## clnea2022007

## Source details

**Canonical URL:** [clnea2022007](https://www.imf.org/-/media/files/publications/staff-climate-notes/2022/english/clnea2022007.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/staff-climate-notes/2022/english/clnea2022007.pdf.md)
- [Structured JSON version](/-/media/files/publications/staff-climate-notes/2022/english/clnea2022007.pdf.json)

---

### Introduction — scale of needs and current funding
- Global investments required to achieve the Paris Agreement’s temperature and adaptation goals: between US$3 to $6 trillion per year until 2050.
- Global climate finance currently: about US$630 billion annually.
- Debt is the main source of funding for these investments.
- Green bonds represent less than 3 percent of global bond markets; most issued in developed markets and China.
- Only about one-half of global climate finance flows come from the private sector and only about one-half goes to developing countries.
- Major data and disclosure gaps, especially outside renewable energy, energy efficiency, and transport.

### Key constraints and risks limiting private climate finance
- High upfront costs and long time horizons for mitigation and adaptation projects.
- Principal deterrent risk types:
  - currency risk;
  - regulatory and political risk (contract renegotiation, change in taxation or regulatory environment);
  - macroeconomic and business-related risk (volatility of demand, exchange rate fluctuations);
  - technical risk (construction delays and cost overruns, technology obsolescence, force majeure).
- Market failures and impediments:
  - knowledge spillovers and short-termism in capital allocation;
  - high perceived political and policy risk;
  - technological costs and uncertain economic effects of climate impacts;
  - exposure of price signals (e.g., carbon taxes) to swings in high-carbon commodity prices.
- Supply- and demand-side constraints:
  - supply-side: changes in energy supply, production technologies, deployment of carbon dioxide-removal technologies;
  - demand-side: need to modify consumption patterns, behavior, and lifestyle.
- Macro-financial constraints in EMDEs:
  - absence of adequate carbon pricing in many EMDEs;
  - country risk difficult to price for climate-related products;
  - pre-existing debt vulnerabilities that could be magnified by additional borrowing, including transfer of currency and liquidity risks from private to public balance sheets.
- Microeconomic constraints in EMDEs:
  - lack of large investment-grade, liquid markets;
  - high transaction costs and significant project risks.
- Investor and market structure challenges:
  - mainstream investors screen for companies with market capitalization of at least US$200 million;
  - cost of equity for climate investments for impact investors and DFIs was 12-15 percent as of June 2022 in small frontier EMDEs;
  - institutional investors limit exposures to only 12 to 15 investment-grade EMDEs with large, liquid bond markets.
- Adaptation-specific constraints:
  - uncertainty about economic consequences of climate impacts and efficiency of adaptation technologies;
  - adaptation finance often unattractive to private sector; almost all adaptation finance currently provided by the public sector.

### Policy instruments and public sector roles to mobilize private capital
- Policy options:
  - adopt carbon pricing paths to ensure well-functioning markets and prices;
  - increase public investment in infrastructure, R&D, and renewable energy technologies;
  - implement sectoral policies and feebates as complements to carbon pricing;
  - address climate data gaps, data disclosure standards, and develop taxonomies for sustainable financing;
  - elevate commitments and coordination; enhance regulations for sustainable finance; create clear transition pathways covering mitigation and adaptation.
- Regulatory tools may include prudential regulation, reallocation of capital across industries, and transparency enhancements.
- Public financing and blended instruments:
  - blending public and private finance to de-risk investments (for example, first-loss investments or performance guarantees);
  - structuring products with junior/equity tranches for public sector and mezzanine/senior tranches for private sector.
- Risks of public support:
  - guarantees and first-loss exposure could privatize gains and socialize losses, creating moral hazard and large contingent liabilities unless public investments take equity or junior tranches and are accompanied by strong monitoring and legal frameworks.
  - smaller LICs face greater fiscal and capacity risks given generally weaker state capacity.

### Role of multilateral institutions and the IMF
- MDBs, NDBs, and IFIs (including the IMF) can help attract private climate finance collectively.
- IMF catalytic roles:
  - policy advice and surveillance (bilateral and multilateral surveillance; Article IV consultations);
  - risk assessments in FSAPs and climate macro-financial country assessments;
  - capacity development;
  - program lending and financing through the Resilience and Sustainability Trust (RST).
- RST and IMF involvement can support reforms improving the investment climate and regulatory/infrastructure resilience.
- IMF activities: advocating carbon pricing, identifying data gaps, promoting climate-related disclosures, developing guidelines for taxonomies of sustainable finance.
- Measures complement carbon pricing and help internalize public benefits of low-carbon, climate-resilient investment.

### Macroeconomic context and balance of payments considerations
- Recent higher energy prices and the war in Ukraine have:
  - sparked energy security concerns and delayed low-carbon transitions in some countries;
  - exposed many EMDEs to high fossil fuel prices and energy rationing;
  - driven sharp price increases in several minerals critical for the transition.
- Monetary policy tightening in advanced economies and high sovereign bond yields in some EMDEs can raise project finance hurdle rates.
- Large capital inflows associated with climate finance could create balance of payments vulnerabilities if de-risking is not accompanied by increased domestic low-carbon manufacturing or critical mineral endowments.

### Addressing data gaps and leveraging technology
- Non-financial impediments: information asymmetries, absence of common taxonomies, inadequate classifications, home bias.
- Technology examples to improve data collection and verification:
  - APIs to retrieve environmental impact and energy consumption data;
  - IoT devices to measure carbon emissions and pollution in real time;
  - blockchain platforms to ensure provenance of ESG certifications;
  - natural language processing to analyze sustainability-related information.
- Developing weather monitoring and forecasting systems important for LICs reliant on agriculture.

### Financial structuring and scaling solutions
- Pooling and securitization:
  - pooling projects through structured funds and ABS-type instruments can attract institutional investment and diversify risk.
  - project bundling could raise investable project supply and reduce competition for a scarce pipeline.
- Managing fossil fuel transition:
  - phase-out requires managing macro-financial consequences of asset stranding and reallocating capital and labor;
  - international investment protections (for example, Investor State Dispute Settlement systems, Energy Charter Treaty) can lock in fossil fuel investments or expose authorities to legal action.
- Adaptation finance opportunities for private capital exist (early warning systems, mangrove protection, climate-resilient infrastructure) but face barriers related to scalability and return generation.

