How Blended Finance Can Support Climate Transition in Emerging and Developing Economies

Emerging market and developing economies account for two-thirds of global greenhouse gas emissions, and many are highly vulnerable to climate hazards. These economies will need significant financing in coming years to reduce emissions and adapt to the physical effects of climate change.

Many also have high debt and constrained budgets because of the pandemic and face higher government borrowing costs amid rising interest rates around the world, making it especially difficult for public finance to meet pressing climate financing needs.

These factors mean mobilizing private capital on a large scale will be key to achieving their climate objectives. Financial markets alone can’t do the job, but combining public and private capital offers unique advantages by reducing investment risk and attracting greater funding. Multilateral development banks and international financial institutions can provide support through creating blended financing structures to alter the risk-return profile for the climate transition in emerging economies.

It’s important to start by establishing an attractive investment climate and policies to incentivize private participation. Climate policies and finance are complementary because better policies attract private investment, in turn helping meet policy objectives. Carbon pricing is the most effective tool to make high emitters pay for the climate costs they impose and thereby channel private investment toward projects that emit less.

More generally, climate policies and commitments like the Paris Agreement’s Nationally Determined Contributions can signal to investors to direct investment to a low-carbon economy. Establishing a strong climate information architecture for data, taxonomies, and disclosures also will help.