Achieving global climate and development goals requires a step-change in investment across emerging markets and developing economies (EMDEs). Yet capital flows remain far below what is needed.
Unprecedented geopolitical and economic volatility are constraining the ability to finance climate transition and resilience investment while driving private capital out of these markets just when it’s needed most.
Public Development Banks (PDBs) are mandated to act as system-level risk-reducers in these moments. Through risk-sharing mechanisms, blended finance, and counter-cyclical lending, they help mobilise private capital and support investment where markets alone fall short.
However, important barriers remain to scaling private finance through multilateral and national development banks for investment in EMDEs at the pace required.
In our report with the International Development Finance Club (IDFC), we outline practical recommendations to reduce these barriers by addressing how the international financial system can better recognise the risk-reducing role of PDBs to lower the cost of capital and mobilise investment at scale.
Closing the gap between perceived and actual risk
While the availability of foreign currency reserves, market liquidity and sovereign debt sustainability are widely recognised as factors affecting the cost of capital for EMDEs, the role of prudential regulation and credit rating methodologies has been less well explored. The challenge isn’t just capital availability – it’s how risk is assessed, priced, and regulated across the financial system.
Currently, prudential frameworks, credit rating methodologies, and market practices often do not fully recognise the risk-reducing role of PDBs. This gap between perceived and actual risk contributes to higher borrowing costs, shorter tenors, and constrained investment.
The report argues that targeted, evidence-based reforms can help better align perceived and real risk. Crucially, this approach does not require reopening underlying global frameworks like Basel III or Solvency II. Instead, it focuses on existing methodologies.
Improving the way that the important macro-stabilising and risk-reducing role of public development banks is understood and reflected across the financial system will enable these institutions to deliver investment to EMDEs for the climate transition at scale.
This report builds on discussions held during the 2026 IMF–World Bank Spring Meetings, the FiCS G7 special event, and London Climate Action Week.
Download the full report
