Climate finance is growing but EMDE investment needs are growing faster

Private capital is essential to close the climate investment gap in emerging markets and developing economies (EMDEs), yet it remains constrained by a small set of recurring barriers:

• policy uncertainty,

• foreign exchange (FX) risk,

• weak “bankability”

• thin data

Global climate finance is rising, but EMDE needs remain far larger than current flows, especially for mitigation. [1]

Blended finance is one of the most practical bridges: it uses public or concessional resources to improve risk–return profiles, prove new markets, and crowd in commercial investors, but it is explicitly “not a cure-all” and must be targeted and time-bound. [2]

Let’s take India for example. Its project pipeline and domestic capital base are sizeable, yet the scale-up required is enormous (estimates in one World Bank Group technical note highlight a jump from roughly USD 18bn to ~USD 170bn per year towards 2030), making catalytic structures increasingly relevant. [3]

Global climate finance hit around USD 1.9 trillion in 2023, with early data indicating it exceeded USD 2 trillion in 2024. [1] That headline sounds like momentum until you look at where decarbonisation must accelerate. EMDEs account for a large share of global emissions and are often more exposed to climate hazards, yet scaling private climate finance there remains hard. [4]

The puzzle is no longer whether private investors “care” about climate. It’s why capital that happily backs renewables in mature markets still hesitates when projects move into EMDE risk territory, and what financial engineering can (and can’t) do about it.

Why private capital matters and why EMDEs can be attractive

Two realities sit side-by-side in EMDE climate finance.

First, domestic capital does the heavy lifting: Climate finance to EMDEs relies largely on domestic actors. For example, CPI tracking shows 2023 EMDE flows were predominantly domestic, with large domestic shares across categories. [7] However, domestic financial markets in many EMDEs can be shallow, with high interest rates and short maturities; one CPI analysis argues they can, at best, cover only about half of the funds needed for the climate transition. [5]

Second, the opportunity set is real. CPI’s EMDE tracking links rising mitigation investment to cost-competitive clean technologies and policy incentives such as in electric mobility and efficiency. [7] International private finance that does flow to EMDEs is heavily skewed toward energy systems, reflecting where revenue models can be clearest. [7]

Private climate finance in emerging markets has grown, but it remains far below what is needed. [7]

Why private capital still hesitates

The barriers are well-known and remarkably consistent across regions.

Policy and regulatory uncertainty raises required returns. Investors look for predictable operating environments, clear rules, enforceable contracts and credible institutions; without those, risk premia rise quickly. [8]

FX risk creates a structural mismatch: project revenues are often in local currency, while financing may be in “hard” currency. Depreciation can threaten project viability, and commercial hedging is frequently expensive or unavailable. [5]

Project bankability is often the binding constraint:

• shortages of investable projects,

• small ticket sizes,

• weaker counterparties,

• limited project preparation capacity

can all stall deal flow. [4]

Data gaps compound everything: weak disclosure, limited climate information architecture, and inconsistent risk data make due diligence slower and more conservative, especially for institutional capital. [4] Most EMDE climate finance bottlenecks fall into four categories, and each needs a different tool.

Blended finance

Definition: OECD guidance describes blended finance as development finance (concessional or not) mobilising non-concessional commercial finance for sustainable development in ODA-eligible countries. [2] In practice, it improves the risk-return profile so private capital can participate. [9]

Critically, Development Finance Institution (DFIs) describe blended finance as a targeted response like “a pivotal tool” but “not a cure-all” and stress the need for sound regulation and an eventual phase-out of dependence on subsidies. [8]

Mechanisms mapped to barriers (quick guide):

• Policy / political risk → partial credit/risk guarantees; political risk insurance; contract-backed payment support.

• FX risk → local-currency lending; subsidised or pooled hedging facilities; FX liquidity backstops; swap structures.

• Bankability / pipeline → project-prep grants and technical assistance; subordinated debt/mezzanine; aggregation vehicles to reach scale.

• Data gaps → funding for measurement, reporting and verification (MRV); disclosure support; taxonomy alignment; performance-linked structures.

Blended finance works best when the instrument matches the bottleneck. [8]

India case study: scale, domestic depth, and the catalytic “last mile”

India combines a large pipeline of climate-relevant assets (power, grids, mobility, industrial transitions) with a meaningful domestic capital base, yet the scale-up required is still daunting.

A World Bank Group technical note focused on blended finance in India highlights the magnitude. Estimates cited in the note suggest climate investments need to rise from roughly USD 18bn to ~USD 170bn per year to align with national ambitions toward 2030. [3]

That same note argues catalytic capital can materially change feasibility which suggests each USD 1 of catalytic capital could leverage USD 8 of private capital that otherwise may not have been deployed. [3]

What this looks like on the ground: blended structures are most defensible where they unlock new market segments (distributed solar, storage, industrial efficiency) and where regulation and procurement frameworks can mature quickly enough for concessional support to step back. [3]

India’s challenge is not “whether projects exist”, it’s whether finance scales fast enough and cheaply enough. [3]

Conclusion

The debate is shifting from “how do we raise more climate finance?” to “how do we make private capital investable at scale in EMDEs?” The answer is less about inventing new asset classes and more about matching tools to frictions: de-risk policy exposure, neutralise FX mismatches, build project pipelines, and fund credible data.

Blended finance has emerged as one practical response to these challenges. By absorbing early risk and improving project bankability, it can help crowd in private investors that might otherwise remain on the sidelines. Yet it is not a permanent substitute for well-functioning markets. Over time, the goal is to create conditions in which climate investments in emerging markets stand on their own commercial footing, supported by stable policy frameworks and stronger domestic financial ecosystems.

What becomes clear is that private capital is not inherently unwilling to engage in emerging markets– it is cautious, selective, and responsive to signals. As those signals improve, capital is likely to follow.

If you’re interested in how private capital is moving in emerging market climate finance, it’s worth paying attention to the underlying mechanics.

• Follow EMDE climate finance dashboards to understand where capital is actually flowing and what counts as public vs private, domestic vs international finance.

• Read blended finance guidance with an “instrument-to-barrier” lens, focusing on how specific tools are designed to address specific risks rather than treating blended finance as a catch-all solution.

• Pay close attention to local-currency financing solutions. Foreign-exchange risk is often the silent deal-breaker for otherwise viable projects.

1. https://www.climatepolicyinitiative.org/publication/global-landscape-of-climate-finance-2025/
2. https://www.oecd.org/en/publications/2025/09/oecd-dac-blended-finance-guidance-2025_8ea42fde.html
3. https://ppp.worldbank.org/sites/default/files/2025-06/Blended%20Finance%20for%20Climate%20Investments%20in%20India.pdf
4. https://www.imf.org/-/media/files/publications/gfsr/2022/october/english/ch2.pdf
5. https://www.climatepolicyinitiative.org/wp-content/uploads/2024/08/Currency-Risk-Report.pdf
6. https://www.climatepolicyinitiative.org/publication/global-landscape-of-climate-finance-2025-emde-spotlight/
7. https://www.climatepolicyinitiative.org/wp-content/uploads/2025/06/Global-Landscape-of-Climate-Finance-2025-EMDE-Spotlight-Summary-Handout.pdf
8. https://www.ifc.org/content/dam/ifc/doc/2025/role-of-blended-finance-in-an-evolving-global-context.pdf
9. https://ppp.worldbank.org/blended-finance