developed countries (LDCs) and fragile contexts where external investments can upset already delicate resource equilibrium in societies at risk of conflict. Blended finance providers operating in fragile contexts should ensure dialogue prior to launching blended investments to secure space for divergent interests to be expressed, avoid an excessive weight of private commercial interests, and ultimately foster ownership by local actors (Basile and Neunuebel, 2019 ). In [13] conflict-affected settings, all actors involved in blended finance should consider the need for an effective implementation of the DAC Recommendation on the Humanitarian-Development-Peace Nexus, under a "do no harm” approach (OECD DAC, 2019 ). [23] Set clear and measurable development targets for blended finance funds and facilities The results of the OECD Survey on Blended Finance Funds and Facilities showed that while most respondents anchor their investment strategies to one or more SDGs, over a third did not formalise quantitative development targets, which may hinder the capacity of investors to capture their (intended and actual) contribution to the sustainable development objectives (Basile, Bellesi and Singh, 2020 ). [11] While grounding the investment strategy to the SDGs is of fundamental importance, blended finance vehicles should also anchor their activities to SDG targets. For instance, while over 70% of blended finance vehicles target SDG 1 (ending poverty in all forms), not enough evidence is available on THE OECD DAC BLENDED FINANCE GUIDANCE © OECD 2021