In a previous article, we highlighted key takeaways from the recently released COP30 Circle of Finance Ministers report, which called for efficient financing to meet the Paris agreement targets and outlined the best pathways to get there. The need for investment is huge. At last year’s COP29 in Baku, Azerbaijan, developed countries pledged to increase their funding commitment to emerging markets and developing economies (EMDEs) from $100 billion to $300 billion per year by 2035 with an aspirational goal of $1.3 trillion. But much more—over $2 trillion—is needed for climate mitigation investments in energy transition and nature-based solutions.
Most of this additional investment will have to come from the private sector, but existing approaches to use public funds to generate multiples in private investment—“blended finance”—have resulted in only marginal progress toward the funding levels needed. On average, a dollar of public money across all development finance still manages to “crowd in” only about half a dollar of private money. It will take a broad spectrum of financial structures and institutions to meet the pledges made in Baku including reform of multilateral development banks (MDBs), enhanced securitization, innovative insurance products, improvements in the integrity of private voluntary carbon markets, and new green bond structures. Of these approaches, we believe none are as effective as guarantees, which, if scaled significantly and effectively, could leverage public capital to attract significant multiples of private investment.
Guarantees are a critical solution and can be implemented at a global scale
A consensus has begun to form in the climate investment community that innovative guarantee structures are likely to be particularly effective—perhaps the most effective—mechanisms to leverage private capital. Only a small percentage of the guaranteed private investment must be contributed in cash, amounting to a conservative estimate of expected loss—as long as the tail risk is adequately protected by other sources.
In the lead-up to COP30 and in recognition of the potential for guarantee mechanisms to scale climate finance, several public-private coalitions and governmental task forces including the Sustainable Business (SBCOP30) initiative and a team formed by the Brazilian Development Bank (BNDES) have formulated several new guarantee proposals for investments in Brazil. Smaller guarantee structures underwritten by private sources like the Green Guarantee Fund and iTrust, as well as several new guarantee proposals backed by the balance sheets of MDBs or a single sovereign entity, have recently launched. These include Inter-American Development Bank and BNDES guarantees, Norwegian Agency for Development Cooperation and Swedish funds, a newly proposed fund in the BRICS multilateral bank (representing emerging economies Brazil, Russia, India, China, South Africa, and five additional members), and the World Bank’s plan to streamline and triple its offering of guarantees. But these existing guarantee initiatives are also much too small to begin to address the challenge of scaling up new private investment to the levels required.
To help close the financing gap, we have worked in conjunction with partners and a global advisory committee over the past two years to develop a proposal originated by UK climate investment expert Ian Callaghan to establish an ambitious, innovative, multilateral global guarantee facility to be backed in part by wealthy countries through both cash contributions and their sovereign balance sheets. The facility would offer qualifying private investors who agree to standards of investment, due diligence, and key performance indicators (KPIs) the opportunity to use the facility’s near-comprehensive guarantees to assemble portfolios or funds for climate mitigation investment in EMDEs. The facility would not require the double or triple diligence typically performed in blended finance transactions nor a prior guarantee from the domestic country’s government. We call this proposal the Emerging Market Climate Investment Compact (EMCIC).
The EMCIC facility embodies five necessary elements for the successful de-risking of debt investments for climate mitigation by private investors in EMDEs on the scale required to meet the capital needs pledged in Baku. They are:
- A streamlined structure. The structure must offer big global investors an environment that is more familiar and attractive to their customary practice, which means reducing overlapping bureaucracies in dealing with governments and MDBs, reducing time delays, streamlining the investment process, and contemplating guarantees of portfolios or funds rather than applying a multi-level review of every project investment.
- High leverage. Because cash contributions to capitalize the facility need only be made in the amount of anticipated losses, the cash can be highly leveraged so long as the tail risks are covered at least in part by developed-country sovereign balance sheets, possibly supplemented by a combination of insurance and mezzanine financing.
- Due diligence standards. The guarantees should be extended to pre-qualified investors and managers who agree to consistent environmental and due diligence standards and also sign up to KPIs that will deepen their involvement in EMDEs over time (the “Compact” element of the facility’s title).
- Additional debt avoidance. To be attractive to EMDEs, the facility must not require backup guarantees on the part of the host EMDE governments, many of whom cannot afford additional sovereign debt.
- Risk coverage. The facility must provide enough risk coverage so that the investor can secure an “investment grade” rating or one sufficient to meet the fund’s risk/return ratio. Devoting a substantial portion of their concessionary financing or low-interest loans to such a facility should be greatly attractive to developed-country investors, since it would multiply and leverage the total amount of investment generated toward the Baku goal.
Beyond Belém: Taking guarantees on the road to COP31
Guarantees may be critical and desperately needed for a variety of financial structures, including new portfolios by major infrastructure investors, securitization and public sale of portions of MDB portfolios, green bond funds, and debt for nature swaps.
Given the consensus among academia, proliferating proposals for new guarantee products, and the steep challenge to reach new levels of funding needed, COP30 and the climate finance community should prioritize the development and growth of both existing and more ambitious new guarantee products and facilities.
Moreover, developing countries should challenge wealthy governments to organize a guarantee facility or several regional facilities that use their cash and balance sheets in the most effective possible way. Acting on this step should be an important deliverable for next year’s COP31.
Ken Berlin is a nonresident senior fellow at the Atlantic Council Global Energy Center.
George Frampton is a distinguished senior fellow at the Atlantic Council Global Energy Center.
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