Private Sector Climate Finance After the Crisis

Climate investments in the emerging markets and developing economies (EMDEs) have so far fallen well short of what is required to meet targets set in the 2015 Paris Agreement. National commitments ahead of the 2021 UN climate summit will further underline the discrepancy. Climate finance in the EMDEs has been dominated by public sources and development funds, while private investors, local capital markets, and green banking became significant only recently. This paper surveys the incentives for the provision of dedicated green financial products by private investors and lenders in EMDEs, and the related challenges for regulators. While green bonds and other portfolio investments have attracted much attention, in low-income countries, mobilizing private finance that addresses the climate challenge will need to rely on banks as the core part of the domestic financial system. This effort will need to be supported by better coordination with regulators in the advanced countries, and by making blended finance schemes more effective.