---

### Box 1 — The Role of the Private and Public Sectors in Adaptation Finance

- Adaptation finance combines private and public components; private sector should in principle be an efficient driver but faces key constraints:
  - uncertainty around climate risks;
  - lack of understanding about the learning cycle for adaptation;
  - insufficient pricing of risks;
  - insufficient access to climate data and models;
  - lack of bankable projects, especially in LICs;
  - underapplication of taxonomies of climate resilience investments.
- Market failures and rationale for public intervention:
  - network effects and coordination problems imply underprovision of adaptation by private actors and a coordination role for government;
  - affordability and access issues create case for international financial support and public financing.
- Policy and market enablers to increase private sector adaptation:
  - long-term adaptation planning support;
  - national adaptation investment plans;
  - market assessment and pipeline screening;
  - project preparation support;
  - downstream transaction demonstration.
- Physical impacts and macro-financial constraints:
  - economic costs of physical impacts are very uncertain and growing;
  - countries’ fiscal vulnerabilities can worsen public debt levels and credit ratings;
  - high project-level risks (cost overruns, delays, permit risks) particularly in LICs and EMDEs.
- Private sector capital scale and frictions:
  - estimated private climate finance: about US$300 billion per year in new climate financing.
  - total private AUM globally: US$210 trillion.
  - sample: climate-labeled investment funds’ global total AUM grew to US$133 billion in 2010–20 (more than tenfold); AUM for climate-labeled private investment funds represented less than 0.3 percent of total AUM.
  - some assessments: 30 largest financial institutions collectively provide more than US$740 billion in primary financing of fossil fuels.
- Private instruments and market facts:
  - total bank loans to the private nonfinancial sector: about 100 percent of the 2020 world’s annual GDP.
  - green bond issuances grew rapidly, reaching more than US$600 billion in 2021.
  - green bonds are one-half of global climate-related bond issuances and about 80 percent of climate-related bond issuances in EMDEs.
  - green bonds constitute only 3.8 percent of all bond issuances in EMDEs (excluding China).
  - Green Sukuk first launched by Malaysia in 2017.
  - SLLs grew to US$400 billion in annual issuances in 2016–21.
  - about two-fifths of SLB issuers are in EMDE countries.
  - social and sustainability bonds surpassed US$200 billion in 2020.
  - venture capital: more than US$200 billion invested in climate-related technology firms between 2013 and H1 2021.
  - green premium (“greenium”) around 50 basis points at best.
- Public sector roles: underwrite risks, take equity/junior tranches, guarantees, capacity development, project selection and diversification.

---

### Annex 3 — MDB climate finance instruments, commitments, and operational approaches

- MDB commitments and outcomes (as of 2020):
  - overall commitments of five major MDBs: US$32 billion.
  - adaptation finance and co-financing increased to US$18 billion and US$110 billion, respectively, including private direct climate finance mobilization of US$40 billion.
  - MDBs’ climate finance for developing countries in 2020: US$38 billion (57 percent).
  - mitigation finance dominated adaptation finance at 76 percent of the total.
  - more than three-quarters of tracked climate finance flows were domestic.
- Instruments in 2020:
  - debt climate finance: estimated 68 percent of total (US$26 billion), of which only 12 percent is low-cost or concessional financing;
  - policy-based financing: 11.5 percent (US$4.4 billion);
  - grants: 9 percent (US$3.3 billion);
  - guarantees: 4 percent (US$1.5 billion).
- Sectoral patterns: solar and onshore wind attract more than 90 percent of financing; low-carbon transportation is the fastest-growing recipient sector.
- Selected MDB targets and initiatives:
  - IFC: 2021-25 aims to reach 35 percent of climate finance in total portfolio; align 85 percent of real sector operations with Paris goals starting mid-2023, 100 percent by mid-2025.
  - EIB: raise share of financing for climate and environmental sustainability to over 50 percent of operations in 2025; restrict almost all oil and gas finance from 2022 onward.
  - IDB: climate finance at least 30 percent of total financing for 2020-23.
  - EBRD: green finance over 50 percent of annual investment by 2025 and set Paris alignment date.
  - AfDB: planned to double climate finance to US$25 billion in 2020-25, prioritizing adaptation.
- Blended concessional finance principles: not crowding out private sector; minimize subsidies; aim for commercial viability; address market failures; avoid distortions; promote higher standards.
- Leverage and mobilization evidence:
  - syndicated lending by MDBs shown to attract US$7 of private credit for every US$1 of public credit in some studies;
  - contrasting evidence: on average US$1 of MDB and DFI investment mobilizes US$0.75 of private finance, falling to US$0.37 in LICs.
- MDBs can support NDBs: strengthen capacity, ease access to climate funds, channel international climate finance through national institutions, and stabilize financing during volatility.
- Risk management and governance: MDBs can provide insurance, require auctions for subsidies, strengthen governance benchmarks, create securitizable portfolios, and mitigate fiscal and governance risks from NDB financing.
- Public-private risk sharing instruments: public equity with private debt, PPPs, underwriting completion/political risks, multi-sovereign guarantees, frontloaded public finance to lower future private risk.
- Example fiscal limit: Uruguay’s PPP law caps total PPP liabilities and fiscal transfers at 7 percent and 0.5 percent of the preceding year’s GDP, respectively.
- Specialized facilities and outcomes:
  - CIF: US$8.5 billion trust fund; as of end-2020 channeled over US$60 billion to co-finance green projects; G7 committed up to US$2 billion in 2021.
  - GCF: goal US$100 billion per year by 2020; initial mobilization US$8.3 billion; first replenishment raised more than US$10 billion from 34 contributors as of September 2021; co-financed or financed US$23.4 billion in 117 developing countries during 2015–20.
  - GGEF: aims to raise US$900 million.
  - IFC MCPP: IFC invests in first-loss tranches to create investment-grade profiles for private investors.
  - Amundi Planet EGO Fund, GRECO: pooled structures with public first-loss tranches to attract private investment.
  - MIGA: in FY2021 issued US$1.35 billion of guarantees (26 percent of new business) to support climate projects in 22 countries.
- Typical pooled structure risk allocation:
  - first-loss (equity) tranche: typically public sector;
  - junior debt (mezzanine): public and private sector;
  - senior and super-senior: private sector.
- Operational levers for scale: mix of equity, policy-based financing, early-stage risk capital, guarantees, capacity development; World Bank levers include financial sector reform to green capital allocation, sectoral policies, and innovation/technology transfer.

---

### Box 3 — Amundi Planet Emerging Green One (EGO) Fund

- Launched February 2018 by Amundi in partnership with IFC.
- Started with net asset value of US$1.42 billion, including IFC’s US$256 million stake.
- Expected to reach US$2 billion and be fully invested in green bonds by year seven.
- Structure: credit enhancement model like a collateralized debt obligation with riskier junior tranches for IFIs and mezzanine/senior tranches for IFIs and private investors.
- Supported by IFC Green Bond Technical Assistance Program to stimulate green bond issuances by local financial institutions.
- Investment footprint (as of end-2020): invested in green bonds issued by financial institutions headquartered in nine countries; proceeds concentrated in renewable energy, green building, clean transportation, water and waste management.
- Challenges and lessons:
  - informational asymmetries mitigated by initial funding of green projects by EM-based banks;
  - EGO is exposed to credit risk of each bank whose green bonds it acquired;
  - future vehicles need flexible capital and project expertise to facilitate transactions.

