Managing Currency Risk to Catalyze Climate Finance

This report by the Climate Policy Initiative analyzes how currency risk—specifically the mismatch between hard-currency debt and local-currency revenues—inhibits climate finance in emerging markets and developing economies (EMDEs). It evaluates standard hedging tools and five innovative models designed to lower the cost of capital and deepen local financial markets to catalyze international private investment.

• Emerging markets and developing economies (EMDEs) face a significant climate finance gap, with domestic markets capable of providing only about 50% of the funds required for the climate transition. Annual investment needs for EMDEs to reach net zero by 2050 are estimated between USD 1 trillion and USD 2 trillion by 2030.
• Currency risk creates a financial mismatch for climate projects in EMDEs because they typically generate revenues in local currency but rely on international loans denominated in hard currencies like US dollars or euros. This exposure is exacerbated by the long lifespans of renewable energy assets, which require long loan tenors (often 25 to 30 years), increasing the complexity and cost of hedging.
• Commercial hedging products are often prohibitively expensive for EMDE borrowers, with costs that can fully offset the lower interest rates of hard-currency loans. For example, a 2015 analysis of Indian clean energy projects showed hedges costing 600 to 700 basis points, making the total cost roughly equal to a local currency loan.
• The report analyzes five innovative currency risk solutions: a TCX donor-funded guarantee facility to reduce uncertainty premiums; Eco Invest Brasil, which uses an IDB credit line to manage tail-end depreciation risks; Delta, a proposed onshore DFI hedging platform to manage liquidity; an FSD Africa MDB portfolio transfer model to recycle capital via local investors; and a CPI FX Hedging Facility for India that tranches depreciation risk.
• The Eco Invest Brasil model leverages the observation that real exchange rates (adjusted for inflation) are more stable than nominal rates. It encourages projects to raise prices with inflation and provides a hard-currency credit line from the IDB to cover severe depreciation periods.
• The proposed Delta platform aims to increase DFI local-currency lending by borrowing short-term local currency and on-lending it to DFIs over longer terms. It intends to be financially sustainable through a positive margin between borrowing and lending rates, without requiring ongoing subsidies beyond initial equity.
• FSD Africa's proposal suggests an 'originate-to-distribute' model where MDBs transfer 'brownfield' loan portfolios to local institutional investors in African markets such as Kenya, Nigeria, Ghana, Tanzania, Uganda, Cote d’Ivoire, and Senegal to free up MDB capital.
• The CPI FX Hedging Facility for India proposes a tranche system where project developers absorb the first 4.5% of currency depreciation, a range covered by annual payments, while donor grants cover extreme tail risks beyond a 99.7% confidence level.
• The report concludes that concessional capital is essential in the short term to make hedging affordable, but such interventions must complement rather than compete with local financial products to avoid hindering private market development.
• A comparative analysis of cost of capital for solar projects shows a stark disparity: while the EU requires around 8% rate of return, major emitting EMDEs require around 22% due to macroeconomic and currency risks.

APA

Yahmed, Z. B., Grant, C., & Pinko, N. (2024). Managing Currency Risk to Catalyze Climate Finance. Climate Policy Initiative. https://www.climatepolicyinitiative.org/wp-content/uploads/2024/08/Currency-Risk-Report.pdf

Chicago

Yahmed, Zeineb Ben, Chris Grant, and Nicole Pinko. Managing Currency Risk to Catalyze Climate Finance. Climate Policy Initiative, 2024. https://www.climatepolicyinitiative.org/wp-content/uploads/2024/08/Currency-Risk-Report.pdf.

Wikipedia

{{cite report |last1=Yahmed |first1=Zeineb Ben |last2=Grant |first2=Chris |last3=Pinko |first3=Nicole |title=Managing Currency Risk to Catalyze Climate Finance |publisher=Climate Policy Initiative |date=August 2024 |url=https://www.climatepolicyinitiative.org/wp-content/uploads/2024/08/Currency-Risk-Report.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{yahmed2024managing, author = {Yahmed, Zeineb Ben and Grant, Chris and Pinko, Nicole}, title = {{Managing Currency Risk to Catalyze Climate Finance}}, institution = {Climate Policy Initiative}, year = {2024}, month = aug, url = {https://www.climatepolicyinitiative.org/wp-content/uploads/2024/08/Currency-Risk-Report.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }