Economic and geopolitical shocks are, unfortunately, the new normal, and they exacerbate the private sector’s hesitancy to explore emerging markets. This hesitancy is a key challenge to closing the climate finance gap and should be addressed at the upcoming COP28. Development banks will play a central role in these discussions, bringing their own solutions to the Climate Change Conference in the UAE. 

Emerging markets’ climate finance challenge is complex. Firstly, even in times of greater certainty, some investors see emerging markets as too risky. Parts of the private sector are uncomfortable with unknown borrowers in unfamiliar markets, often unwilling or unable to complete due diligence and price the risk.

Secondly, many investors have no presence in these economies. Local borrowers, in turn, have no international market network, so struggle to find new partners and suitable financial instruments. Thirdly, local currency revenues are likely to be inadequate to service foreign currency loans. Local businesses often require loans in their own currency, while investors predominantly hold hard currency.

Finally, the absence of sustainable finance regulations — and regulatory volatility more broadly — dampen green finance initiatives and discourage the private sector from committing to long-term investments. 

Navigating uncertainties

Development banks are in a unique position in being able to help tackle this challenge. Their loan portfolios enjoy lower losses and higher recoveries, not only in comparison to similar-rated risks, but even when compared to similar operations in developed economies. As a result, they are increasingly asked to share data on their assets’ performance that attracts private green capital into their projects. 

Educating private investors on the performance of multilateral development bank (MDB) loans is therefore key to providing much-needed certainty. This can be done, for example, through the Global Emerging Markets Risk Database Consortium. Complexities with data-sharing remain, but the European Bank for Reconstruction and Development (EBRD) and fellow development banks are working towards a solution.

MDBs should also ensure the private sector is able to capitalise on their local knowledge and status as multilateral institutions. This includes sharing their preferred creditor status via mobilisation products which see the MDB remain the lender of record and leading market experience, which is often the result of years of policy dialogue. To an investor, what might be an unknown borrower in an unfamiliar market may well be a longstanding client in a development bank’s member country. This is where on-the-ground presence and local knowledge is most valuable.

Emerging market clients require tailored solutions. MDBs are developing instruments that suit these markets while enabling private investments. Examples include insurance products, currency solutions and blended finance, such as smartly used guarantees and concessional finance. Diversifying the product offering allows development banks to broaden their investor base, incorporating non-bank investors such as insurers and pension funds. 

For instance, the EBRD has been working with a European government donor on an innovative climate-focused blended solution to support and motivate private co-financing partners in the most challenging projects. This is set to be unveiled at COP28. 

More on EBRD:

• Opinion | Stronger banks are key to closing the climate finance gap
• The EBRD’s 10 biggest debtors
• Video | ‘Food and energy prices are keeping me up at night’

Closing the gap together 

There is already a lot to build on. For the second year in a row, MDBs are surpassing their target of delivering $50bn in climate finance to emerging economies. Between 2019 and 2022, the EBRD mobilised mor than €56bn, averaging €14.1bn per year.

Yet, a gap remains between public institution financing and the investment required to reach climate and related development goals. To address this, MDBs must not only mobilise private investors, but continue working closely with governments on the regulatory environment and climate governance through policy dialogue, legal reform and technical assistance. 

We saw this in Egypt, where the EBRD’s policy work has directly led to billions of euros in investments in the renewable energy sector. We are now doing the same in Uzbekistan, where our policy support recently enabled the mobilisation of $246m from multiple private sector lenders for a wind power project. That’s alongside the EBRD’s own $300m investment.

But more can and must be done. Common challenges need concerted actions, and the forthcoming COP28 is a great opportunity for development banks to help close the climate finance gap together. By mobilising the private sector, they will support the way forward in emerging economies. 

Soha El-Turky is vice-president and chief financial officer, and Christian Kleboth is head of debt mobilisation at EBRD. Please follow our work towards this goal at the COP28 here.

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