---

### Box 5 — Case Study: Replacing Coal with Renewables

- Baseline net global economic gain from phasing out coal and replacing it with renewables: around US$ 78 trillion (present value of avoided emissions using IMF SCC of 75 dollars per ton of CO2).
- Benefits exclude reduced pollution-related health gains (conservative estimate).
- Baseline replacement mix: solar and wind.
- Global requisite climate financing to enable replacement of coal with renewables: around $29 trillion.
  - Regional breakdown of the $29 trillion: 46 percent in Asia, 18 percent in Europe, 13 percent in North America, 13 percent in Australia and New Zealand, 8 percent in Africa, and 2 percent in Latin America and the Caribbean.
- Under blended public-private financing assumption (every $1 public leverages $9 de-risked private):
  - Governments would need to invest $2.9 trillion;
  - Private sector would provide the remaining $26 trillion.
- Suggested baseline country contribution: individual countries pay 10 percent of their domestic costs to replace coal with renewables.
  - Individual-country net gains disappear only if country-specific SCC < US$2 per ton of CO2.
- Market context and scaling:
  - size of structured finance market today: around $2 trillion globally;
  - ESG assets under management: around $3 trillion;
  - AUM by GFANZ signatories: $130 trillion.
- Public development banks:
  - collectively disburse about $2 trillion per year;
  - estimated annual climate financing needed to replace coal with renewables: between $0.05 trillion and $0.2 trillion, with front-loaded investment this decade of $0.3 trillion.
- Capital markets would finance remaining 90%:
  - annual investment required from capital markets between $0.45 trillion and $1.8 trillion, with front-loaded investment this decade of $2.7 trillion.
- Suggested financing structure: $2.9 trillion of government investment in junior/equity tranches to support roughly $26 trillion in senior tranches for private investors, enabling de-risked investment-grade senior tranches.
- Policy levers and public roles:
  - regulate and standardize sustainable finance bond market;
  - disseminate sustainable finance best practices and public-good research;
  - partner with global database providers for updated macroeconomic and climate data;
  - supervise information quality and monitor impact indicators for SLBs;
  - MDBs could design and monitor KPIs with national authorities.
- Social considerations: necessity of “just transition” policies to compensate affected workers, communities, and regions; strengthen financial regulations to contain stranded asset risks.
- Research priorities and constraints include: long investment time frames; high upfront costs; significant project/country risk; limited familiarity with geographies; lack of specialized investment channels; physical climate-related financial risks; uncertain governance landscape.

---

### Annex Figure 1 — Climate finance flows, needs, and instruments (key figures)
- Tracked global climate finance flows (average 2019 and 2020): US$632 billion.
- Estimated global climate finance needs: US$4–5 trillion per year.
- IPCC: annual climate finance flows need to increase by 4 to 8 times in developing countries until 2030.
- Some estimates: needed increase in annual climate finance about 600 percent by 2030.
- About one-half of climate financing from public sources and one-half from private sources (without COVID-19 impact).
- As of 2020, three-quarters of tracked climate investments were domestic.
- Financial institutions and funds provided 41 percent of private-sector climate finance.
- Mitigation and adaptation investment uncertainty drivers: economic/population growth, rate of decoupling GDP and energy demand, future low-carbon technology costs, fossil fuel producers’ strategies, policy integration.
- Infrastructure (including adaptation) could cost low- and middle-income countries 2 to 8 percent of GDP per year until 2030 depending on spending efficiency and service targets.
- Quantitative estimates:
  - EMDEs’ low-carbon infrastructure investment gap: US$15–30 trillion by 2040 (1.5°C pathway).
  - IMF estimate: energy-related investments needed about US$3.3 trillion per year until 2030 to achieve net zero by 2050.
  - Some estimates: net zero by 2050 requires US$4.5 trillion per year on average from 2021–2050 (US$3.5 trillion annual increase plus US$1 trillion reallocated).
  - Incremental investment relative to baseline reported as US$0.9 trillion per year.
  - Some observers estimate fossil fuel rents savings about US$2 trillion per year.
  - Current annual global spending on clean energy: US$750 billion.
  - Clean energy investment in EMDEs excluding China: about US$150 billion.
  - Investment in renewable energies needs to average about US$1 trillion per year between 2021 and 2030.
  - Annual investment in total power generating capacity < US$500 billion between 2016 and 2020.
  - Fossil fuel investments: US$850 billion per year.
  - EMDEs account for only 20 percent of global clean energy investment despite about 60 percent of global GDP.
  - DFIs and MDBs fossil fuel financing estimates: US$16 billion and US$6.4 billion per year, respectively, over 2018–20.
  - International public climate finance estimated at US$58 billion in 2017.
  - Estimated US$4.5–5 trillion of infrastructure investments needed each year till 2030 to meet climate objectives.
  - Climate Islamic finance (green Sukuk): US$2.56 billion in 2020 and US$869 million in 2021.
  - Global green bond issuance: US$517 billion in 2021 (from US$297 billion in 2020).
- Macro-financial risks from scaling climate finance in EMDEs:
  - increased exposure to global financial system can raise capital outflow risks;
  - de-risking can increase share of benchmark-driven flows, transmitting cross-border stress;
  - reliance on local currency bond markets with foreign investor presence may increase exposure to global cycles and weaken monetary autonomy.
- High debt distress in LICs: about 60 percent of 73 countries eligible for G20 DSSI in 2020–21 were already in, or at high risk of, debt distress.

---

### Annex E — Types of Instrument (counting and eligibility principles)
- Climate finance counted when instruments "lead to, enable, or support the implementation and operation of activities included in the joint MDB methodology for tracking climate finance."
- Instrument descriptions and counting rules:
  - Refinancing: refinancing operational climate projects not yet at breakeven can count if break-even conditions are confirmed by the investment team; refinancing can adjust maturities, costs, exchange rate exposure, or replace expensive debt.
  - Working capital: "finance provided for operational expenditures"; counts if it leads to, enables, or supports eligible activities.
  - Lines of credit: climate finance equals the proportion of the credit line committed to eligible activities.
  - Policy-based financing (PBF): climate share equals proportion of climate-related "prior actions" triggering disbursement (example: one in three prior actions climate-related → one-third counted).
  - Results-based financing (RBF): proceeds used for activities included in the joint MDB methodology count as climate finance.
- For multi-purpose and commitment instruments, the climate share equals the proportion of eligible activities or prior actions tied to climate objectives.

