Access to public and private climate finance for Small Island Developing States (SIDS) and Least Developed Countries (LDCs) is constrained by an underlying problem: the global financial system is designed around large, standardised, intermediary-led transactions, excluding smaller economies and local institutions, enterprises, and implementers. For the most climate-vulnerable countries, enabling access to private finance is not just about mobilising greater volume, but requires identifying who has existing access to private capital, who is locked out, and why.
Conversations about access at this year’s Pacific Pre-COP highlighted the need for finance models that work for smaller markets and locally led projects. Heading into COP31, the role of multilateral development banks (MDBs) in strengthening local and regional institutions to turn adaptation needs into investment should be a priority.
E3G has identified three intersecting barriers to access: structural constraints associated with small and vulnerable economies; a supply side organised around fragmented funds and intermediaries; and inadequate sustained support to turn locally identified priorities into action. These barriers reinforce one another, leaving countries without established pipelines less likely to attract the support needed to build them.
Access to private capital is particularly difficult because projects are often small, transaction costs are high, and investors must account for currency, regulatory, and perceived political risks. This means efforts cannot stop at identifying or platforming projects that already meet commercial investment criteria; they must also address the finance structures and support needed to make investment viable on countries’ own terms.
Pre-COP points to empowering local initiatives
At the Pre-COP, E3G co-hosted a panel with IIED and the Climate and Development Ministerial on expanding access to private finance for SIDS and LDCs, with speakers from the Maldives, Australia, the Asian Development Bank (ADB), the Adaptation Fund, and IIED. The Maldives’ experience demonstrated the need to:
- Build the conditions for investment. The ADB highlighted that early-stage preparation support can achieve more than one-off technical assistance. Yet the Maldives found that international development finance institutions (DFIs) often deem its projects too small and compliance requirements too heavy.
- Use first transactions to create lasting capacity. In the Maldives’ ASPIRE solar programme, an IDA partial guarantee and a developer performance bond shared the risk and helped establish the country as a solar investment destination. A first deal can establish the policies, partnerships, procurement systems and investor confidence needed to unlock further investment.
- Identify local needs and be selective about private finance. Adaptation is often a public good. The Maldives’ multi-million-dollar coastal protection around Malé is financed by bilateral aid, not private capital. Direct access can build capacity through practice, but private capital will not be suitable for every project.
Access is hardest for adaptation: projects are highly context-specific, smaller, and often generate little to no returns on investment. Local, national, and regional financial institutions, which understand local needs and can work at smaller scale, are therefore essential.
Local institutions are the missing link
MDB adaptation finance should be assessed against resilience, development benefits, affordability and debt sustainability, rather than commercial returns alone. Country-owned institutions, such as National Development Banks (NDBs), are often better placed than international public lenders to understand local markets, originate projects and structure co-investment with the private sector. However, they are frequently bypassed in favour of MDBs or UN funds, closing off one route to private capital that would allow for better domestic capacity-building and expertise. Research on development finance notes that MDBs can support NDBs through on-lending, co-financing and using them as intermediaries to channel international climate finance.
Despite known support channels, the scale of the gap to local finance is still significant. IIED has estimated that less than 10% of the US$17 billion committed from international climate funds between 2003 and 2016 was prioritised for locally-led activities, partly because higher transaction costs can make it harder for international institutions to finance small-scale projects directly. A more recent analysis found that local impact or involvement was mentioned in less than a third (29%) of climate-finance transactions reported between 2016 and 2023, while just 0.17% mentioned “locally led” or “community led”.
This stems in part from barriers to local institutions. Developing and sustaining NDBs also remains out of reach for many SIDS and LDCs, which often lack the economic scale, fiscal space or institutional capacity to establish them and frequently rely on intermediaries to access climate finance. NDBs that do exist can face limited pipelines of investment-ready adaptation projects, a lack of dedicated climate change strategies or adaptation goals, and constrained capacity to assess climate risks, prepare projects and structure finance.
Where national or regional capacities cannot meet the demands of adaptation finance, MDBs have a distinct role in not just financing large projects directly, but enabling local and national institutions to prepare, finance, and deliver investment.
MDBs as enablers of, and connectors to, local institutions
MDBs already play a role in mobilising private climate finance, and they can do more to fill gaps in local financial institutions in SIDS and LDCs while strengthening domestic capacity. This means supporting early-stage project preparation and investment coalitions that bring together governments, NDBs and commercial financiers to share risks and navigate fragmented support. For example, the Bangladesh Climate and Development Platform included plans for a project preparation facility to improve the bankability of climate projects and attract private investment at scale.
MDBs can also use guarantees, concessional and blended finance, and local currency solutions to change the risk-return profile of projects that would otherwise struggle to attract private capital. The ADB’s Wayfinder programme supports co-financing and risk-sharing through concessional finance, reimbursable grants, guarantees and technical assistance. These instruments reduce the risks and upfront costs that deter private financiers and could make adaptation projects with limited financial returns viable for private co-financing.
Finally, MDBs should back local institutions when they cannot absorb risk alone, stepping in directly only where such institutions do not exist. This could include channelling credit lines through national and local institutions, guarantees for adaptation lending, local currency lending, and extending networks such as the International Development Finance Club to more SIDS and LDC institutions.
What COP31 should deliver
At COP31, the conversation must focus on turning these entry points into practical routes for MDB investment and private finance mobilisation.
To expand private finance access for SIDS and LDCs, efforts must identify the finance structures and support needed to make investment possible on their terms. Three priorities should guide this agenda at COP31:
- Channel more support through national and regional institutions.
- Expand project preparation funding for SIDS and LDCs, targeting early stages where many adaptation projects stall.
- Adapt instruments and requirements to smaller projects, including through local currency lending and proportionate compliance requirements.
Together, these asks can help ensure MDB support builds domestic capacity and expands access to locally led adaptation finance.
