Lowering the Cost of Capital for Climate and SDG Finance in Emerging Markets and Developing Economies

Today, some of the world’s fastest-growing economies face some of the highest borrowing costs—even for clean energy and development projects with strong fundamentals. This is not a function of global capital scarcity. Trillions are available. The problem lies in systemic barriers that prevent capital from flowing to where it is most urgently needed. The high cost of capital in EMDEs not only undermines critical financing for the energy transition and sustainable development; it also limits the ability for US- and EU-based financial institutions to invest in and finance projects in EMDEs, despite institutional and stakeholder appetite and interest for transition finance.

This paper provides a holistic diagnosis of the structural forces inflating the cost of capital in EMDEs—including sovereign credit ratings, investor risk perceptions, development finance mandates, and regulatory norms—and it outlines ten actionable solutions to unlock long-term, affordable finance for climate and sustainable development—at the speed and scale required by both global goals and national ambitions.

Key Takeaways:

• The cost of capital—not capital scarcity—is the biggest bottleneck for climate and SDG finance in EMDEs.
  With ~$30 trillion in global savings annually, there is more than enough capital to fund the global transition. Yet EMDEs often face 3–5x higher borrowing costs than advanced economies—even when they have faster growth, lower debt, and strong fundamentals.
• Credit ratings are skewed by income, not actual risk.
  Empirical analysis shows that GDP per capita—not solvency indicators—is the strongest predictor of sovereign credit ratings. This penalizes low-income countries regardless of investment quality or growth potential, inflating their cost of capital and deterring private and public investment.
• High cost of capital makes clean energy unaffordable where it’s most needed.
  In Africa, solar energy might cost just 3–4 cents/kWh in Europe—but can cost 12–18 cents/kWh due to high financing costs. As long as clean technologies are financed at EMDE capital costs, fossil fuels will remain cheaper in many markets, undermining global climate goals.
• It’s not just a development problem—it’s a missed investment opportunity.
  The distorted risk-return landscape also holds back large institutional investors in the U.S. and EU. Many want to deploy capital into the high growth EMDEs—but are blocked by structural risk ratings, capital adequacy rules, and lack of de-risking mechanisms.
• The system is designed to reward the past, not the future.
  Today’s dominant credit and debt sustainability frameworks focus on short-term liquidity risks, not long-term structural growth potential. This leads to pro-cyclical investment patterns that funnel capital to already-rich countries and perpetuate underinvestment in high-potential regions.

The paper offers a Ten-Part Roadmap for Reform:

1. Reform credit rating methodologies to reflect long-term growth, investment returns, and structural convergence—not just income levels.
2. Update the IMF–World Bank Debt Sustainability Framework to enable productive borrowing for high-return SDG investments.
3. Lengthen financing maturities to align with development timeframes and reduce rollover risk.
4. Establish global and regional lenders of last resort to stabilize access to liquidity in times of stress.
5. Build deep, local capital markets to reduce EMDE dependence on volatile foreign-currency borrowing.
6. Scale guarantees and blended finance tools to de-risk investments and attract private capital at scale.
7. Transform MDB mandates to dramatically increase annual disbursements and leverage capital more efficiently.
8. Streamline and harmonize access to climate funds to reduce transaction costs and delays for EMDE borrowers.
9. Fix prudential regulations so they recognize risk mitigation from guarantees and blended finance.
10. Realign institutional investor incentives to invest in high-growth, climate-aligned opportunities in EMDEs.

Each of these approaches deserves careful discussion, consideration, and exploration; they are presented in this paper as a roadmap for discussion, including in the context of relevant global discussions on financing climate action and sustainable development, including the Financing for Development Agenda, the UNFCCC COPs, and the G20 Sustainable Finance track.

We welcome your thoughts, feedback, and engagement.

Authors

Jeffrey D. Sachs

Director, Center for Sustainable Development, Columbia University

Lisa Sachs

Director

Ana Maria Camelo Vega

Senior Economics and Finance Researcher

Bradford M. Willis

Senior Associate

Themes

• Financing Climate & Sustainable Development
• Sustainable Finance

Tags

• Renewable energy