*Source: clnea2022007 — IMF Staff Climate Notes.*

### Introduction

### Introduction

### Scale of climate finance needs and current funding
- Estimates of global investments required to achieve the Paris Agreement’s temperature and adaptation goals range between US$3 to $6 trillion per year until 2050.
- Global climate finance currently adds to about US$630 billion annually.
- Debt is the main source of funding for these investments.
- Green bonds represent less than 3 percent of global bond markets, and most are issued in developed markets and China.
- Only about a half of global climate finance flows come from the private sector and only about a half goes to developing countries.

### Key constraints and risks limiting private climate finance
- Large data gaps in tracking climate finance, especially outside renewable energy, energy efficiency, and transport; data collection and disclosures are not required in several countries.
- High upfront costs and long time horizons of mitigation and adaptation investment projects.
- Risk types that deter investment:
  - currency risk;
  - regulatory and political risk (contract renegotiation, change in taxation or regulatory environment);
  - macroeconomic and business-related risk (volatility of demand, exchange rate fluctuations);
  - technical risk (construction delays and cost overruns, technology obsolescence, force majeure).
- Market failures and impediments:
  - knowledge spillovers and short-termism in capital allocation;
  - high perceived political and policy risk (uncertainties about future climate policies);
  - technological costs and uncertain economic effects of climate impacts;
  - exposure of price signals (e.g., carbon taxes) to swings in high-carbon commodity prices.
- Supply- and demand-side constraints:
  - supply-side: changes in energy supply, production technologies, deployment of carbon dioxide-removal technologies;
  - demand-side: need to modify consumption patterns, behavior, and lifestyle toward more sustainable options.
- Macro-financial constraints, particularly in EMDEs:
  - absence of adequate carbon pricing in many EMDEs;
  - country risk that is difficult to price for climate-related products;
  - pre-existing debt vulnerabilities that could be magnified by additional borrowing, including transfer of currency and liquidity risks from private to public balance sheets.
- Microeconomic constraints in EMDEs:
  - lack of large investment-grade, liquid markets;
  - high transaction costs and significant project risks.
- Investor and market structure challenges:
  - mainstream investors screen for companies with market capitalization of at least US$200 million, a threshold few renewable energy companies clear;
  - development finance institutions report cost of equity for climate investments for impact investors and DFIs was 12-15 percent as of June 2022 in small frontier EMDEs, implying commercial investors may face even higher costs;
  - institutional investors face difficulties identifying relatively safe and liquid EMDE investments, limiting exposures to only 12 to 15 investment-grade EMDEs with large, liquid bond markets.
- Adaptation-specific constraints:
  - uncertainty about economic consequences of climate impacts and efficiency of adaptation technologies;
  - adaptation finance often unattractive to private sector due to underpriced risks, lack of access to finance in EMDEs, and lack of economies of scale;
  - almost all adaptation finance is currently provided by the public sector.

### Policy instruments and public sector roles to mobilize private capital
- Policy options to attract and scale private climate finance include:
  - adopting carbon pricing paths to ensure well-functioning markets and prices;
  - increasing public investment in infrastructure, R&D, and renewable energy technologies to support and incentivize private climate capital inflows;
  - implementing policies to complement carbon pricing (sectoral policies; feebates where political support for adequate carbon pricing is lacking);
  - addressing climate data gaps, data disclosure standards, and developing taxonomies for sustainable financing;
  - elevating commitments and coordination of all participants;
  - enhancing regulations for sustainable finance; and
  - creating clear transition pathways covering mitigation and adaptation.
- Regulations may encompass:
  - prudential regulation;
  - reallocation of capital across industries; and
  - enhancing market practices through transparency.
- Public financing and instruments:
  - blending public and private finance to de-risk investments (for example, first-loss investments or performance guarantees);
  - structuring innovative products with at least two tranches—junior/equity tranche for public sector and mezzanine/senior tranches for private sector—to internalize social benefits while sharing risk.
- Risks of public support:
  - public sector guarantees and first-loss exposure could privatize gains and socialize losses, creating moral hazard and potentially large contingent liabilities unless public investments take equity or junior tranches and are accompanied by strong monitoring and legal frameworks.
  - smaller low-income countries (LICs) face greater fiscal and capacity risks given generally weaker state capacity.

### Role of multilateral institutions and the IMF
- Multilateral and national development banks (MDBs and NDBs) and international financial institutions (IFIs), including the IMF, can help attract private climate finance collectively.
- The IMF’s catalytic roles include:
  - policy advice and surveillance (bilateral and multilateral surveillance; Article IV consultations);
  - risk assessments in FSAPs and climate macro-financial country assessments;
  - capacity development;
  - program lending and, where fiscal space is limited, financing through the Resilience and Sustainability Trust (RST) that focuses on longer-term structural changes including climate change.
- RST and IMF involvement can help develop a conducive investment climate through reforms that address hurdles to private sector investment and improve regulatory and infrastructure-resilience policies.
- The IMF is also active in advocating carbon pricing, identifying data gaps, promoting climate-related disclosures, and developing guidelines for taxonomies of sustainable finance.
- Measures discussed are complements to carbon pricing and can help internalize public benefits of low-carbon, climate-resilient investment.

### Macroeconomic context, externalities, and balance of payments considerations
- Recent higher energy prices and the war in Ukraine have:
  - sparked energy security concerns and delayed low-carbon transitions in some countries;
  - exposed many EMDEs to high fossil fuel prices and energy rationing;
  - driven sharp price increases in several minerals critical for the transition.
- Monetary policy tightening in advanced economies and high sovereign bond yields in some EMDEs can raise project finance hurdle rates, jeopardizing capital-intensive projects such as solar and wind.
- Large capital inflows associated with climate finance could create balance of payments vulnerabilities if de-risking is not accompanied by increased domestic low-carbon manufacturing or critical mineral endowments:
  - capital inflows could drive current account deterioration and financial imbalances if future returns are overestimated.

### Addressing data gaps and leveraging technology
- Major non-financial impediments include information asymmetries, absence of common taxonomies, inadequate classifications for sustainable investment, home bias, and other externalities.
- Data gaps and quality issues make transparency, verification, and reporting cumbersome and costly.
- Technology can improve data collection and verification; illustrative examples include:
  - Application Programming Interfaces (APIs) to connect directly to infrastructure systems to retrieve environmental impact and energy consumption data;
  - Internet of Things (IoT) devices to measure carbon emissions and pollution levels in real time (with attendant environmental considerations);
  - blockchain platforms to ensure provenance of ESG certifications;
  - natural language processing to analyze sustainability-related information.
- Developing weather monitoring and forecasting systems is especially important for LICs reliant on agriculture.

