As climate experts and leaders gather in Baku, Azerbaijan, for COP29 to discuss how to help foster green, resilient economies—especially in developing nations—we are reminded of the launch of USAID’s Climate Finance for Development Accelerator (CFDA) at COP26 to mobilize $2.5 billion in public and private investment by 2030. In two years of operations, CFDA has mobilized $380.7 million of sustainable investment towards that goal and worked with partners to strengthen local ecosystems in over 60 countries. While there is no one-size-fits-all approach to catalyzing investment, here are some of the biggest takeaways so far:
Credit enhancements and guarantees are in demand and can be a strategic tool for mobilizing private investment.
While the market for green bonds and loans has continued to grow (now valued at an estimated $2.5 trillion for green bonds alone), private investors and lenders are often still wary of financing them in emerging markets and developing economies. Enter credit enhancements, which can be used to improve the credit quality of loans, bonds, or other financial assets by lowering the risk of default or loss for investors and lenders.
For example, green and resilient infrastructure projects in developing countries often fail to secure funding, in part because international credit rating agencies and lenders perceive borrowers and projects in such markets as inherently risky. The Green Guarantee Company (GGC), which is receiving USAID support through CFDA, assumes the financial risk associated with green bonds and loans by providing investors with investment-grade guarantees (a type of credit enhancement). These offer protection against potential losses or non-payment, and enable climate projects to secure this otherwise inaccessible funding. A guarantee from GGC could provide global investors with the confidence they need to purchase blue bonds in a small island developing state in the Caribbean, the proceeds of which would support the development of critical conservation and climate adaptation projects, such as wastewater treatment plants.
Supporting credit enhancements can be a strategic use of public funding to unlock much greater amounts of capital and, over time, it can also hopefully shift investors’ perceptions and willingness to invest in emerging markets and developing economies.
The intersection of sustainable agriculture and nature conservation is ripe for private sector investment and partnerships.
Agriculture in the emerging and frontier markets where USAID works is under threat from droughts, flooding, and other extreme weather events, leading to food insecurity and economic losses. For example, Zambia is facing its worst drought on record, with some regions experiencing less than 50 percent of the usual annual rainfall; as a result, malnutrition rates are among the world’s highest, and nearly half of the population is unable to meet their minimum calorie requirements. At the same time, agriculture can also contribute to biodiversity habitat loss by degrading forests and other healthy ecosystems. Transitioning to more sustainable, nature-positive agriculture practices can yield a triple dividend by reducing future agricultural losses, providing positive economic benefits, and improving social and environmental outcomes. However, this requires significant investment.
This was the impetus for launching the Nature-Based Solutions for Agricultural Resilience Window at New York Climate Week this September. In just over a month, CFDA received more than 200 applications from private sector partners all over the world with innovative proposals for supply chain improvements, investment vehicles, environmentally friendly agricultural practices, and more, showcasing how much appetite there is for collaboration in this space.
There’s a consistent funding gap across sectors and geographies known as the “valley of death.”
In its first two years of operation, CFDA has conducted a number of landscape assessments, often to help USAID Missions identify and better understand opportunities to encourage sustainable investment. These include an analysis of the potential for investment in the Brazilian Amazon’s bioeconomy, an examination of opportunities to increase finance for nature and resilience in Southern Africa, and more, with others on the way. Through this work, a consistent funding gap across countries has emerged that prevents projects and enterprises from achieving scale and/or financial viability.
This “valley of death” is a familiar term in the world of technology startups, where many early stage entities can access seed funding (grants, accelerators, angel investors, etc.) to launch their businesses, but then struggle during the costly stages of development, testing, and production to grow to commercial scale. As their financial needs grow, there are few investors willing to finance businesses that have not yet begun to generate revenue. The limited availability of capital in emerging markets and developing economies compounds this problem, making it even more difficult for promising projects and enterprises to get off the ground. Plus, many sustainability and resilience projects are developing physical assets, which require even more resources. There are multiple opportunities to help close this gap, including using blended finance to generate more funding and deploying technical assistance to shorten the amount of time that is spent in this “valley of death.”
There are a lot of different ways to invest in oceans—and all of them are likely needed.
Blue carbon systems are among the richest carbon stores on the planet. Studies indicate that every $1 billion invested in adaptation against coastal flooding leads to a $14 billion reduction in economic damages. Protecting and restoring coastal ecosystems through nature-based solutions can be a highly effective and sustainable way to mitigate the impacts of rising sea levels and more frequent and intense storms.
CFDA supports a number of initiatives to build coastal and marine resilience. This includes the establishment of a landmark Egyptian Fund for Coral Reefs to leverage up to $50 million in private and public funding for sustainable blue economic transition and conservation efforts in Egypt’s Red Sea. In Senegal, CFDA helped USAID identify opportunities to support the development of locally led and bankable coastal resilience and blue carbon projects. In addition, CFDA is supporting a social enterprise in Trinidad and Tobago that is piloting a sustainable oyster harvesting technique to facilitate mangrove conservation, climate resiliency, and economic growth. CFDA also convenes a global community of blue carbon and coastal resilience experts to share knowledge and best practices while helping to identify investment opportunities aligned with private and public sector interests. Such investments not only increase the resilience of coastal communities but also safeguard their livelihoods and food security.
Strategic collaboration and alignment of resources is necessary to efficiently utilize the large number of donor funding options in the climate finance space.
Through market sounding exercises and conversations on the ground, CFDA was surprised to learn how many donors are operating in similar spaces. While the early stage grants play a crucial role in helping enterprises, investment funds, and projects to get off the ground, there are opportunities to encourage communication between donors and ensure that efforts are complementary, not competitive.
For example, CFDA launched several initiatives in partnership with other donors under the Investment Mobilisation Collaboration Alliance, with the intention of either pooling resources to increase their impact or combining different financing tools to offer more flexible support. Through the Adaptation Finance Window, CFDA recently announced support for two partners tackling these issues in innovative ways. The first is Lightsmith, an integrated one-stop shop platform to provide adaptation technology companies with the full range of equity, credit, and technical assistance. Second is the GAIA Fund, a groundbreaking investment vehicle that will help make the case for greater private sector investment into sub-sovereign entities that face significant gaps in funding for climate resilient infrastructure while cultivating a pipeline of quality, bankable projects that these entities can then invest in. These models demonstrate that there are multiple opportunities to strategically deploy grant capital to help projects and enterprises clear obstacles, scale, and successfully navigate the “valley of death.”
Anne Spahr
With over 20 years of experience in international development and sustainability, Anne leads USAID's Climate Finance for Development Accelerator (CFDA), a $250 million initiative that aims to mobilize $2.5 billion in sustainable public and private investments by 2030. Prior to joining CFDA, Anne led a dynamic team of more than 500 professionals across Latin America and the Caribbean to deliver impactful programs in security, stability, governance, and environmentally and socially sustainable development for Chemonics International. Anne holds an MBA from The University of Texas at Austin and a BA in Latin American Studies from Cornell University.
