Risk to Reward 2025

Regulatory barriers to climate-aligned investments In many EMDEs, the barriers to increasing domestic capital flows remain structural, with domestic institutional investors – such as pension funds, insurers and sovereign wealth funds – bound by mandates prioritizing liquidity and capital preservation. Prudential regulations and risk-weighted capital requirements reinforce a preference for sovereign debt and short-term assets. As a result, institutional investors are systematically underrepresented in EMDE equity markets, accounting for only 12% ownership compared to 47% globally.60 This lack of institutional depth means that even where capital exists, it is not channelled effectively into climate- aligned projects. Local institutions benefit from knowing how to navigate local regulations and markets.61 They have the potential to leverage domestic resources to de-risk, reduce the cost of capital and crowd-in private sector. In this context, building robust local capital markets, through improved governance, sustainable finance standards and diversified financial instruments is a key lever to scaling-up climate finance in EMDEs. Survey respondents consistently highlighted regulatory misalignment and mandate constraints as major inhibitors of climate investment in EMDEs. Domestic institutional investors, particularly pension funds and insurers are often bound by fiduciary duties and conservative capital rules, favouring low- risk assets such as sovereign debt. As a result, local capital remains underutilized unless opportunities are de-risked. Credit guarantees tailored to local currency and domestic investors can absorb disproportionate risks and unlock private investment. They mitigate perceived and actual risks, enabling domestic investors to engage in sectors they might otherwise avoid. Facilities such as InfraCredit in Nigeria have mobilized pension fund capital by improving credit ratings and offering principal and interest protection (see Box 10). These tools help build investor track records in green infrastructure while maintaining portfolio stability. Instead of relying on rigid capital controls or external flows, EMDEs can integrate credit guarantees with technical assistance to support deal origination and due diligence. Complementary incentives such as tax credits for reinvested dividends, voluntary green investment quotas and streamlined permitting processes, can further create an enabling environment for local capital. Scaling-up climate investment in Africa through domestic finance BOX 9 In June 2025, the Public Investment Corporation (PIC), Africa’s largest asset manager with over $130 billion under management (March 2024), committed $17 million to the SA-H2 Fund for green hydrogen development.62 Executed in partnership with the Industrial Development Corporation and the Development Bank of Southern Africa, this investment represents a landmark in African institutional climate finance. The fund is directly supporting the Hive Hydrogen Coega Green Ammonia Project in South Africa’s Eastern Cape, which is projected to produce 1 million tonnes of green ammonia annually and create over 20,000 direct and indirect jobs.63 Deploy local credit guarantees to mobilize domestic capital Asset managers Project developers Institutional investors MDBs and DFIs EMDE governments Donor governments BanksSOLUTIONS: SHORT-TERM 30 From Risk to Reward: Unlocking Private Capital for Climate and Growth