Innovative instruments and equity finance can help enhance risk-sharing through public-private partnerships and maximise the impact of scarce public funds. Investment vehicles that can channel finance at scale, relying both on capital markets and joint investment platforms between public financial institutions (FI’s) and private investors are key to incentivising more private capital for emerging markets and developing economies.
Multilateral development banks and international financial institutions, including development financial institutions such as Denmark’s IFU, Norway’s NORFUND, and Swedish SIDA, can provide support through blended financing structures to alter the risk-return profile for the climate transition in emerging economies. This blended financing mechanism was particularly important behind the Lake Turkana project in Kenya (See Investment Case Study
). Multilateral development banks such as the World Bank, African Development Bank, Asian Development Bank, or the Inter-American Development Bank can play a crucial role in bringing the local expertise and overview of the recipient country to the investors.
These partnerships can provide standardised risk mitigation instruments available at scale with low transaction costs that address key risks such as guarantees against offtake risk for clean energy projects or currency risk coverage. By agreeing to be first to endure losses in green funding vehicles and securitisations, development banks can increase the expected risk-adjusted return for private investors.
In the cases when guarantees are missing, extensive collaboration between public and private bodies on blended finance mechanisms is required to deploy successful investment models that have better risk protection for the downside when the rate of return is close to zero, as well as the offside when the rate of return exceeds sustainable trajectories.
From private investors’ perspective, this step requires their active and targeted collaboration with multilateral development banks and international financial institutions, both in the country of origin, as well as in the receiving country.
Areas of Improvement
While there are cases of successful investments (See examples of Investment Cases
) in green projects in emerging markets and developing economies, there are remaining challenges and bottlenecks in increasing and scaling the deployment of private capital into these markets.
As stipulated in the above recommendations, the challenges remain threefold; The creation of enabling environments, scaling up and increase predictability of investments, and strengthening of the public-private cooperation.
In order to develop a new public-private partnership and multilateral climate finance models, greater collaboration across stakeholder networks is crucial. Private developers and companies, international organisations, development finance institutions (DFI’s), multilateral development banks, private investors, and governments from both developed as well as emerging markets and developing economies can only accelerate climate investments in emerging markets together.
The creation of a supportive interaction platform to analyse and promote capacity building to bridge the climate finance and investment gap can be a solution to strengthen such cross-sector collaboration, overcome barriers and unlock increased investments in emerging markets and developing economies.