Towards a multi-sovereign guarantee mechanism for low carbon investments and climate resilience in developing countries

The latest 2023 IPCC Report on Climate Change states that climate finance for both mitigation and adaptation must increase in this decade, by a factor of three to four compared with its current levels (IPCC SYR, C.7), This gap is biggest in developing countries, especially those that are already struggling with debt, poor credit ratings and burdens of the recent macroeconomic shocks in the world economy. There is sufficient global capital, public and private, to close this gap if we succeed in reducing the regional and sectoral mismatches between where the global pool of savings is currently directed and where it should be directed. It thus urges to reduce the barriers to this redirection both within and outside the global financial system.

There exists a diversity of national policy instruments to reduce these barriers. However, in the context of narrowing fiscal space for governments to finance directly climate action, there is an increasing recognition that these should be combined with an ‘increased use of public guarantees to reduce risks and leverage private flows at lower cost’ (IPCC, SYR C.7.3) especially in mitigation. However, public guarantees are not a miracle solution, as their public cost and leverage effect depend entirely on their design, their core objective and the context in which they are applied.