Private Investments in Developing Countries: Progress Requires Reforms

The European Bank for Reconstruction and Development (EBRD) is making increased efforts to provide more information to the private sector. However, as Reuters analyses reveal, there is still significant potential for multilateral banks to accelerate necessary changes to strengthen the role of the private sector. Research on 14 leading development banks shows that for every dollar invested, only 88 cents of private capital flowed in, and in poorer countries only 0.44 cents, despite climate finance commitments of 75 billion US dollars. Governments are now pushing for development banks to implement reforms more swiftly to achieve ambitious financing targets. The EBRD was able to increase its private investment ratio to 3.58 dollars per dollar invested. IDB Invest has also made significant progress. Various instruments, such as packaging and selling loan tranches to private investors, are being utilized. However, delays and unattractive returns dampen the interest of some investors. Large institutions like pension funds often view direct investments in emerging markets as risky. Harmen van Wijnen from the Dutch pension fund ABP, for instance, calls for guarantees from multilateral banks. Some institutions already offer risk mitigation structures. At COP29, new initiatives were presented, including a U.S. guarantee over existing loans from the Asian Development Bank to promote climate-friendly projects. While some development experts, such as Hubert Danso from Africa Investor, criticize the inadequate mobilization of private capital, organizations like the OECD view the lack of transparent data as an obstacle. Data already shared in the GEMs compendium is deemed insufficient by investors. According to Erich Cripton from CDPQ Global, more comprehensive information is needed to provide the necessary security for investment decisions. Despite the higher risk in developing countries, some, like Somalia’s climate negotiator Abdullahi Khalif, see opportunities for good returns. Investors willing to take on these risks could benefit in areas such as renewable energy.