Financing the Transition: Mechanisms to Scale Clean Energy Transitioning Emerging Markets
- Alex Lim
- Nov 12
- 6 min read
Updated: Nov 17
How can emerging markets (EMs) attract the investments needed to transition and sustain their clean energy projects?
In recent decades, emerging economies have set ambitious net-zero goals whilst grappling
with limited fiscal space and rising energy demand. Despite growing interest in green
finance, most clean energy investments still flow towards advanced economies. This leaves
developing nations struggling to fund their own transitions. This poses the question, how
can emerging markets (EMs) attract the investments needed to transition and sustain their
clean energy projects?
EMs will determine the success of global clean energy transitions. By 2050, EMs will drive
nearly three-quarters of global energy consumption, yet receive less than one-fifth of total
clean energy investment. In 2025, global clean energy investment reached a record US$2.2
trillion; however, the majority of this investment was directed towards developed
economies. This raises a significant question: How can regions most vital to
decarbonisation remain the least financed?
This paradox is not due to a shortage of capital, but a failure to channel it to where it is most
needed. High borrowing costs, currency volatility, and perceived government instability
make renewable projects (e.g., in many African EMs) at least two to three times more
expensive than in advanced economies.
Over the past decade, development banks, multilateral funds and governments have
experimented with new ways to attract private capital into green projects through the use of
blended finance, which shares risk between public and private investors, and green and
sustainability-linked bonds (SLBs) that tie returns to climate outcomes. These mechanisms
have already mobilised billions but lack the scale and impact to close the gap.
The challenge, therefore, is about redesigning mechanisms that make clean energy
investments in emerging markets more scalable and accessible.
Sharing Risk
One way of reallocating more capital towards EMs is by sharing risk to attract private capital. This can be achieved through blended finance, where concessional capital from public, philanthropic or development sources mobilises commercial investments into projects otherwise deemed too risky. By altering the risk-return profile using blended finance, it reallocates risk across different investor classes through structured layering. Typically, first-loss tranches absorb early project losses first, protecting senior lenders' risk and limiting their exposure.
Public or development partners can further enhance creditworthiness through risk-mitigation instruments such as guarantees, interest rate buy-downs, and technical assistance. Together, these create a de-risked capital stack that gives private investors the confidence to enter markets they would otherwise avoid.
A noteworthy example is the Indonesia Just Energy Transition Partnership, which combines
grants, concessional loans and private finance to gather approximately US$20 billion for
phasing down coal and expanding renewables. According to the World Bank, blended finance portfolios in EMs have grown rapidly in recent years, with Southeast Asia and Sub-Saharan Africa spearheading.
By absorbing early losses and providing long-term capital (typically 10-15 years) at a below
market rate, blended finance advances public policy goals while generating risk-adjusted
returns. It improves credit histories, enhances operational performance and over time
transforms high-risk markets into bankable assets, integrating clean energy infrastructure into mainstream investment portfolios.
However, challenges persist. Concessional or philanthropic capital remains scarce, and higher global interest rates raise funding costs. Additionally, blended finance often favors larger projects, overlooking smaller energy initiatives with strong social and environmental
benefits. It is therefore a transitional catalyst to crowd in private capital and demonstrate
commercial viability, rather than a tool to reform domestic financial markets or manage
policy and currency risks.
Tying Finance to Climate Goals
Another way for EMs to make clean energy investments more attractive and scalable is by
developing financial instruments that link climate performance to economic returns. Green
and SLBs convert environmental outcomes into investable, risk-adjusted products.
Enabling investors to invest large amounts of ESG capital in emerging economies.
These enhance market confidence and transparency by establishing verifiable connections
between environmental outcomes and financial performance. In traditional bond markets, investors often face informational asymmetry – they are uncertain about their money’s use
and the reliability of the issuer's claims. Green bonds address this issue by earmarking these
proceeds exclusively for certified low-carbon projects, requiring external audits to verify
expenditure. This builds credibility and reassures investors that their capital supports energy transition rather than general spending.
SLBs further this by embedding measurable climate targets directly into financing contracts. This affects coupon rates – the interest paid to investors rises if the issuer fails to meet its sustainability targets and falls if goals are achieved. This introduces price mechanisms, which make environmental performance financially meaningful. Therefore, meeting emissions and renewable energy goals is key to reducing borrowing costs, incentivising governments and companies to achieve their objectives and offering investors accountability and a form of downside protection.
However, one limitation of Green and SLB is the absence of universal taxonomies and
verification standards across markets limits comparability and facilitates greenwashing.
Smaller EM issuers also face an added administrative burden, and performance metrics
often rely on self-reported or unaudited data.
Securing confidence through credit guarantees and insurance
A third mechanism for unlocking clean energy investment in EMs is the use of credit
guarantees and political risk insurance. These mechanisms protect investors from loan
defaults, currency shocks, or policy reversals that could undermine investor confidence.
They underwrite confidence by assuring lenders that even if the borrower defaults, or the
regulatory environment shifts, their investments will be partially covered – reducing investor exposure.
Institutions such as MIGA and the African Trade Insurance Agency utilise these instruments
to mitigate investor risk through partial credit guarantees, political risk insurance and
currency conversion protection. Through these, MIGA's renewable energy portfolio in
Sub-Saharan Africa reaches US$2.5 billion in guarantees, helping projects secure long-term
funding.
However, these mechanisms heavily rely on counterparties, require extensive due diligence,
and often prioritise large-scale developers, thereby leaving smaller developers without
access. Still, these remain essential tools for making emerging markets investable —
particularly when paired with blended finance and green-bond initiatives.
Policy Recommendations
Policymakers should strengthen domestic financial ecosystems by enhancing
regulatory frameworks, mitigating currency volatility, and fostering the development
of domestic capital markets.
Development finance institutions and multilateral banks should expand their use of
catalytic capital and risk mitigation instruments, such as loss tranches, concessional
lending, and guarantees, to support sustainable development.
Investors and corporations should improve transparency and disclosures for Green
bonds and SLBs. By adopting consistent verification and establishing reporting
standards, it enhances credibility, reduces greenwashing and narrows yield spreads –
enabling cheaper large-scale financing
Conclusion
The future of the clean energy transition will be dependent on financial innovation that
bridges risk and opportunity. EMs have unlimited potential but are hindered by the highest
barriers. Mechanisms such as blended finance, Green and SLBs and credit guarantees can be used to transform climate ambition into an investable reality. These tools will scale
investments if concessional capital is expanded, standards are followed, and domestic
financial capital markets are strengthened.
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