The Price of Capital

CLIMATE change is not merely an environmental concern; it increasingly threatens the global economy, and it threatens developing countries most of all. Nicholas Stern made that case in his review of the economics of climate change two decades ago, and the intervening years have only strengthened it. As the UK looks to support sustainable development, it must consider the crucial role of developing countries in the solutions. Work by Amar Bhattacharya and his colleagues at the Brookings Institution shows that emerging markets will account for a growing share of both future emissions and future global infrastructure investment, which makes supporting developing countries not only a moral imperative but a strategic one.

For developing countries, sustainable development requires balancing rapid economic growth and poverty reduction against environmental constraints. The central challenge is therefore how countries can expand energy access, infrastructure and industrial capacity while limiting long-run climate and environmental costs.

The Obstacle Has Changed

The falling cost of green technologies, set against the stubborn persistence of fossil fuels and carbon emissions, indicates that the primary obstacle to sustainable development is no longer technological but financial. The United Nations makes the same point in its most recent report on the Sustainable Development Goals. Many developing countries already possess the renewable energy resources and the technologies needed for sustainable growth, yet high borrowing costs and perceived investment risks limit their ability to deploy them at scale.

This piece argues that developing countries can pursue sustainable development most effectively when domestic investment strategies are supported by a reformed international finance system. In particular, multilateral development banks – institutions such as the World Bank and the African Development Bank, owned jointly by groups of governments and set up to lend for development – must move beyond financing individual projects.

They should instead help to reduce the cost of capital, coordinate complementary investments and support economy-wide green transformation. Such reforms would allow governments to invest more effectively in the infrastructure and technologies needed for sustainable, climate-resilient growth.

What Vietnam’s Solar Boom Reveals

At present, developing countries seeking sustainable growth struggle to secure financing for coordinated development strategies, because international finance primarily funds isolated projects – a single power station, a single road – rather than interconnected ones. Yet green transitions exhibit strong investment complementarities: each piece of the system is worth far more when the other pieces exist too. The failure to finance those complementary investments can constrain sustainable development for years.

Vietnam’s green transition shows the problem clearly. Between 2018 and 2021, investment in solar and wind generation expanded extraordinarily quickly, but investment in transmission networks and grid infrastructure did not keep pace, and a significant share of the renewable electricity being generated could not be delivered efficiently to consumers. Generation capacity, as Nguyen Cong Cuong and Le Xuan Thanh document, simply grew faster than the supporting infrastructure required to use it.

Vietnam’s experience makes clear that building solar panels is not enough: successful green transitions depend on cross-sector coordination if they are to produce systemic transformation. Markets underinvest in green infrastructure because private investors do not capture the wider social returns generated by interconnected investments. Individually rational investment decisions therefore produce collectively insufficient transformation, leading to the substantial bottlenecks in power transmission that Vietnam exemplifies.

Access to coordinated and affordable finance matters precisely because it enables the deployment of the complementary technologies that sustainable development requires – renewable generation, electricity transmission networks, battery storage and climate-resilient infrastructure, built together rather than one at a time.

The Case for the Multilateral Banks

Developing countries should use financing from the multilateral development banks to implement coordinated investment strategies. By providing long-term finance and absorbing risk – the practice Esther Sekyoung Choi and Valerie Laxton describe as de-risking – these banks allow governments to invest simultaneously in renewable generation, transmission networks and climate-resilient infrastructure.

A compelling example of this approach is the Bridgetown Initiative, championed by the Prime Minister of Barbados, Mia Mottley, and published in 2022. It highlights how developing countries seeking sustainable growth face systematically higher risk premiums in global capital markets – lenders charge them more because they are judged more likely to default – which raises the cost of every climate-compatible investment they make.

That constrains their ability to invest in renewable energy and climate-resilient infrastructure at the scale required. The Initiative’s call for the multilateral banks to take a more active role in sharing risk and lowering the cost of capital aligns closely with the argument made here for expanding long-term concessional finance – lending offered at below-market interest rates and over longer repayment periods than commercial lenders will accept.

The Limits of Lending

However, expanding lending is not a complete solution for countries pursuing sustainable development. Many already face severe debt burdens, which means that even concessional climate loans can worsen long-run debt sustainability, as Bodo Ellmers has argued.

Moreover, financing from these banks often arrives with policy conditions and reporting requirements that may limit governments’ ability to pursue domestically determined development strategies; a 2025 mapping of the banks’ procurement frameworks sets out just how varied and demanding those requirements are. This creates an important trade-off between mobilising international capital and preserving national policy autonomy.

For that reason, sustainable development strategies should not rely on expanding lending alone. Greater use of grants, of guarantees, and of the fulfilment of aid commitments that advanced economies have already made, may be equally important for supporting sustainable development without deepening debt dependence.

The Overlooked Instrument

Developing countries should therefore make more effective use of the multilateral banks by prioritising instruments such as guarantees within their financing strategies. A guarantee is a promise by the bank to cover part of a private investor’s losses if a project fails; it costs the bank nothing unless something goes wrong.

Guarantees are particularly valuable because they address the central obstacle to coordinated green investment, which is perceived risk rather than actual return. By committing to absorb a portion of the downside, the banks make private investors willing to finance renewable generation and the complementary infrastructure around it.

Guarantees also function as a form of state-contingent debt restructuring – repayment terms that flex with circumstances – which helps to reduce the procyclicality of fiscal policy during climate shocks, so that a government is not forced to cut spending at precisely the moment a disaster has struck.

Despite mobilising private capital roughly six times more effectively than the banks’ loans and equity investments do, guarantees account for only about four per cent of the banks’ climate finance commitments, according to a 2024 briefing from Zero Carbon Analytics. Developing countries should press for a far larger share, and use it to scale up investment in sustainable infrastructure.

Conclusion

Climate change exposes a fundamental mismatch between the short-term incentives of global finance and the long-term investment horizons that sustainable development requires. While renewable energy, battery storage and climate-resilient infrastructure are increasingly viable in technological terms, developing countries remain constrained by high borrowing costs, fragmented investment systems and limited fiscal space. The central challenge is therefore not technological feasibility but enabling countries to finance and coordinate these technologies at scale, as part of their own development strategies.

Countries can pursue economic development sustainably when climate policy is treated not as a constraint on growth but as a driver of structural transformation. Developing countries can achieve sustainable growth by combining domestic industrial strategies – focused on clean energy, resilient infrastructure and green investment – with improved access to international finance.

Reforming the multilateral development banks offers one of the most promising pathways forward, because it addresses both the cost failures and the coordination failures that currently inhibit large-scale investment. For the UK, supporting sustainable development therefore means moving beyond aid alone, and backing the reforms that allow developing countries to implement their own development strategies more effectively.