Managing Currency Risk to Catalyze Climate Finance

The report identifies currency risk—specifically the mismatch between local currency revenues and hard currency debt—as a primary barrier to climate investment in EMDEs. It argues that while long-term solutions require macroeconomic reform and deeper local capital markets, immediate needs must be met through innovative hedging mechanisms. The document analyzes five specific models: a TCX donor-funded guarantee, Eco Invest Brasil, the Delta onshore DFI platform, FSD Africa's MDB portfolio transfer, and a CPI FX Hedging Facility for India. It concludes that concessional capital is essential in the short term to make these tools affordable and to catalyze private investment.

• Local capital markets in many EMDEs are insufficient to meet climate transition needs, potentially providing only about 50% of the required funds.
• Climate investment needs for EMDEs (excluding China) to reach net zero by 2050 are estimated between USD 1 trillion and USD 2 trillion annually by 2030.
• Currency risk creates a financial mismatch because clean energy projects typically generate revenues in local currency but rely on loans denominated in hard currencies like US dollars or euros.
• Commercial hedging products are often prohibitively expensive, with costs that can fully offset the lower interest rates of hard currency loans; for example, hedges for clean energy projects in India were estimated at 600 to 700 basis points in 2015.
• The Eco Invest Brasil program uses a hard-currency credit line from the IDB to help projects service foreign-currency debt during severe depreciation, relying on the project's ability to raise prices in line with inflation.
• 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, using a liquidity pool to manage risk.
• FSD Africa proposes an 'originate-to-distribute' model where MDB loan portfolios for operating 'brownfield' assets are transferred to local institutional investors in African markets such as Kenya, Nigeria, and Ghana.
• The CPI FX Hedging Facility for India proposes a tranche-based system where project developers absorb the first 4.5% of depreciation, and donor grants cover extreme tail risks beyond a 99.7% confidence level.
• A significant disparity exists in climate finance accessibility between high-emitting emerging economies like Brazil and India and least developed countries (LDCs), which have more underdeveloped financial markets and are often left behind.
• The cost of capital for solar projects varies drastically by region, with required rates of return around 8% in the EU compared to approximately 22% in major emitting EMDEs.

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} }