### Financial structuring and scaling solutions
- Pooling and securitization:
  - many mitigation and adaptation projects are too small individually to meet institutional investor diversification needs; pooling projects through structured funds and ABS-type instruments can attract institutional investment and diversify risk.
  - project bundling could raise investable project supply and reduce competition for a scarce pipeline.
- Managing the fossil fuel transition:
  - phasing out fossil fuel assets requires managing macro-financial consequences of asset stranding and reallocating capital and labor;
  - existing international investment protections (for example, Investor State Dispute Settlement systems, Energy Charter Treaty) can lock in fossil fuel investments or expose authorities to legal action when adopting climate regulations; reforms to these treaties are underway in some jurisdictions but protection for certain investments may extend to 2040 in some proposals.
- Adaptation finance opportunities for private capital exist (early warning systems, global mangrove protection, climate-resilient infrastructure), but face specific barriers related to scalability and return generation.

*Source: clnea2022007 - Introduction.*

### Box 1. The Role of the Private and Public Sectors in Adaptation Finance

### Box 1. The Role of the Private and Public Sectors in Adaptation Finance

### Overview
- Adaptation finance has private and public components.
- The private sector should in principle be the most efficient driver of adaptation actions.
- Main constraints to private adaptation action:
  - uncertainty around climate risks;
  - lack of understanding about the learning cycle to approach the uncertainty issues around adaptation;
  - insufficient pricing of risks;
  - insufficient access to existing climate data and models;
  - lack of bankable projects, especially in LICs;
  - the underapplication of taxonomies of climate resilience investments.
- Another potential constraint: expectation that the public sector will socialize reconstruction costs after climate or weather extremes.

### Market failures and the rationale for public intervention
- Network effects and coordination problems:
  - Resilience often depends on networks; private adaptation investment will tend to be underprovided because adaptation in components of networks affects other parts of a network.
  - This implies a coordination role for government to internalize social benefits of adaptation.
- Affordability and access:
  - Poor countries and populations may not be able to afford adaptation projects, creating a case for international financial support and public financing.
  - High upfront costs and affordability issues can prevent private actors from implementing effective solutions.
  - Widespread lack of access to financing means hundreds of millions of people in or close to poverty cannot adapt to climate change.
- Policy and market enablers identified to increase private sector adaptation:
  - long-term adaptation planning support;
  - national adaptation investment plans;
  - market assessment and pipeline screening;
  - project preparation support;
  - downstream transaction demonstration.
- Importance of fiscal, regulatory, and insurance policies to incentivize adaptation and create profitable opportunities for private finance.

### Physical impacts, transition costs, and macro-financial constraints
- The economic costs of physical impacts are very uncertain; frequency and strength of physical impacts are growing.
- Climate-related financial risks remain underestimated, limiting reallocation of capital to the climate transition.
- Countries’ economic vulnerability and indebtedness exacerbate the challenge:
  - Growing fiscal costs of mitigation and adaptation worsen public debt levels and credit ratings, and in some cases level of debt distress.
- High financial project risks:
  - Low-carbon projects face high upfront transaction and other risks, especially in LICs and EMDEs, including cost overruns, delays, transaction costs, permit risks, and contract renegotiation.
  - Risks are higher for smaller projects and compounded by limited familiarity with geographies/markets and uncertain governance.
  - Investments in climate projects tend to be bespoke, one-off, costly, time consuming, uncertain and hard to diversify.
  - These factors limit the supply of high-quality, transparent low-carbon climate-resilient investment projects and make the cost of capital higher in LICs and EMDEs.
- Transparency concerns:
  - Lack of transparency (for example, secret power purchase agreement contracts) can hinder the low-carbon transition, create contingent liabilities for the state, and undermine democratic accountability.
- Green bond market challenges:
  - Risk of “greenwash” as demand increases; need for independent third-party evaluation.
  - Role of taxonomies and specific standards (for example, EU and China developing standards).

### Private sector capital in climate finance — scale, frictions, and the need for de-risking
- Private sector climate finance characteristics:
  - Often priced on a market basis with financial returns measured against risks.
  - Large uncertainties about technologies, returns, and future carbon policies make climate-related investments risky.
  - Innovative financial instruments (blended/structured financing, risk sharing) are needed in addition to existing tools.
  - Appropriateness of such tools depends on countries’ public debt and balance sheet sustainability because of potential contingent losses and liabilities.
- Size and share metrics:
  - Estimated private climate finance: about US$300 billion per year in new climate financing.
  - Total private AUM globally: US$210 trillion.
  - In an IMF-analyzed sample, global total AUM for climate-labeled investment funds grew more than tenfold to US$133 billion in 2010–20.
  - AUM for climate-labeled private investment funds in the sample represented only less than 0.3 percent of the total AUM.
  - Some assessments find the 30 largest financial institutions collectively provide more than US$740 billion in primary financing of fossil fuels.
- Implication: private sector capital remains a small share of total AUM and public de-risking is likely needed to scale up private participation.

### Private sector instruments, recent scale, and market features
- Broad classes of private climate finance tools (examples summarized from Table 1):
  - Commercial bank lending with climate considerations.
  - Green bonds and green loans.
  - Sustainability-linked bonds (SLBs) and sustainability-linked loans (SLLs).
  - Sustainability bonds and social bonds.
  - Green asset-backed securities (ABSs).
  - Other instruments: ESG funds, private equity, venture capital, shareholder engagement.
- Key statistics and market facts preserved from source:
  - Total bank loans to the private nonfinancial sector amount to about 100 percent of the 2020 world’s annual GDP.
  - Green bond issuances grew rapidly, reaching more than US$600 billion in 2021.
  - Green bonds represent one-half of the global total issuances of climate-related bonds and about 80 percent of climate-related bond issuances in EMDEs.
  - Green bonds constitute only 3.8 percent of all bond issuances in EMDEs (excluding China).
  - Green Sukuk were first launched by Malaysia in 2017.
  - SLLs have grown to US$400 billion in annual issuances in 2016–21.
  - About two-fifths of SLB issuers are in EMDE countries.
  - Global issuance of social and sustainability bonds surpassed US$200 billion in 2020.
  - Venture capital estimated more than US$200 billion invested in climate-related technology firms between 2013 and the first half of 2021.
  - The green premium (“greenium”) is still small, reaching around 50 basis points at best.
- Market development notes:
  - Green securitization can transform illiquid climate-friendly assets into tradable securities, but green ABS market size remains small and requires monitoring and regulation.
  - ESG and climate-labeled funds have experienced strong inflows, but screening criteria vary widely.
  - Large global investment funds can allocate a small percentage of capital to climate products in EMDEs and partner with MDBs and public sector to diversify and reduce risks.
  - Public sector roles in joint instruments: underwrite more risks, take equity/junior tranches, provide guarantees and credit enhancements, help with project selection and assessment, capacity development, and diversification.

