The Power of the Private Sector: Increasing Climate Resilience

Climate finance has been a global priority for decades, with milestones including the establishment of the Green Climate Fund under the United Nations Framework Convention on Climate Change in 2010. Private sector investment in climate resilience has increased between 2021 and 2023, with institutions such as multilateral development banks and the Green Climate Fund playing a key role in this growth.

The Resilience and Sustainability Trust, launched by the International Monetary Fund in April 2022, was established as an international initiative to provide climate finance to vulnerable countries. It aims to help low-income and vulnerable middle-income countries address long-term structural challenges, including climate change and pandemic preparedness. The RST’s capacity to attract private capital is a key element of its design. With IMF funds, private investors could be more willing to take risks and work with these countries to address their climate financing needs.

RST offers long-term financing with a significant grace period, making it an attractive option for private investors looking for reduced financial risk associated with long-term climate projects. The accompanying Upper Credit Tranche program strengthens macroeconomic and financial stability, improving investor confidence. This potential for private sector involvement is a reason for optimism in climate finance.

Promising results with private sector involvement

RST is starting to deliver results in addressing long-term climate and sustainability challenges. Its full impact, particularly in leveraging private capital, will become more visible as institutional mechanisms and blended financing structures are adopted, more projects come into circulation, and innovative public-private risk-sharing instruments are developed.

Eighteen countries have started using RST funds to address their structural challenges, increase resilience and support sustainable development initiatives. Some countries have explored options to attract private investment through blended finance structures. These countries, including Barbados, Rwanda and Costa Rica, are inspiring examples of commitment to reform and building a healthy long-term investment climate.

Barbados has secured B$141.8 million (about US$183 million) in special drawing rights under the RST to increase climate resilience and support sustainable development. The government has partnered with private companies to expand renewable energy infrastructure and promote sustainable tourism practices. However, attracting significant private investment remains a challenge due to procedural hurdles and the need for more significant policy reforms.

Rwanda is using $319 million from the RST Resilience and Sustainability Facility to improve resilience to external sectoral shocks. The government is working with private agribusinesses to introduce climate-resilient agricultural techniques and technologies. While Rwanda’s efforts are commendable, the challenge is scaling these initiatives nationally and ensuring that private investment is consistently aligned with long-term sustainable development goals.

Costa Rica has secured the maximum financing under the RST (US$710 million) and has stepped up further climate financing from the official and private sectors. The private sector has launched green bonds and sustainability-linked loans, supported by government policies supported by the RST. Costa Rica’s ambitious goals face potential obstacles, such as the need for a robust monitoring and evaluation framework to ensure the effectiveness and accountability of private sector contributions.

Private Sector Caution

Despite the progress made by RST, the private sector remains cautious about fully committing to providing significant capital. Private investors are looking for important assurances and improvements: policy stability and predictability, regulatory clarity and simplification, improved risk mitigation mechanisms, transparency and accountability, and project scalability.

The involvement of MDBs in providing guarantees, co-financing and other risk mitigation tools increases investor confidence. MDBs provide the necessary guarantees and risk mitigation tools that private investors are looking for, encouraging them to participate in the IMF RST.

Private investors want structural and policy reforms to be supported by RST financing. However, no firm assurances are possible at this stage. The IMF’s Interim Review of the Resilience and Sustainability Trust and Review of the Adequacy of Resources highlighted limitations and areas for improvement. Some countries need help implementing policy reforms quickly enough to attract private capital. Bureaucratic hurdles and insufficient risk mitigation mechanisms remain significant obstacles. In addition, the alignment of public and private sector objectives is still evolving, requiring a more robust framework for cooperation.

Actions to increase resilience to climate change

To attract the private sector, IMF Managing Director Kristalina Georgieva stressed the need for RSTs to support countries in achieving their climate goals and to align IMF actions with the 2015 Paris Agreement. This alignment is key to mobilising private capital and driving sustainable investment.

In his speech at the European Investment Bank Group Forum 2023, IMF Deputy Managing Director Bo Li highlighted the role of RST in providing long-term, affordable financing and the need for private sector participation to meet the huge climate financing needs of developing countries. He stressed the importance of policies that redirect investment flows towards climate-friendly opportunities and the need for stronger institutional partnerships.

The IMF’s RST is a significant step forward in mobilising climate finance, with a focus on leveraging private sector engagement. It has the potential to be a multilateral success story if it helps create a stable investment climate through policy reforms, a deep and liquid market for innovative financial instruments and partnerships with multilateral development banks.

Early signs from Barbados, Rwanda, and Costa Rica suggest that strong public-private partnerships are key to sustainable and resilient development worldwide. By learning from the successes and challenges of RST, other international efforts can improve their strategies for attracting private capital, creating a more sustainable and resilient global economy.

Udaibir Das is a former Deputy Director and Advisor in the Monetary and Capital Markets Department at the International Monetary Fund. He is a Non-Resident Fellow at the National Council of Applied Economic Research and a Senior Non-Resident Advisor at the Bank of England.