This paper discusses the systemic challenges that have resulted in significantly higher costs of capital for many emerging markets and developing economies (EMDEs) face compared to high-income countries (HICs). This high cost hinders the ability of financial institutions based in the US and European Union to invest in and finance projects in EMDEs, even though there is strong institutional and stakeholder interest in supporting climate finance.
The paper outlines ten key strategies to lower the cost of capital in EMDEs.
One of these strategies highlights the growing importance of blended finance as a tool to reduce perceived risks for private investors. However, despite its potential, blended finance in EMDEs still encounters major obstacles, including misconceptions about risk and concerns over illiquidity.
To effectively scale private investment through credit enhancements, the paper suggests that regulatory and prudential frameworks must be updated to more accurately reflect the real risk profile of de-risked assets and to enable financial institutions to support climate and SDG-related investments without jeopardizing their financial stability.