### MDBs, NDBs, and public finance roles
- MDBs and NDBs can:
  - provide countercyclical intervention in credit markets via direct lending, credit guarantees, or buying loans and securitized products;
  - provide long-term or concessional resources and promote private-sector involvement (for example, on-lending schemes);
  - leverage capital through bond issuances subject to capital adequacy frameworks and rating considerations.
- Equity stakes:
  - Equity stakes allow the public sector to share upside and help leverage private capital, particularly useful given most EMDEs already have too much debt.
- Public equity investments are important to help deliver on the annual US$100 billion commitment by developed countries in support of climate action in EMDEs.

*Source: Box 1. The Role of the Private and Public Sectors in Adaptation Finance (clnea2022007).*

### Annex 3 provides details on MDB’s climate finance instruments.

### Box 3. Amundi Planet Emerging Green One (EGO) Fund

### Box 3. Amundi Planet Emerging Green One (EGO) Fund

### Overview
- Launched in February 2018 by Amundi in partnership with the IFC, building on a concept developed by the IFC.
- Targets green investments in public debt markets in EMDEs.
- Started with a net asset value of US$1.42 billion, including IFC’s US$256 million stake.
- Expected to reach US$2 billion and be fully invested in green bonds issued by emerging market (EM) banks by year seven.

### Fund structure and supporting programs
- Structured on a credit enhancement model along the lines of a collateralized debt obligation:
  - Riskier junior tranches are to be invested by IFIs.
  - Mezzanine and senior tranches by IFIs and private sector investors.
  - Private investors receive more senior, less risky tranches.
- Supported by the IFC Green Bond Technical Assistance Program, created to stimulate the development of green bonds issuances for local financial institutions.
- Aims to stimulate private investment in green infrastructure while leveraging public sector expertise.

### Challenges, constraints, and lessons learned
- Large gap remains to properly factor in climate externalities associated with each project.
- Lack of information and informational asymmetries faced by end investors are mitigated by initial funding of green projects being conducted by EM-based banks.
- The EGO Fund is only exposed to the credit risk of each individual bank whose green bonds it has acquired.
- Going forward, an investment vehicle that:
  - Builds on lessons learned with the EGO fund,
  - Has flexible capital,
  - Possesses project expertise to facilitate transactions,
  is likely needed.

### Investment footprint (as of end-2020)
- Invested in green bonds issued by financial institutions headquartered in nine countries.
- Use of proceeds concentrated in:
  - renewable energy,
  - green building,
  - clean transportation,
  - water and waste management,
  - among other sectors.

*IMF | Staff Climate Notes — Box 3. Amundi Planet Emerging Green One (EGO) Fund*

### Box 5. Case Study on Climate Financing for Replacing Coal with Renewables

### Box 5. Case Study on Climate Financing for Replacing Coal with Renewables

### Main finding and methodology
- Conservative baseline estimate of net global economic gain from phasing out coal and replacing it with renewables: around US$ 78 trillion.
- Benefits calculated as present value of avoided emissions using a carbon price set equal to the IMF estimate of the social cost of carbon (SCC) of 75 dollars per ton of CO2.
- Benefits from reduced pollution to people’s health are not explicitly captured in the study, yielding a conservative benefit estimate.
- Baseline replacement energy mix: solar and wind (most cost-efficient and scalable at present). Replacing coal with natural gas yields a net economic gain at least two magnitudes smaller due to higher emissions and higher levelized cost of energy of gas plants.

### Costs and components of financing
- Minimum costs to replace coal with renewables include:
  - capital expenditure for renewable capacity equivalent to coal-fired output;
  - compensation for coal companies’ lost future earnings from early shutdowns;
  - potential additional compensation for retraining workers and unemployment benefits during retraining;
  - investments in energy storage, electricity grid extension, and grid flexibility.
- Global requisite amount of climate financing to enable replacement of coal with renewables: around $29 trillion.
  - Regional breakdown of the $29 trillion: 46 percent in Asia, 18 percent in Europe, 13 percent in North America, 13 percent in Australia and New Zealand, 8 percent in Africa, and 2 percent in Latin America and the Caribbean.
- Under a blended public-private financing assumption (every $1 public leverages $9 de-risked private):
  - Governments would need to invest $2.9 trillion.
  - Private sector would provide the remaining $26 trillion.
- Suggested baseline country contribution: individual countries would pay 10 percent of their domestic costs to replace coal with renewables.
  - Individual-country net gains would disappear only if country-specific SCC < US$2 per ton of CO2.

### Suggested financing structures and market context
- Blended finance structures (e.g., asset backed securities, ABSs) could be used:
  - $2.9 trillion in government investment in junior/equity tranches to reduce risk for roughly $26 trillion in senior tranches for private investors.
  - De-risked senior tranches could obtain investment grade ratings and attract institutional investors, creating a green asset class explicitly reducing emissions.
- Market scale considerations:
  - Size of the structured finance market today: around $2 trillion globally.
  - ESG assets under management: around $3 trillion.
  - Assets under management by GFANZ signatories: $130 trillion (suggests investor appetite).
- Public development banks:
  - Collectively disburse about $2 trillion per year.
  - Estimated annual climate financing by public development banks needed to replace coal with renewables: between $0.05 trillion and $0.2 trillion, with a front-loaded investment this decade of $0.3 trillion.
- Capital markets would need to finance the remaining 90%:
  - Annual investment required from capital markets between $0.45 trillion and $1.8 trillion, with a front-loaded investment this decade of $2.7 trillion.

### Economic and political rationale (Coasian bargain)
- Replacing coal with renewables can be a Pareto improving deal where every country is made better off.
- In absence of global carbon taxation at the social cost of carbon, a Coasian approach: offer climate financing conditional on commitment to phase out coal (pay the polluter to stop polluting).
- Governments reap much of the net gain via fewer climate damage repair costs, adaptation costs, and health-related expenditures.
- Domestic net gains are not nullified by carbon leakage if renewables are phased in domestically while phasing out coal.

### Roles for public sector, MDBs, and policy levers
- Public sector roles and actions (selected):
  - Regulate and standardize the sustainable finance bond market to lower transaction costs and enable quality public information dissemination.
  - Disseminate sustainable finance best practices, public-good research, and training curriculum adapted to EMDEs.
  - Partner with global database providers to supply updated macroeconomic and climate-related data; IMF’s Climate Change Indicators Dashboard is an existing example.
  - Supervise information quality verification (e.g., second opinion providers on GSS bonds use of proceeds) and monitor impact indicators for SLBs.
  - MDBs could design and monitor KPIs with national authorities and civil society; proposals include a Nature and Climate Sovereign Bond Facility.
- Policy levers to attract private capital:
  - Use IMF instruments: surveillance, capacity development, risk assessments, climate diagnostic tools.
  - Public equity investments can leverage private capital; advanced economies can use public equity to deliver on annual US$100 billion commitment to EMDEs.
  - Announce and implement policies, including carbon pricing paths; complement carbon pricing with sectoral policies and large-scale public investments where emissions responsiveness to carbon prices is low.
  - Public investment in infrastructure that supports low-carbon private investments (electricity grids, charging stations, public transport, broadband, urban planning).
  - Improve data quality, disclosure standards, harmonized taxonomies, and a climate information architecture (high-quality comparable data, globally harmonized disclosure standards, and principles for climate finance taxonomies).
  - Develop standardized GHG accounting methodology based on gross (absolute) emissions to ensure environmental integrity of impact reporting.

