Urgent action is needed to accelerate capital mobilization for the green transition, particularly in emerging markets and developing economies (EMDEs). Despite a significant increase in global annual climate finance between 2018 and 2022—from USD 674 billion to USD 1.46 trillion—substantial efforts are still required to meet the target of USD 7.4 trillion per year by 2030 to align with the 1.5°C climate goal (CPI, 2024). With public capital pools limited and high public debt in both advanced and emerging economies, scaling up private capital is crucial to closing the financing gap.
This issue brief examines the barriers to adopting green guarantees and presents existing solutions to these challenges. Through expert discussions by the Green Guarantee Group (GGG) and interviews with guarantee providers, the report offers insights into the design and implementation of guarantee products. It provides actionable recommendations for governments, multilateral development banks (MDBs), development finance institutions (DFIs), guarantee providers, and policy advisors involved in scaling green guarantees.
Key Takeaways
Streamline Guarantee Processes
Simplify application and reporting requirements for similarly structured guarantee products to enhance accessibility, particularly for borrowers with limited internal capacity. Institutions offering guarantees should standardize procedures and consolidate information, as envisioned by the World Bank Group Guarantee Platform, reducing administrative burdens for borrowers. Coordinated efforts across stakeholders will be vital to achieving this goal.
Enhance Technical Assistance (TA) Pipeline Development
Strengthen or establish TA facilities to support local actors in developing bankable green projects that can attract guarantees and financing. TA can improve investment readiness by building local capacity, enhancing project structuring, and supporting certification processes, as demonstrated by the Green Guarantee Company.
Address High Costs and Fees
Reduce the costs of obtaining and implementing guarantees to increase their attractiveness. In the short term, cost-sharing mechanisms, fee subsidies, or donor-funded facilities can lower hedging and transaction costs, particularly in EMDEs. Long-term efforts to improve data sharing and risk assessment will help reduce the costs of guarantee instruments.
Expand Guarantee Timelines
Adapt green guarantees to align with the long-term nature of climate projects, which often require extended financing periods. For example, GuarantCo’s 20-year guarantees have proven effective in attracting private capital for infrastructure and renewable energy projects. Reducing costs and fees will be critical to making these longer tenors more affordable.
Foster Stakeholder Collaboration
Strengthen coordination among private and public sector actors, including MDBs, DFIs, and regional banks. Collaborative models, such as the USAID-DFC partnership, have shown how pooling resources and expertise can reduce risks, lower costs, and expand financing options for climate projects in underserved markets.
Policy Considerations
Policy and Regulatory Implications
How do MDBs’ accounting rules for including guarantees on their balance sheets affect their lending capacity? What changes could enhance the accessibility of guarantees for climate investments?
Will the updated Development Assistance Committee regulations on counting guarantee support as Official Development Assistance encourage greater collaboration between aid agencies, DFIs, and other guarantee providers?
How should policymakers address potential moral hazards and market distortions related to guarantees?
Risk Assessment and Structuring
How does the misalignment between perceived risk and low default rates in guarantee instruments impact their uptake? Are current risk frameworks too conservative, and how can they be adjusted to improve risk evaluations?
Do the challenges faced by cross-border guarantees mirror those of domestic guarantees, and how can uptake be increased at the subnational level?
Geopolitical and Strategic Considerations
How does the geopolitical landscape affect the availability of guarantees, particularly in high-need countries, given the links between financing and the provision of equipment and services from host countries to beneficiary nations?
This work aims to inform and guide key stakeholders in designing, implementing, and scaling green guarantees, helping to address the financial challenges facing climate investments globally.
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