Funding strategies for developing countries to counterbalance the climate emergency
In the global fight against climate change, innovative climate finance strategies are playing a crucial role in addressing the finance chasm in emerging economies. These strategies balance innovation with practicality, ensuring that climate investments are financially viable and scalable, while respecting the economic realities and development trajectories of these countries.
One such strategy is strengthening institutional capacity and coordination in emerging economies. Country-led platforms and climate finance units (CFUs) are being established to develop national climate finance strategies, coordinate various funding sources, and build strong project pipelines. For instance, Uganda's CFU has developed a National Climate Finance Strategy and a National Green Taxonomy, improving finance mobilization aligned with national priorities.
Leveraging multilateral funds for readiness support is another approach that enhances countries' abilities to access and manage climate finance effectively. This includes assessments, coordination mechanisms, and national investment frameworks.
Innovative financing mechanisms like guarantees and blended finance are also being utilised to unlock capital from both public and private sources. The Asian Development Bank's Innovative Finance Facility for Climate in Asia and the Pacific (IF-CAP) uses guarantees on sovereign loans, where every $1 guaranteed can leverage up to $5 of new climate loans, amplifying capital flow for climate investments without overburdening existing budgets.
Scaling private sector engagement through financial institutions (FIs) is another key strategy. By providing targeted climate risk assessment, technical advisory support, and capacity building, FIs can deploy capital into climate adaptation and mitigation projects. ResponsAbility’s adaptation finance strategy is a prime example of this approach.
Developing national green taxonomies and project checklists is another strategy that enhances the bankability and clarity of sustainable projects, thereby increasing investor confidence and aligning investments with economic structures and sustainability goals.
Programmatic and governance-based country platforms, such as Brazil Platform for Climate Investments and Ecological Transformation, align government priorities with clear procedural mechanisms to mobilise diversified finance effectively from multiple sources.
Integrating social return metrics such as lives saved can broaden the appeal of climate investments. Green infrastructure projects like flood-resistant housing or renewable-powered transit systems can generate revenue through user fees, tolls, or public-private lease agreements. Tying investor returns to measurable local benefits is a strategy to reshape the climate financing landscape in emerging economies.
Governments can issue diaspora green bonds, targeting communities abroad with higher disposable incomes and a vested interest in their home country. Remittance-based financing platforms could automatically channel a fraction of remittances into dedicated climate funds, creating a steady funding pipeline for adaptation projects.
Blending philanthropy and profit offers a hybrid model where philanthropic funds cover high-risk costs, while private investors benefit from the profits. The potential of the international diaspora remains largely untapped as a source of climate finance.
Adaptation measures, which adjust systems and practices to cope with the impacts of climate change, often lack direct revenue streams. Impact-linked bonds can be designed to finance projects with social or environmental objectives, offering payouts depending on the success of the project. Debt-for-climate swaps allow international creditors to forgive portions of debt in exchange for climate investment commitments.
One promising approach is linking returns to local economic multipliers, such as investing in flood protection infrastructure and generating jobs and economic activity. The US$300 billion commitment from developed nations to address climate change is projected to shrink to the equivalent of $175 billion by 2035, assuming a 5% annual inflation rate. Green sovereign debt instruments tie lower interest rates to achieving specific climate targets, attracting impact investors looking for both returns and sustainability outcomes.
Mitigation projects, which reduce or prevent the causes of climate change, often generate tangible economic benefits such as job opportunities. Contributions from emerging economies such as China could potentially raise the total to $265 billion.
Dr Amar Rao, an Associate Professor at the School of Management, BML Munjal University, Haryana, focuses on climate risk and funding mechanisms. His research is focused on the intersection of risk management and climate, including energy markets. Risk mitigation through guarantees from multilateral development banks or international financial institutions can make climate bonds more attractive to private investors. Local carbon credit markets can empower communities to generate revenue by selling carbon credits from projects such as reforestation or urban greening.
Despite the developed nations' pledge to mobilize $300 billion annually by 2035 to address climate change, this commitment is deemed insufficient by developing nations. Innovative climate finance strategies offer a promising solution to bridge this gap, ensuring that emerging economies can transition towards a sustainable and resilient future.
- The strategy of strengthening institutional capacity and coordination in emerging economies involves creating country-led platforms and climate finance units (CFUs) to develop national climate finance strategies.
- A national Green Taxonomy, like Uganda's, enhances finance mobilization aligned with national priorities through the improvement of project bankability and clarity.
- Leveraging multilateral funds for readiness support aids countries in effectively accessing and managing climate finance, providing assessments, coordination mechanisms, and national investment frameworks.
- Innovative financing mechanisms, such as guarantees and blended finance, are being used to unlock capital from both public and private sources, with each $1 guaranteed potentially leverage up to $5 of new climate loans.
- Scaling private sector engagement through financial institutions (FIs) by providing targeted climate risk assessment, technical advisory support, and capacity building can deploy capital into climate adaptation and mitigation projects.
- Developing national green taxonomies and project checklists broadens investor confidence and aligns investments with economic structures and sustainability goals.
- Programmatic and governance-based country platforms, such as the Brazil Platform for Climate Investments and Ecological Transformation, align government priorities with effective financing from multiple sources.
- Integrating social return metrics, such as lives saved, can broaden the appeal of climate investments while generating revenue through user fees, tolls, or public-private lease agreements.
- Diversified finance can be effectively mobilized from multiple sources through clear procedural mechanisms, as seen in programs like the diaspora green bonds and remittance-based financing platforms.