### Social considerations and “just transition”
- Transition will generate localized costs disproportionately affecting certain groups, industries, workers, communities, and regions.
- Importance of “just transition” policies and climate finance to smooth transitions, compensate adversely affected populations, and design redistribution measures addressing social and labor-market impacts.
- Strengthening financial regulations to contain risks from stranded assets.

### Future policy work, research priorities, and key constraints
- Key constraints to private sector climate finance to investigate and address:
  1. long investment time frames;
  2. high upfront capital and transaction costs;
  3. significant project and/or country risk;
  4. limited familiarity with specific geographies;
  5. lack of formalized and specialized investment channels due to political, regulatory, and macroeconomic instability;
  6. physical climate-related financial risks;
  7. an uncertain governance landscape.
- Additional research and policy questions highlighted:
  - Granularity on constraints to mobilize private finance for adaptation; segregation of adaptation projects suitable for private investment versus public financing.
  - Mechanisms for public-private risk sharing (credit enhancements vs coinvesting vs specific risk guarantees) and structure of ABS-type vehicles (public equity/junior funding vs private mezzanine/senior demand).
  - Pricing mechanisms for first loss guarantees by the public sector.
  - Appropriate duration for public sector funding and implications of long-term capital lockups for private investors.
  - How to build liquidity in the space and manage potential risks (volatility, capital flight).
  - Views on the “greenium”: can it enhance returns and how to foster it?
  - Need for pipelines of investable projects, demonstration projects, and technologies to demonstrate commercial viability.
  - Governance, trust, and risk management requirements to attract private sector participation at scale.

*Source: Box 5. Case Study on Climate Financing for Replacing Coal with Renewables (IMF Staff Climate Notes).*

### Annex Figure 1. Climate Finance: Flows, Needs, Recipients, Sources, and Instruments

### Annex Figure 1. Climate Finance: Flows, Needs, Recipients, Sources, and Instruments

### Key findings on climate finance flows and scale of needs
- Tracked global climate finance flows (average of 2019 and 2020) total US$632 billion.
- Estimated global climate finance needs: US$4–5 trillion per year.
- IPCC: annual climate finance flows need to increase by 4 to 8 times in developing countries until 2030.
- Some estimates of needed increase in annual climate finance stand at about 600 percent by 2030.
- About half of climate financing comes from public sources and half from private sources (without COVID-19 impact on climate finance).
- As of 2020, three-quarters of tracked climate investments were domestic.
- Financial institutions and funds provided 41 percent of private-sector climate finance (noting possible under-reporting through secrecy and green bond financing).

### Mitigation and adaptation investment needs and uncertainties
- Major sources of uncertainty for mitigation investment needs include:
  - economic and population growth projections;
  - rate of decoupling between GDP growth and energy demand;
  - potential biophysical limits to decoupling GDP growth and emissions;
  - future evolution of the cost of low-carbon technologies;
  - economic and financial strategies of fossil fuel producers;
  - degree of integration of climate policies into general economic policies.
- Adaptation investment uncertainty arises from synergies with broader development investments and service targets.
- Example estimate: new infrastructure (including adaptation) could cost low- and middle-income countries 2 to 8 percent of GDP per year until 2030, depending on spending efficiency and quality/quantity of service targeted.

### Quantitative estimates of required investment and current gaps
- In EMDEs, low-carbon infrastructure investment gap estimated at US$15–30 trillion by 2040 (1.5°C pathway scenario).
- IMF estimate: energy-related investments needed about US$3.3 trillion per year until 2030 to achieve net zero by 2050.
- Some estimates: achieving net zero emissions by 2050 requires US$4.5 trillion per year on average from 2021 to 2050 (composed of an annual increase of US$3.5 trillion compared to the present and US$1 trillion annually reallocated from high- to low-emission assets).
- Incremental investment relative to a baseline scenario reported as only US$0.9 trillion per year (not factoring savings from fossil fuel rents).
- Some observers estimate fossil fuel rents savings at about US$2 trillion per year.
- Current annual global spending on clean energy: US$750 billion.
- Clean energy investment in EMDEs excluding China: about US$150 billion.
- Investment in renewable energies needs to average about US$1 trillion per year between 2021 and 2030.
- Annual investment in total power generating capacity was less than US$500 billion between 2016 and 2020.
- Fossil fuel investments stand at US$850 billion per year.
- EMDEs account for only 20 percent of global clean energy investment despite accounting for about 60 percent of global GDP.
- Evidence of fossil fuel financing by DFIs and MDBs estimated by some at US$16 billion and US$6.4 billion per year, respectively, over 2018–20.
- International public climate finance estimated at US$58 billion in 2017.
- Estimated US$4.5–5 trillion of infrastructure investments are needed each year till 2030 to meet climate objectives.
- Climate Islamic finance (green Sukuk issuance) stood at US$2.56 billion in 2020 and fell to US$869 million in 2021.
- Global green bond issuance rose to US$517 billion in 2021 from US$297 billion in 2020.

### Regional/per-capita disparities (clean energy investment)
- Per capita clean energy investment, 2020–22 (U.S. dollars, 2021): charted regions include Advanced economies, China, Emerging market and developing economies (specific per-capita values shown in the source figure).

### Macro-financial risks from scaling climate finance in EMDEs
- Greater exposure to the global financial system can increase capital outflow risks in EMDEs, adversely impacting green infrastructure financing over time.
- De-risking can raise the share of capital flows originating from benchmark-driven investors and portfolio flows, transmitting cross-border stress and exacerbating vulnerabilities in recipient EMDEs.
- Increased reliance on local currency bond markets with significant foreign investor presence may:
  - increase exposure to global financial cycles;
  - weaken monetary policy autonomy via transmission of global monetary conditions;
  - expose EMDEs to foreign currency funding conditions, exchange rate volatility, and portfolio procyclicality (local currency depreciation accelerates capital outflows).
- More reliance on market-based finance could increase liquidity risks in local bond markets.
- Public guarantees can generate macro-financial risks, including exposure to collateral and currency risks when linked to market prices and external ratings.
- Official sector capital or guarantees from IFIs and advanced economies (or local governments) may have implications for EMDE public balance sheets and contingent liabilities.
- High debt distress in LICs magnifies macro-financial risks:
  - about 60 percent of the 73 countries eligible for the G20 DSSI in 2020–21 were already in, or at high risk of, debt distress — raising concerns about socialization of losses and lack of fiscal space.

