Catalyzing Private Finance for Climate Action: Learning Brief

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Catalyzing private finance for climate action is essential to achieving goals for limiting global warming. USAID can play a pivotal role in climate action across partner countries by increasing funding for activities that catalyze and crowd in private capital to climate-focused investments.The Intergovernmental Panel on Climate Change estimates USD 1.6 trillion is needed annually to keep global warming to the 1.5-2°C target range; only 38 percent of this was funded in 2019. Blended finance, the strategic use of public resources to attract private capital, represents an opportunity for USAID to help close this gap and dramatically increase the scale and scope of climate finance in the coming years.

Barriers to Climate Finance

Several barriers limit the flow of finance toward climate action, including a lack of understanding of the urgency of the climate crisis and limited public sector finance. In response to this challenge, the United States government has committed to doubling public climate finance for developing countries by 2024, including an effort to triple public finance designed to help communities adapt to the negative impacts of climate change. As part of this effort, USAID seeks to increase funding to partner countries and reduce global emissions by half by 2030. Given the limits of public sector finance, raising adequate funds for climate action requires increasing the private sector’s investment in adaptation and mitigation.

The private sector contributed an estimated USD 280 billion to climate action in 2018, a level of investment far below current needs. To date, private investment has focused primarily on mitigation activities that aim to limit or prevent greenhouse gas emissions. However, further neglecting investments that can support adaptation — the ability to moderate the negative impacts of climate change — may jeopardize mitigation activities by rendering them less effective.

USAID's Role in Financing Climate Adaptation

USAID can play a complementary role to that of the U.S. International Development Finance Corporation (DFC), providing support to counter lower expected financial returns and higher risk profiles. In particular, USAID can add value during the earlier stages of the investment lifecycle, when proof-of-concept must be demonstrated to attract commercial or even development finance institution (DFI) funding.This is particularly important for conservation or adaptation projects with insufficient revenue generation potential to attract commercial capital. Given their long-term country presence, USAID Missions can support the DFC in identifying climate action related projects that direct investment to community-level programs with substantial development benefits for underserved populations, such as Indigenous Peoples or women entrepreneurs.

Lessons for development assistance organizations catalyzing private finance for climate action are categorized in three principal areas: early-stage design, investment facilitation and enabling conditions. Donors have an essential role to play during the early stage to identify and assess investment opportunities and financing gaps, support investment readiness of firms and projects, and to ensure the equitable distribution of climate benefits.Throughout the lifecycle of an investment, USAID can support activities such as transaction advisory, fund structuring, provision of guarantees and catalytic capital to increase the speed and scale of climate action and crowd in additional sources of capital. USAID can also improve the enabling environment to encourage investment or reduce costs enhancing ecosystem additionality.

This Learning Brief offers a clear justification for the role of development assistance organizations like USAID in catalyzing private finance for climate action. It synthesizes lessons learned from a broad set of donor experiences and offers practical "how to" descriptions of donor-supported activities that lead to additionality and positive climate and human impacts.This is one of three complementary resources that includes a set of case studies that examine various models of blended finance for climate action and a guidance note that provides a framework for understanding the potential for additionality and human impacts for blended finance from USAID’s perspective.