Leveraging private sector finance for climate compatible development: Lessons from CDKN

This working paper by the Climate and Development Knowledge Network (CDKN) provides lessons on leveraging private sector finance for climate compatible development based on projects in Africa, Asia, and Latin America. It emphasizes the need for country-specific approaches, strong public sector leadership, and the use of innovative financial instruments to bridge the gap between commercial interests and climate goals.

• Private sector engagement must be tailored to the specific national context and existing policies. For example, Indonesia promoted independent power producers (IPPs) through a grid compensation mechanism to ensure income stability and by offering diverse financial instruments such as direct public loans and partial risk guarantees.
• Public policy is a critical tool for incentivizing private investment. In India, government subsidies were essential to make the conversion of diesel generator operators (DGOs) to renewable energy operators (REOs) financially feasible due to the difference between REO asset ownership goals (4-5 years) and renewable energy payback periods (7-8 years). In Bangladesh, a 2011 central bank mandate required 10% of loans and grants from banks and financial institutions to be directed toward green investment.
• The viability of private sector involvement depends on specific project characteristics and sector dynamics. In the Brazilian Amazon's 'Forest Finance Lab', private interest in REDD+ was limited by insufficient returns on investment and low demand for carbon credits. The paper suggests a 'landscape approach' that integrates sustainable agriculture and agroforestry to increase revenue-generation capacity and attract investors.
• Bridging the language gap between the public and private sectors is necessary for buy-in. In Colombia, the term 'competitiveness' was used as common language to link climate change to business operations. In Peru, a lack of data to prove economic gains and a lack of skills to initiate public-private partnerships (PPPs) were identified as barriers to energy efficiency investments.
• Private sector actors should be involved during the design and conceptualization phases of a project to identify barriers and appropriate financial instruments early. An example is the 'Building Climate Resilience in the Limpopo Basin' project in Mozambique, which evaluates PPP feasibility for water infrastructure during the early planning stages.
• Pilot projects are effective in demonstrating the business case for novel technologies and reducing investor uncertainty. A CDKN-funded pilot in Uganda demonstrated that sustainable off-grid power services are viable without subsidization if working capital from development funds is sufficiently scaled.
• Risk-sharing mechanisms, particularly insurance and guarantees, can make high-risk projects more attractive. In Kenya and Ethiopia, the development of geothermal drilling risk insurance aimed to improve the risk-return ratio for resource exploration. Because of the high risks and required reserves, international re-insurance companies were found to be more suitable than domestic insurers.
• Innovative financial instruments can attract different types of investors. The African Risk Capacity’s Extreme Climate Facility (XCF) uses catastrophe bonds to transfer risk to financial markets, which have ten times the capacity of re-insurance markets. Colombia has also explored green bonds to stimulate capital flows from institutional investors.
• Micro, small and medium-sized enterprises (MSMEs) and existing commercial banks represent an underutilized opportunity for climate finance. MSMEs account for 90% of businesses in developing countries, but face barriers such as weak enabling environments and inadequate financial products. In Bangladesh, some commercial banks were found to have higher readiness for GCF accreditation than expected regarding fiduciary standards.

APA

Ellis, C., & Pillay, K. (2017). Leveraging private sector finance for climate compatible development: Lessons from CDKN. Climate and Development Knowledge Network. https://cdkn.org/sites/default/files/files/Leveraging-private-climate-finance_final-web.pdf

Chicago

Ellis, Charlotte, and Kamleshan Pillay. Leveraging private sector finance for climate compatible development: Lessons from CDKN. Climate and Development Knowledge Network, 2017. https://cdkn.org/sites/default/files/files/Leveraging-private-climate-finance_final-web.pdf.

Wikipedia

{{cite report |last1=Ellis |first1=Charlotte |last2=Pillay |first2=Kamleshan |title=Leveraging private sector finance for climate compatible development: Lessons from CDKN |publisher=Climate and Development Knowledge Network |date=October 2017 |url=https://cdkn.org/sites/default/files/files/Leveraging-private-climate-finance_final-web.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{ellis2017leveraging, author = {Ellis, Charlotte and Pillay, Kamleshan}, title = {{Leveraging private sector finance for climate compatible development: Lessons from CDKN}}, institution = {Climate and Development Knowledge Network}, year = {2017}, month = oct, url = {https://cdkn.org/sites/default/files/files/Leveraging-private-climate-finance_final-web.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }