October 2, 2025 

Anik Islam 

A climate-resilient, competitive Canada depends on growing the cleantech sector and strengthening energy-transition supply chains. However, the country faces an estimated $115 billion annual investment gap to meet our climate and economic goals. With government budgets stretched thin and the challenge of accessing capital, filling this gap needs to go beyond the public balance sheets. 

One promising option is blended finance—an approach that combines public and philanthropic funds to attract larger pools of private-sector investment. When properly designed, blended finance allows governments and philanthropic organizations to achieve their environmental, socioeconomic and competitiveness objectives, and for investors to turn a profit.  

However, blended finance can only overcome financing challenges and attract much-needed private capital to help close the climate-investment gap if it is designed, arranged and governed effectively. 

Why does private capital stay on the sidelines? 

Clean technologies and energy-transition projects face market challenges. These challenges vary by sector and by phase of project or company development. For example, clean technologies such as small modular nuclear reactors are often new and complex. This makes it hard for investors and businesses to know how commercially successful they might be.  

In other cases, such as retrofitting buildings for energy efficiency, benefits build up slowly through energy savings, creating a revenue risk for investors in such projects. These types of challenges, or what economists call “market failures”, deter private investments.  

In addition to these barriers, there is often a mismatch between the practices of investors and the financing needs of clean innovation. For example, banks tend to give loans for shorter periods because they are risk-averse and face regulatory capital treatment pressures, stemming from rules regarding how much money they must hold in reserve when they lend.  

Venture capitalists are drawn to quicker, higher-yield sectors like biotechnology. On the other hand, institutional investors, such as pension funds, seek safer returns with proven assets, such as toll-road infrastructure assets, to meet their fiduciary obligations. These features result in private capital being kept on the sidelines instead of flowing into climate solutions. This is where blended finance comes in. 

How does blended finance work? 

By combining different kinds of policy and financing instruments, like grants and guarantees, into financing structures, blended finance makes projects more attractive to investors. For example, grants, risk guarantees and low-cost loans can be combined into a financing structure to support new technologies such as a utility-scale battery energy storage system. By layering these financial instruments, projects employing new technologies can be turned into commercially viable ones that the private sector is ready to invest in. 

Blended finance is a well-established approach to support international development—particularly projects that have demonstrated return on investment, like large infrastructure projects. For instance, different international development and philanthropic organizations support the GAIA blended finance platform, which helps channel investment into climate-adaptation and mitigation projects in emerging markets and developing economies. 

In developed economies, blended finance can be channeled into technology and related infrastructure projects where there is a limited track record on return on investment. Public financial institutions (PFIs) are used to compile information, deploy various financing/policy tools and structures, and collaborate with stakeholders—from policymakers to academia—to address financing challenges.  

How is Canada using blended finance?  

The federal government's clean economy strategy uses PFIs such as the Canada Infrastructure Bank (CIB) and the Canada Growth Fund (CGF) to attract private capital. While both PFIs use blended finance, they target different types of investments that reflect different risk profiles and stages of development. Together, they address complementary parts of Canada’s climate-investment landscape. 

The CIB focuses on revenue-generating infrastructure projects that can produce stable cash flow over time but struggle to attract early investments. For example, the CIB has structured financing to provide technical assistance grants for sustainable aviation fuel-production projects. The grant covers the cost of front-end engineering and design studies. If the project advances to a positive final investment decision, these grants can be converted into loans or equity. Since project owners often cannot shoulder these costs alone, this support helps attract private operators.  

The CGF is designed to support emerging and innovative cleantech firms that face high risks and uncertain returns. For example, the CGF can offer direct market support through carbon contracts for difference, alongside traditional equity or debt investments. The instrument provides a stable and predictable path on carbon pricing for projects whose financial viability depends on industrial carbon pricing. Carbon contracts for difference have been used to support companies developing district energy systems and industrial decarbonization technologies in “hard-to-abate” sectors such as steel and cement.  

Path forward 

Blended finance can help balance risks and returns, bridge market gaps and build stakeholders’ technical capacity to advance projects. Canadian PFIs are still in the early stages of developing blended-finance approaches, and these structures remain bespoke and costly. Over time, through learning by doing, these approaches can evolve into scalable models that allow stakeholders to participate more readily and efficiently. 

Success will depend on the PFI’s expertise and ability to learn. It will also depend on how policies work together and how effectively regulators, financial institutions, industry, civil society and other stakeholders coordinate their roles and responsibilities.  

Blended finance is not a silver bullet. It does not replace the need for broader policy reforms. These include improving the industrial carbon pricing system to maintain a consistent trajectory in carbon pricing or streamlining permitting requirements to develop an inclusive and transparent process. In short, blended finance needs a robust climate and energy-transition policy framework to work.  

To help grow a strong blended-finance ecosystem in Canada, the federal government can: 

• Give clear guidance on policies and regulations, like the clean fuel regulations and the clean electricity standards, so investors have clarity and know what to expect. 

• Help develop the climate information tools and frameworks that make it easier to track and compare climate-related financial and other related information, such as  taxonomies and transition plans. These tools and frameworks would support PFIs and other stakeholders in making smart investments decisions and monitoring investments.  

• Support learning and capacity building for PFIs, helping them draw lessons from early Canadian projects and international best practices to design effective and scalable blended finance structures. 

With the right mix of policy certainty, institutional capacity and public-private collaboration, blended finance can help close Canada’s climate investment gap. It can help deliver the next generation of clean technologies and energy-transition projects to build a climate-resilient and economically competitive future. 

To learn more about blended finance, read our research brief here.