Designing Blended Finance Structures : Balancing Institutional Investors’ Risk-Return Requirements with SDG-aligned Outcomes

Sammanfattning

Blended finance has emerged as an important approach for mobilising private capital towards sustainable development in emerging and developing markets. By combining public or philanthropic support with private investment, blended finance seeks to improve investment conditions and enable investments that might otherwise be considered too risky or insufficiently profitable under normal market conditions (Havemann et al., 2020; Jung, 2020; OECD., 2025; Sheikh et al., 2025). Despite its growing importance in addressing the financing gap related to Sustainable Development Goals (SDGs), institutional investor participation in blended finance remains constrained (Chen et al., 2024; Clark et al., 2018). This study explores how risk-reducing mechanisms and SDG-aligned outcomes shape institutional investors’ willingness to participate in blended finance investments, as well as the barriers that limit such participation. The study adopts a qualitative research design based on semi-structured interviews with actors across the blended finance ecosystem. Using an abductive approach, the analysis integrates empirical findings with theoretical perspectives from agency, signalling and legitimacy theory. The findings indicate that risk-reducing mechanisms, such as guarantees and first-loss structures, operate as a prerequisite for participation by addressing institutional investors’ need for capital protection and risk-adjusted returns. In contrast, SDG-aligned outcomes represent a conditional factor, where their influence depends on their credibility, measurability and verifiability. The findings further show that institutional investors follow a sequential decision logic, in which downside protection acts as a prerequisite for participation, while sustainability considerations are evaluated only once financial risk is deemed acceptable. In addition, the findings highlight that perceived risk, driven by limited data, lack of ratings and low market familiarity, often exceeds actual risk and constitutes a central barrier to participation. Beyond financial considerations, the study identifies structural and informational barriers, including lack of standardisation, high complexity, coordination challenges and limited scalability. This reduces the attractiveness of blended finance investments, as these factors weaken the effectiveness of risk-reducing mechanisms by making them difficult to interpret and compare in practice. The study contributes to the literature by demonstrating that blended finance should not only be understood as a financial arrangement but as a governance and communication structure, where risk mitigation, signalling and legitimacy jointly shape investor participation. By highlighting the role of perceived risk, conditional sustainability and structural constraints, the study extends existing research on de-risking and institutional investment behaviour in sustainable finance.