Meeting the Paris Agreement goals of limiting global warming to 1.5°C by the end of the century, while pursuing climate-resilient development, will require an unprecedented mobilisation of finance. The financing needs to meet these goals are particularly acute in emerging and developing economies. The scale and complexity of the challenge is compounded by Covid-19 recovery needs, as well as longer-term development needs under the 2030 Agenda for Sustainable Development. Meanwhile, there remain myriad long-standing barriers to infrastructure investment and wider climate finance, and the use of scarce development finance to effectively mobilise commercial capital remains far below its potential.
The scale of the challenge is such that all sources of finance – public, private, domestic, and international – need to be mobilised at scale. In particular, the huge stocks of global commercial capital need to be mobilised at scale towards more productive uses. Global finance is increasingly in search of investments to support the transition, as well as the enabling measures required to make them viable, and policy certainty by governments on the shape of the transition. This requires development finance to play a catalytic role in the mobilisation of commercial finance towards underserved sectors and geographies. Blended finance – the strategic use of development finance for the mobilisation of additional finance towards sustainable development in developing countries – has a critical role to play in this endeavour, by helping to de-risk investments and supporting effective public-private cooperation on the ground. In light of this potential, the OECD’s Development Assistance Committee (DAC) developed a set of comprehensive principles to support development actors to most effectively leverage commercial capital through development finance.
While finance will need to be mobilised at scale to support climate mitigation and adaptation in all sectors, the energy sector1 – which accounts for around three-quarters of global greenhouse gas emissions – will require the lion’s share of investment. Investment towards clean energy is particularly constrained in emerging and developing economies, despite its huge potential decarbonisation and developmental impacts. The international donor community is making support for the clean energy transition a central pillar of their development strategies, as part of their wider efforts to support the development and implementation of robust national determined contributions (NDCs) to emissions reduction. The OECD DAC committed in October 2021 to align development cooperation with the goals of the Paris Agreement, including by prioritising support for technologies focused on accelerating progress towards net zero systems, in particular renewable energy and energy efficiency. At the same time, donors and beneficiary countries are increasingly calling for a rapid scaling of private capital mobilisation, including through blended finance, to help close the global clean energy financing gap.
This introduction was written for the OECD Blended Finance Guidance for Clean Energy publication by the Organisation for Economic Co-operation and Development (OECD). The full text is available publicly through the links below.