Risk-Sharing Instruments of MDBs to Support Private Capital Mobilisation in EMDCs

Emerging markets and developing countries (EMDCs) will require anywhere between US$ 3 trillion to 6 trillion per year by 2050 to meet their climate targets (Songwe et al., 2022). Unfortunately, recent studies paint an unpleasant scenario, the climate funding commitments are far too inadequate. EMDCs, whilst grappling with the balancing act of a fair and prudent distribution of their insufficient resources on economic and social developmental needs, they find themselves faced with the challenge of ensuring adaptation of their communities to climate change impacts as well as reducing greenhouse gas (GHG) emissions.

Private capital is amongst various forms of resources expected to assist in the climate action that is required as the countries seek to fulfil their Paris Agreement commitments whilst ensuring survival of their communities. Regrettably, efforts of driving private capital to these countries do not yield expected results. Difficulties have not only been encountered in domestic markets, but international private capital has also been largely absent in EMDC geographies. For example, only 14 percent of the total climate finance in Africa so far has come from private capital (CPI, 2022). The snails-pace flow of private capital towards these markets may be due to unfavourable assumptions by investors who have sighted short-comings such as lack of bankable projects, poor reporting standards and data constraints, high fossil fuel subsidies, currency risks, and uncertainty regarding future climate policies.

Considered as a huge part of the solution, DFIs, particularly MDBs, are uniquely placed to crowd in private capital for climate projects. Beyond their traditional lending, MDBs can reduce, transfer, or mitigate the risks associated with investing in developing countries under certain conditions, thereby mobilizing large volumes of additional private capital that otherwise would not be available.