Bending the Climate Change Curve by Blending Finance: What is the Real Potential Value-Added of Guarantees?

The investment needs to mitigate and adapt to climate change are substantial and especially difficult to finance in emerging markets and developing countries (EMDEs), particularly in low- and lower-middle-income countries among them. Guarantees by national and international public entities are often presented as a promising solution, but many estimates of the additional financing they can mobilise rely on unrealistic assumptions. To generate genuine value, guarantees must do more than shift risk mechanically: they must address specific contractual problems, reduce the cost of capital, correct economic and financial frictions, and overcome market failures on either the supply or the demand side of finance. Drawing on theory, recent policy debates, and practical experience, this paper assesses the scope for guarantees in climate finance generally, and in adaptation and mitigation specifically. We argue that guarantees can be more useful than their current scale suggests, but only under more demanding conditions than is often assumed. True additionality requires a different delivery architecture from the one that currently dominates: greater pooling of financial and human resources, simpler and more standardised structures, stronger project-preparation and pipeline systems, wider use of portfolio approaches, greater use of local-currency solutions, and better coordination across specialist guarantors, MDBs, DFIs, and national institutions. Guarantees can play a significantly larger catalytic role, but only when embedded in country-led financing platforms and used selectively alongside concessional finance, especially where adaptation and public-good characteristics limit the scope for purely private mobilisation.