The United Nation’s Independent High Level Expert Group (IHLEG) on Climate Finance – a group that advises COP on the climate finance agenda – has called for a major transformation to mobilise private finance towards emerging markets and developing countries (EMDCs) to meet climate goals.
The IHLEG, which was founded at COP26 to examine net zero pledges made by the private sector and other non-state entities, has called for an increase in blended and catalytic finance.
In its third report — Raising ambition and accelerating delivery of climate finance — the IHLEG outlines its recommendations for unlocking institutional capital to EMDCs and highlights the current barriers to achieving this.
The call for action comes at a time when the world faces an unprecedented investment imperative to meet Paris-Aligned climate goals.
The transition to clean, low-carbon energy, urgently building resilience to the impacts of climate change, and protecting nature and biodiversity, requires a rapid step-up of investment in all countries, according to the report.
“This investment push will give a major boost to growth and development, and will lead to large, avoided costs and very substantial savings. But this new growth story can only be realised through a major transformation of the climate finance system based on concerted efforts to unlock investment opportunities and ramp up all pools of finance.
“Different blended finance instruments and approaches can play complementary roles in mobilising private finance towards climate action,” the report stated.
In the context of the high adaptation financing needs, blended finance can be particularly promising in driving private finance towards key adaptation areas, according to the report.
Unlocking capital
Furthermore, the report stressed the need to tackle supply-side regulatory and incentive barriers to remove both legal and organisational constraints to investing in EMDCs, especially for clean energy and green industrialisation, in order to unlock institutional capital for EMDCs.
Additionally, the report calls for a reform of the policies of regulatory and rating agencies that can help achieve consistency in capital treatment of transactions across jurisdictions, along with recognition of the risk-mitigating features of blended finance and other strategies such as A/B loan structures.
“While supply-side regulation like the prudential regime for insurance and reinsurance undertakings in the EU, Solvency II, is still a critical barrier to insurers, pension funds arguably do not have the same legal or fiduciary constraints,” the report stated.
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