Public funds can play an important role in facilitating the scaling up of investments into climate solutions, especially in emerging markets. With the estimated annual financing required for tackling climate change between 2023-30 at a staggering $2.4tn, public funds can be deployed via blended finance to help bridge this substantial funding gap and reach scale for impactful and sustainable investments in emerging markets.
Blended finance can be used to address risk challenges that continue to be associated with new technologies or less mature markets. It can be structured through mechanisms such as risk guarantees, first-loss protections and concessional finance to make projects in emerging markets more attractive to private investors.
Multilateral development banks play a critical part as key vehicles for the design and deployment of different blended finance instruments. Their involvement helps bring to market innovative solutions, meaning they can achieve scale and reach investors and geographies that may otherwise not have been in a position to deploy or access climate finance.
North Macedonia deploys public and private sector to achieve climate goals
The role of MDBs as providers of blended finance extends beyond mobilisation. Technical assistance can be critical in supporting capacity building of investors, financial intermediaries and end users. It can also be deployed in order to tackle challenges in the wider regulatory system, from the introduction of effective auction systems to more policies that facilitate a just transition.
For example, at COP28 North Macedonia launched an investment platform to guide its far-reaching plans for a low-carbon and just transition of the electricity sector. By creating a vehicle for investment and policy development that brings together government, international finance and the private sector, the platform represents a milestone for the historically coal-dependent country and highlights its ambition to transform its energy sector and economy to a low-carbon, low-cost and secure paradigm.
The European Bank for Reconstruction and Development has been supporting the North Macedonian government in the development of the platform and will lead coordination with international partners, including the Climate Investment Funds, World Bank, European Investment Bank, Council of Europe Development Bank, KfW, CDP and, more recently, Agence française de développement. The aim is to reduce the country’s net greenhouse gas emissions by 82% by 2030 compared to 1990 levels, as set out in the nationally determined contribution for North Macedonia.
As the electricity sector is prominent in the country’s emissions profile, with coal historically accounting for over 40% of generation, the energy transition is key to achieving this goal. To address the impact of this transition on local labour markets in the coal-reliant regions of the country, the platform will support regional economic diversification and human capital development in line with a Just Transition Roadmap, supported by the European Union and EBRD.
To be successful, initiatives such as country-level platforms need to be tailed to address specific local challenges and characteristics. These differ substantially across emerging markets globally, where risks, investor interest and the types of local policy solutions call for adjusted approaches.
As climate finance is being scaled up and more investors consider entering this space, there is a need for further engagement between investors and MDBs to enhance awareness of the role that blended finance can play and to better set out the opportunities for co-operation. MDBs can play a broader role in helping to build this capacity across the wider global investment community. They can help build local and regional platforms and create momentum to catalyse investments into priority sectors and regions.
Barbara Rambousek is Director of Gender and Economic Inclusion at the European Bank for Reconstruction and Development.
This article featured in OMFIF’s ‘Global public funds and transition finance‘ report. The report is based on conversations had by the Transition Finance Working Group with public pension and sovereign funds representing over $5tn in assets under management.
