As multilateral development banks have increased commitments toward addressing the climate crisis, financial instruments have become available to encourage private investors to direct capital toward the low-income economies that are the hardest hit by warming temperatures.
During a panel at the Devex Climate + Finance event in London on Tuesday, finance executives discussed how financial mechanisms for emerging markets, including guarantees and blended finance models, are evolving.
Nick O’Donohoe, former senior adviser to the Gates Foundation specializing in blended finance models, said climate finance has become more urgent over the past decade.
When he joined British International Investment as chief executive in 2017, for example, climate finance was an “afterthought,” he said, and it now represents 30% of the development finance institution’s investments.
One instrument created to bridge the distance between development banks investing in emerging markets and risk-averse private investors is guarantees, said Lasitha Perera, CEO of the Green Guarantee Company, which is based in Richmond, England.
A guarantee is a promise to pay, Perera said. It’s designed to assure investors when a viable project in an emerging market has received a below-investment grade rating. The long-term goal is for investors to gain the confidence to invest without the guarantee — putting the guarantor itself out of business, he said.
Blended financing structures can also incentivize private participation in the climate transition in emerging economies.
But blended finance is not the same set of instruments in every case, said Katherine Stodulka, partner at Systemiq, a climate-focused investment firm based in London. It is not in itself an end goal, it won’t turn a poor project into a good one, and it must be used in a limited and targeted way depending on the market, she said.
O’Donohoe echoed a similar perspective.
“It’s different solutions for different markets,” he said. “You’re crowding out risk in investment-grade markets. In sub-investment grade markets, it’s all about catalytic capital and actually starting to make things happen.”
Read more coverage of the Climate + Finance event:
► Mother Nature is about to get paid for her sound
► World must summon urgency to hit new climate goals, Alok Sharma says
About the author
Jorge Valencia
Jorge Valencia is a freelance journalist based in Bogotá, Colombia. He previously covered Latin America from Mexico City for public radio in the United States. A 2023 fellow with the Nieman Foundation for Journalism at Harvard University, he has also reported from Arizona, North Carolina, and Virginia.