### Risks in scaling up private climate finance (macro and micro)
- Macro-financial risks include:
  - debt sustainability risks;
  - currency, liquidity, and market risks;
  - balance of payments risks;
  - risks related to social disruptions;
  - creation of new, volatile asset classes tied to climate financing.
- Micro-financial risks for private sector investors include:
  - vulnerability from investing in high-return but risky projects in EMDEs and LICs;
  - securitization product risks and leverage risk (private investors using leverage to boost expected returns);
  - exposure to sudden tightening in global financial conditions and sharp increases in the cost of debt.
- De-risking private climate investments in EMDEs could lead to privatization of gains and socialization of losses, risking social and political instability.
- Capital flows from de-risking infrastructure assets could create balance of payments vulnerabilities by increasing current account deficits.
- Creating a new asset class via securitization of climate investments in EMDEs could increase global financial fragility and boom-bust vulnerability.
- Risk that low-cost capital is not allocated to highest-return projects; need to match supply of capital with projects that provide commensurate financial return and climate mitigation effectiveness.
- NDCs help prepare “shovel-ready” projects, but some observers see a large gap between climate spending needs and availability of shovel-ready projects.
- In most LICs and EMDEs, NDCs focus mainly on infrastructure projects.

### Risk management and project selection principles
- Downside risks under high-default scenarios are significant; rapid scale-up in risky sectors can create portfolios with larger or more correlated risks (historical parallel: subprime crisis).
- Financing structures should align incentives of risk capital providers, owners/operators, and host governments.
- Projects should be appropriately selected and planned to increase chance of success; financial vehicles must provide diversification while allowing swift project approval.
- Examples: purchase of green bonds issued by banks can provide safety via bank intermediaries and relieve fund managers from extensive credit analysis.
- Diversification across countries provides benefits but can reduce transparency and increase risk.
- Significant buy-in in recipient countries is important:
  - EMDEs with stronger state capacity, middle-income level, and market access could benefit from private capital mobilization.
  - smaller LICs with weaker capacity should prioritize improved public investment efficiency and official aid.
- Greater private finance can expose poor households to higher service costs; measures should compensate those adversely affected.
- Ensure project effectiveness through in-depth public-private dialogue and tools like the Public Investment Management Assessment framework.
- PPP design principles include: identifying a clear market failure, demonstrating additionality, leaving sufficient risk/control with private sector, and minimizing contingent liability risks for the state.

### MDB climate finance instruments and reporting developments
- Recent MDB developments:
  - EIB product linking loan interest rate to emission reductions.
  - MDB Climate Change Mitigation Working Group finalization of tracking methodology for climate mitigation finance; MDBs began applying the methodology in 2021.
  - New methodology includes granular breakdown of eligible activity types, clear criteria, and additional guidance; MDBs intend to ensure reported climate finance activities align with countries’ long-term low-carbon, climate-resilient pathways.
- Typology of climate finance instruments reported by MDBs for 2020:
  - Advisory services: advising governments and private sector; tracking program management costs.
  - Equity: ownership interest representing claims on assets proportionate to shares.
  - Grants: cash/goods/services transfers requiring no repayment; used for investment support, policy-based support, technical assistance.
  - Bond: client-issued bonds supported by MDBs where proceeds finance climate projects; only percentage of proceeds used for activities in joint MDB methodology count as climate finance.
  - Guarantees: instruments covering commercial and non-commercial risk to support private sector investments, commercial borrowing by sovereigns or SOEs, and to transfer risks lenders cannot absorb.
  - Investment loans: repayable transfers for development activities; proceeds used for activities included in joint MDB methodology count as climate finance.
  - Refinancing: replacement of existing debt under different terms; may be classified as climate finance under specified terms, including commitments to originate new climate deals within 24 months or improving financial terms of climate-related assets.

*Source: clnea2022007 – Annex Figure 1 and accompanying annexes (IMF | Staff Climate Notes).*

### Annex E: Types of Instrument).

### Annex E: Types of Instrument

### Overview
- Describes categories of financing instruments and how they are treated as climate finance when they "lead to, enable, or support the implementation and operation of activities included in the joint MDB methodology for tracking climate finance."
- Emphasizes that the climate finance share of multi-purpose instruments equals the proportion of eligible activities or prior actions tied to climate objectives.

### Instrument descriptions
- Refinancing:
  - Refinancing climate finance projects that have already been constructed or are already operational but have not passed the breakeven point (for example, recently built solar projects).
  - "The break-even conditions are confirmed by the investment team."
  - Refinancing can correct mismatches of maturity, adjust costs of asset construction, reduce exchange rate impact, replace expensive debt, and so on.
- Working capital:
  - "Working capital is finance provided for operational expenditures."
  - Working capital is climate finance if it "leads to, enables, or supports the implementation and operation of activities included in the joint MDB methodology for tracking climate finance."
- Lines of credit:
  - "Lines of credit provide a guarantee that funds will be made available, but no financial asset exists until funds have been advanced."
  - Climate finance is the proportion of the credit line that is committed to activities defined as eligible in the MDBs’ climate finance tracking methodologies.
- Policy-based financing (PBF):
  - Financing for a public borrower that helps the borrower to address actual or anticipated requirements for development finance of domestic or external origins.
  - "Policy-based financing supports a program of policy and institutional actions for a particular theme or sector of national policy."
  - Disbursements are conditional on the borrower fulfilling their policy commitments in the lending agreement.
  - "The proportion of this public financing that is reported as climate finance is the same as the proportion of the climate-related 'prior actions' agreed to allow the policy-based financing to proceed." Example: "if one in three prior actions are climate-related, one-third of the resulting policy-based financing would be counted as climate finance."
- Results-based financing (RBF):
  - "Results-based financing directly links the disbursement of funds to measurable results in a government-owned program."
  - RBF aims to increase accountability and incentives for delivering and sustaining results, improve the effectiveness and efficiency of government-owned sector programs, promote institutional development, and enhance the effectiveness of development.
  - "Proceeds used for activities included in the joint MDB methodology for tracking climate finance count as climate finance."

### Counting and eligibility principles
- For instruments that commit funds without immediate asset creation (for example, lines of credit), climate finance is measured as the committed or designated proportion that will be used for MDB-eligible climate activities.
- For multi-action programmatic finance (for example, policy-based financing), the climate share equals the share of climate-related prior actions triggering disbursement.
- For operational financing (for example, working capital and RBF), eligibility depends on whether proceeds "lead to, enable, or support the implementation and operation of activities included in the joint MDB methodology for tracking climate finance."

*Source: IMF STAFF CLIMATE NOTE 2022/007 — Annex E: Types of Instrument*

---


_Source: https://www.imf.org/-/media/files/publications/staff-climate-notes/2022/english/clnea2022007.pdf_