As public funding for sustainable development is shrinking, private business is expected to fill the gap. But the private sector is not ready to take the place of public funding and institutions. A more realistic and effective model is one where the private and public sectors complement each other. In this Currents perspective, SEI researchers outline what this could look like and shed light on current and future trends in impact investment.
This perspective explores one of the major trends discussed during SEI’s trendspotting webinar, Currents 2026.
With only four years left to achieve the Sustainable Development Goals (SDGs) of the 2030 Agenda, government support for their achievement clearly is eroding. Only 17% of the targets are on track. Many countries have started to lower their ambitions, given fiscal constraints, growing debt or changed priorities. Official development assistance budgets are shrinking and needs are growing, resulting in a widening of the financing gap.
Many hope that the private sector will step in. In 2026, the role of private investment will take centre stage at high-level meetings throughout the year, such as the ECOSOC Forum on Financing for Development, the World Bank–IMF Annual Meetings and the ninth World Investment Forum. More countries are eyeing development challenges as investment opportunities, following historically large donor governments such as the Sweden and Germany, which now explicitly encourage their private sectors to expand into climate mitigation, adaptation and inclusive service delivery (Government of Sweden, 2023; BMZ, 2026).
The thinking behind the sudden reliance on companies to forward climate action is to align sustainability needs with viable business opportunities, creating mutual value for business and society. Companies can tap into previously underserved markets and build a profitable business selling products or services that help solve real problems, for example affordable off-grid solar systems that bring electricity to remote areas. Society benefits when more people have access to basic services such as electricity and when funding can be expected to continue as long as the business model remains viable.
There are, however, risks involved. Many ventures fail to take off due to the inherent difficulty of doing business in low-income contexts, which can be exacerbated by a lack of good data and understanding of the issues. At other times, investments end up generating profit for private sector actors in historical donor countries but without benefit for the people in the places where the investments are made.
Further, there are significant structural barriers to private investment in sustainable development. For obvious reasons, businesses flock towards the least risky projects that offer the required return. Only a small fraction of private capital goes to early-stage project development, small and medium enterprises, and rural contexts marked by high transaction costs. Areas such as climate adaptation or biodiversity conservation, where the need is clear but revenue models are less straightforward, also receive very little private financing. The unfortunate paradox is that the low-income countries most in need of investment tend to be least likely to attract it.
Public finance can help address some of these challenges. Channeled through blended finance mechanisms – combining private and public funding – it can, for example, adjust the risk–return balance of specific investments such that private sector investors participate. As SEI research shows, risk mitigation through blended finance and other mechanisms can play an essential role in renewable energy investments in low-income contexts such as sub-Saharan Africa.
However, public finance cannot compensate for weak demand, diffuse benefits or fundamentally low revenue potential. In these situations, common public-private partnership structures could result in the protection of private profits without yielding on-the-ground benefits. Therefore, its transformative reach remains limited unless paired with broader institutional reforms, patient public investment, and long-term sector development.
For private finance to contribute to sustainable development in a meaningful way, the complementary roles of the public and private sectors must be identified and clarified. The sectors are mutually dependent, but simply combining or connecting them without carefully aligning the strengths and needs of each is unlikely to produce new or greater sustainable development outcomes. Many services can be effectively provided by the market, but businesses may not want to invest unless their risks are lowered by well-run public institutions, characterized by transparency, competence and integrity. Sometimes the public sector must also step in more directly where the private sector lacks a mandate or incentives to operate.
However public and private sector finance might be aligned, both sectors will require tools to guide investment decisions toward “nature-positive” outcomes, or there is a risk that new investment will exacerbate existing sustainable development challenges or create new ones. In Eastern Africa, where this type of guidance has increasingly been developed, Kenya has emerged as something of an impact investment hub, with growing efforts to mobilize transition finance for agricultural supply chains.
SEI research is helping private sector actors such as the impact advisory firm Clarmondial design robust and scientifically credible decision support frameworks that guide the deployment of finance into nature-positive activities. The work directly informs the design of the Biosphere Integrity Platform, a planned USD 200 million investment vehicle aimed at enabling and scaling action that delivers sustainability outcomes while maintaining business profitability.
The Biosphere Integrity Platform offers an interesting model, since biodiversity suffers from a chronic financing gap, estimated at approximately USD 700 billion per year. Mobilizing private capital to fill this gap in a manner that results in nature-positive outcomes requires not only compelling investment opportunities, but also scientifically credible frameworks to assess and measure impact.
Against the backdrop of these many challenges, it is perhaps not surprising that the scale of private finance is still limited, trailing far behind hopes and expectations. Some USD 70 billion in private finance was mobilized in 2023, rather than the envisioned “trillions”. Even initiatives that have generated a lot of positive publicity, like the Green Climate Fund and the recently launched Global Biodiversity Framework Fund, have struggled to raise the capital needed to achieve their goals.
The international financial landscape is changing fast, and it is hard to foresee how it will evolve in 2026 and beyond. The general economic outlook, the debt crisis, and changing priorities related to geopolitical instability will have a strong influence, in unpredictable ways.
Meanwhile, multilateral banks and development finance institutions continue to explore reforms but are increasingly met with mixed signals. At the climate meeting in Belém, COP30, low-income countries called for reforms that would give them easier access to climate funding. The new US administration is, however, instead pressuring the World Bank, where it is the largest shareholder, to deprioritize climate action. In the longer term, other actors might be stepping up, including China, Brazil, India and the United Arab Emirates.
At SEI we are attempting to build scientifically credible tools that can serve both public and private finance. We cannot see the future, but we project that risk mitigation will be critical, especially efforts to lower risks in challenging contexts. More research will be needed on what makes risk mitigation mechanisms work in practice and the complementary roles the public and private sector can play to enable investment.
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