Public funds hold significant importance in facilitating the growth of investments in climate solutions. In emerging markets, where the estimated annual financing needed for combating climate change from 2023 to 2030 is a whopping $2.4tn, these funds can be utilized through blended finance to bridge the substantial funding gap and achieve large-scale, impactful, and sustainable investments.

Unlock the Potential of Public Funds for Climate Impact

Blended Finance and Risk Challenges

Blended finance serves as a crucial tool in addressing the risk issues linked to new technologies and less developed markets. It can be structured by means of mechanisms like risk guarantees, first-loss protections, and concessional finance, making projects in emerging markets more appealing to private investors. For instance, in emerging markets with emerging technologies, these financial structures help mitigate uncertainties and encourage private sector participation.

By providing these risk-mitigating features, blended finance enables a more conducive environment for private investors to engage in climate-related projects. It acts as a bridge between the public and private sectors, facilitating the flow of funds and expertise.

Moreover, different blended finance instruments can be designed and deployed based on the specific needs and characteristics of each emerging market. This customization ensures that the financial solutions are tailored to the local context and can effectively address the unique challenges faced.

The Role of Multilateral Development Banks

Multilateral development banks play a vital part as key vehicles for the design and implementation of various blended finance instruments. Their active involvement brings innovative solutions to the market. They have the ability to reach investors and geographies that might otherwise be excluded from accessing climate finance.

For example, in North Macedonia, these banks have been instrumental in launching an investment platform to guide the country's low-carbon and just transition in the electricity sector. By bringing together government, international finance, and the private sector, this platform represents a significant milestone for the historically coal-dependent nation.

The technical assistance provided by MDBs is critical in supporting the capacity building of investors, financial intermediaries, and end users. It helps in addressing challenges in the wider regulatory system, such as the introduction of effective auction systems and policies that facilitate a just transition.

North Macedonia's Climate Goals and Initiatives

North Macedonia is actively deploying public and private sectors to achieve its climate goals. The role of MDBs in providing blended finance extends beyond mobilization. In North Macedonia, the European Bank for Reconstruction and Development has been supporting the government in developing the investment platform.

By leading coordination with international partners like the Climate Investment Funds, World Bank, European Investment Bank, Council of Europe Development Bank, KfW, CDP, and Agence française de développement, the aim is to reduce the country's net greenhouse gas emissions by 82% by 2030 compared to 1990 levels.

Given the prominence of the electricity sector in the country's emissions profile, with coal historically accounting for over 40% of generation, the energy transition is crucial. The platform will support regional economic diversification and human capital development in line with a Just Transition Roadmap, with the support of the European Union and EBRD.

Tailoring Initiatives to Local Challenges

For initiatives like country-level platforms to be successful, they need to be customized to address specific local challenges and characteristics. These vary significantly across emerging markets globally. In different emerging markets, risks, investor interest, and local policy solutions call for adjusted approaches.

Each emerging market has its own set of circumstances and requirements. By tailoring initiatives, we can ensure that the solutions are relevant and effective in addressing the local issues. This customization helps in maximizing the impact of public funds and climate finance.

As climate finance is expanding and more investors consider entering this space, there is a need for enhanced engagement between investors and MDBs. This can lead to a better understanding of the role of blended finance and the opportunities for cooperation.

MDBs can play a broader role in building capacity across the global investment community. They can help create local and regional platforms and generate momentum to catalyze investments in 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.