All views expressed by members are their own and not reflective of the views of the Bretton Woods Committee.
Last month’s COP29 resulted in a landmark pledge committing $300 billion annually for climate finance. The agreement highlighted the stark contrast between the climate financing needs of developing countries which run to trillions of dollars per year and the capacity of public budgets.
The climate finance gap in emerging markets and developing countries will be $1 trillion per year by 2025 and will grow to around $2.4 trillion per year by 2030. Even with the new pledge at COP29, public finance will not be nearly enough to meet this gap on its own and so mobilization of private finance is critical. In 2022 developed countries belatedly met the goal set in 2015 by providing $116 billion of climate finance to developing countries, but less than 20% of this was mobilized private finance.
Private climate finance is a key part of nearly every climate plan, but it has not yet been mobilized on anything like the scale necessary to close the finance gap in emerging markets and developing countries. At COP29, there were further calls to reinvigorate the mandate to mobilize private climate finance.
But how can this be done more effectively? The Bretton Woods Committee has produced a series of concrete recommendations. The Multilateral Reform Working Group proposed ways to strengthen the IMF and World Bank to lead on climate, and in the previous report of the Climate and Energy Transition Group (of which we are co-chairs), recommendations shared how to increase the focus, speed, and efficiency of Multilateral Development Bank (MDB) climate efforts.
Our most recent contribution to this dialogue is a new report released last month alongside COP29, Mobilizing Private Finance for Climate Action and Energy Transition, which sets out further steps the MDBs and other national and international institutions should take to help close the climate finance gap facing emerging markets and developing countries. The report argues that policies are needed both to “push” private finance away from carbon-intensive investment and “pull” it towards green investment.
Pushing investment away from fossil fuels will increase the pool of funds available for green investment. It requires the reduction and eventual elimination of hydrocarbon subsidies as well as addressing moral hazard—the expectation that governments will bail out investors if carbon-intensive investments fail in the future. Both steps reduce distortions, help to align private costs with social costs, and support the development of carbon markets.
To pull investment toward climate action, we recommend the MDBs implement two new types of climate finance windows which are capitalized by the public sector but do not rely on callable capital, preferred creditor status, or predetermined country allocations of finance.
The first window would solely focus on climate action. It would require high governance standards (though not necessarily follow all current MDB standards) and would raise funds by conventional borrowing in the private markets to lend for investment projects. By requiring a lower rate of return than private banks and focusing on rapidly growing countries, this window would realize “near bankable” projects. Crucially, by limiting the exposure of public sector providers of capital to their initial stakes, the window would give more scope for risk taking than in conventional MDB operations. It would ensure that private finance was genuinely being leveraged and would continue to bear risk.
A second type of window of similar design, with publicly provided capital, could also be established to provide guarantees, insurance, or equity investments focused on climate action. This could be implemented by MDBs and would build on MIGA’s successful provision of publicly capitalized guarantees.
These recommendations can make realistic and important contributions towards bridging the climate finance gap. The international conversation on climate finance has centered around the mobilization of private finance for several years. Now is the time to turn ideas into action.
Afsaneh Beschloss, Co-Lead, Bretton Woods Committee Climate and Energy Transition Finance Project Team; former Treasurer and Chief Investment Officer, The World Bank
Creon Butler, Co-Lead, Bretton Woods Committee Climate and Energy Transition Finance Project Team; former Director, International Economic Affairs, UK National Security Secretariat