External publications

Scaling up green investment in the Global South: strengthening domestic financial resource mobilisation and attracting patient International capital

London: SOAS Centre for Sustainable Finance

DOI: https://doi.org/10.25501/SOAS.00041078
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Mobilising finance for climate and SDG action is more urgent than ever. As the goals of the Paris Agreement and the Agenda 2030 start to slip from our grasp, we need to have a sober reality check regarding the most promising approaches to mobilise finance for sustainable development and stop pursuing elusive blended finance solutions that have not delivered at scale to date and are unlikely to do so in the future. International private investors demand high risk-adjusted returns when investing in emerging and developing economies (EMDEs), and many – perhaps the majority – climate- and SDG-related projects will not deliver those. While foreign capital in the form of direct investment or foreign aid has played an important role in the economic development of many countries, historically, no economy has developed its infrastructure and financed its development primarily through foreign finance, spare a few resource- rich countries. Mobilising domestic savings for local investments is a crucial part of economic development, and it is vital to lower the cost of capital – one of the main bottlenecks to development. This report calls for a much larger role of public development banks at the national and international level in developing a sustainable project pipeline and in financing these. At the international level, the multilateral development bank (MDB) reform agenda needs to be accelerated, and shareholders should further bolster the potential of MDBs to mobilise private capital through international bond markets by new capital increases. MDBs have an unmatched ability to leverage public resources, and capital invested in MDBs will generate a multiple in returns. Going further, we need to empower national development bank (NDBs) in EMDEs to replicate how MDBs and advanced country development finance institutions (DFIs) backed by highly solvent governments can borrow against their equity in capital markets. Hence, a key recommendation of this report is that MDBs and international DFIs work more closely with NDBs and support them in strengthening their governance structures, enhancing their ability to develop sustainable project pipelines, and in bolstering their capabilities to raise funds in capital markets. Going beyond technical assistance and capacity building, MDBs and international DFIs can strengthen the capital base of NDBs by providing equity, callable capital, and subordinate debt, and thereby empower NDBs to mobilise a multiple in local capital. Moreover, they can provide guarantees to NDBs when issuing debt. With international support, NDBs can become stronger local partners and investors in low-carbon climate resilient projects that are well placed to generate, monitor and audit significantly expanded project pipelines. Lastly, the report highlights and illustrates the opportunities of digital technologies for developing countries to develop new, innovative fundraising approaches and reinvent how capital market infrastructure and instruments are built to serve the specific financing needs in these markets, as well as the needs of the local investor base. Fintech solutions have a capacity to facilitate domestic resource mobilisation for sustainable investments and at the same time improve the implementation of infrastructure projects by facilitating processes and enhancing transparency.

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