Why Blended Finance Struggles to Deliver Social Impact at Scale
The climate transition is accelerating—but not everyone is being brought along. Funding for green technologies and emissions reductions is flowing fast. Yet, financing the social equity elements of that transition—job access, community impact, inclusion—is lagging far behind. In addition, the decline in official development assistance means we all need to do more with less. No longer can we think of addressing climate and social objectives in isolation. We need an integrated approach. This is what efforts to finance a “just” transition address.
BCG has been on a multi-year journey to help solve the challenges of financing the just transition (JT) through dynamic engagements with key partners, for example the World Economic Forum’s Equitable Transition initiative, and via close involvement in COP28 in Dubai, COP29 in Baku and COP 30 in Belem. Since 2024, we have been partnering with the World Business Council for Sustainable Development, the Council for Inclusive Capitalism, alongside other stakeholders from the finance, development, philanthropy, and public sectors.
The Sustainable Advantage: Build lasting impact through sustainability
Together, we've explored mechanisms to define a framework that outlines different pathways for financing the JT (see our report Framework for Financing the "Just" in Just Transition). One that emerged quickly is Blended Finance (BF)—which enables those financiers that want to focus on the social elements of the transition to provide technical assistance and/or concessional capital into structures that are also solving climate mitigation and/or adaptation challenges. However, there are several challenges to using BF in a JT context:
- BF structures for JT are inherently more complex than those focused on climate alone.
- They often require more concessionality due to non-revenue-generating social elements.
- Investor interest is dampened by a lack of standardized metrics, proven success cases, and alignment across capital providers.
- Traditional philanthropic capital is often too constrained or inflexible to support innovative structures.
The result: an ecosystem of vehicles that are fragmented, difficult to scale, and often ineffective at delivering measurable social outcomes.
Designing Solutions That Break the Trade-Offs in Just Transition Finance
BCG’s work has focused on exposing and understanding the design trade-offs that plague BF for JT—and designing solutions to resolve them. Drawing on deep stakeholder input and a review of 35 nominally JT-linked BF vehicles, BCG has identified a structural triad of three highly influential dimensions integral to the BF/JT issue:
- Scalability: The ambition to expand across markets and sectors, mobilizing significant capital
- Simplicity: The need for clarity, manageability, and ease of use for all parties
- Effectiveness: The requirement to deliver measurable, inclusive, and lasting impact that is appropriate to any investment situation
Yet improving one often compromises another:
- Scaling introduces new investors with diverging needs—reducing simplicity
- Ensuring effectiveness in impact goals and measurement adds layers of complexity and challenges scalability
- Simplifying design can dilute social targeting—weakening effectiveness
Solving for blended finance for just transition means identifying solutions to breaking these tensions. — Douglas Beal, Global head of impact and integrated transition for Financial Institutions, BCG
Six Actionable Solutions to Make Blended Finance Work for All
From numerous virtual working sessions, roundtables, and field engagements—spanning New York, Seville, London, Geneva, Baku, Dubai, and Sao Paolo—six actionable solutions have emerged. Each is designed to ease one or more of the design trade-offs and unlock capital at scale.
- Standardized Impact Frameworks. Standardized structures and impact reporting that can unlock scale in BF and improve outcomes.
- Flexible Philanthropic Capital. Engaging high net worth individuals and family offices act to catalyze funders—with fewer programmatic constraints than foundations.
Investor Strategy Alignment. While some institutional investors remain hesitant about BF, clearer messaging and simplified structuring can help overcome the barriers.
Asset managers can educate investors and share lessons from BF experience to build confidence among private investors—supported by stronger fund metrics that demonstrate how mechanisms work, protect investors, and mitigate perceived risk.
- Technical Assistance Innovation. New technical assistance mechanisms—and pooled, flexible funding that can unlock more investable projects.
- Capital Aggregation Mechanisms. Development Finance Institutions (DFIs) and Multilateral Development Banks (MDBs) that act as trusted intermediaries—with convening power and credibility that can help scale new BF platforms.
- Embedded Social Objectives. Social goals should be baked into fund design from the start—not treated as risk mitigation or added later. Common barriers include difficulty standardizing local outcomes, capacity gaps in evaluating social impact at scale, and language misalignment across stakeholders.
Solutions discussed include co-defining priorities with communities, using policy incentives or data standards to embed social goals early, and building a library of best practices to guide design while allowing for local adaptation. This approach ensures BF vehicles reflect community needs and deliver meaningful, measurable social impact.
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Innovative Financing to Achieve Greater Impact
Innovative Financing to Achieve Greater Impact -
How Family Offices Can Create New Forms of Catalytic Capital
How Family Offices Can Create New Forms of Catalytic CapitalDouglas Beal
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The Role of Asset Managers in Blended Finance
The Role of Asset Managers in Blended Finance -
Breaking Barriers to Blended Finance
Breaking Barriers to Blended Finance -
Funding Mechanisms That Multiply Results
Funding Mechanisms That Multiply Results -
DFIs’ Credibility Is Critical to Scaling Blended Finance
DFIs’ Credibility Is Critical to Scaling Blended Finance
Each solution addresses a pain point within the ecosystem—and together, they push the market toward a new ‘frontier of efficient design’: vehicles that are more scalable, simple, and effective.
Looking Ahead
This is not a project that ends with a report. BCG and partners are already advancing and testing some of the solutions that we have collectively identified:
- Piloting the solutions with wealth managers, DFIs, and asset owners
- Hosting innovation labs and breakout workshops globally
- Exploring new initiatives to link philanthropic capital to catalytic roles
- Continuing to test, iterate, and amplify the most effective design approaches
The question isn’t whether the world can finance a just transition. It’s how we design the structures to make it happen—at scale, with clarity, and with measurable impact.
