Blended finance will not close the climate funding gap in emerging markets on credit enhancement alone, according to a new Moody’s Ratings report, which says deals scale only when projects progressively become commercially viable. Insurers appear on both sides of that equation, as providers of credit and political risk cover that makes deals investable and as buyers of the bonds that let them scale.
Moody’s report, “Scaling climate blended finance will take more than credit enhancement,” says credit enhancement can crowd in private capital by reallocating risk, but it does not address whether a project is investable or create the revenue to service debt.
Citing Climate Policy Initiative estimates, Moody’s says global climate finance exceeded US$2 trillion in 2024, against annual average needs of US$7.8 trillion for 2025 to 2030 and US$9 trillion for 2031 to 2035. Private climate finance topped US$1.2 trillion in 2024, but international climate finance reaching emerging markets and developing economies was only US$197 billion, with 78% coming from public sources.
The donor base is shrinking. Official development assistance is in decline as governments focus on domestic priorities, with projected cuts of 9% to 20% by 2027 in the data Moody’s cites, which limits development finance institutions’ capacity to crowd in private money. Competition for long-term capital is also rising, because debt markets are increasingly financing data centers and related infrastructure, and climate projects in emerging markets face a higher hurdle in attracting investors on a risk-adjusted basis.
Donors are responding by shifting from grants to concessional instruments with higher leverage, using first-loss capital, guarantees and subordinated tranches to reduce expected losses for senior investors. Blended finance mobilised US$19.6 billion in 2025, according to Convergence data cited in the report. Moody’s says private-sector mobilisation strengthened last year, led by commercial banks, supported by rising use of guarantees and Brazil’s Eco Invest program, and adaptation financing doubled, though mitigation still took the largest share, dominated by renewable energy.
Guarantees and insurance accounted for 14% of the concessional instruments used in climate blended finance transactions between 2022 and 2024, according to Convergence data in the report. Senior debt took 22%, investment-stage grants 21%, technical assistance grants 18% and subordinated, junior and first-loss debt 13%. Pre-project assistance, which includes technical assistance and design-stage grants, makes up nearly a quarter of the concessional finance MDBs and DFIs provide.
Moody’s lists insurance as a risk mitigation channel for seven of the ten climate technology categories in its review: nature-based solutions, early-stage transition technologies, nuclear power, public adaptation infrastructure, water resilience, hydropower, and solar and wind. Insurance does not appear in its list for low-carbon fuels, grid infrastructure and geothermal, or energy efficiency.
The Bahamas’ debt conversion for marine conservation, in November 2024, is Moody’s example of insurance inside a blended structure. The transaction refinanced US$300 million of maturing commercial debt with longer-term debt and targets about US$124 million for marine conservation over 15 years. Its credit enhancement included an IDB guarantee, an impact investor’s co-guarantee and private credit insurance from AXA XL. Moody’s says the Bahamas’ relatively strong institutional framework, reflected in a governance score of 2, supported execution, and the deal also included institutional strengthening measures on environmental governance and public debt management.
The IDB’s announcement put the guarantee at US$200 million, with a US$70 million co-guarantee from Builders Vision and US$30 million of credit insurance from AXA XL. Standard Chartered, which provided the loan, described it as the first time a private insurer has provided credit insurance alongside a multilateral development bank for a sustainable nature and climate issuance.
Moody’s says the need for credit enhancement rises as adaptation benefits become harder to monetise, because they often arrive as avoided losses or broader resilience. It sets out a spectrum. A desalination refinancing with water revenue needs little cover, leakage reduction at Anglian Water needs low to moderate, Florida Power & Light’s storm hardening investments need moderate to high, and the Bahamas’ marine conservation, a public ecosystem benefit, needs the highest level, supported by guarantee and insurance.
Scaling adaptation, the report says, often involves mechanisms that convert resilience into investable value, such as insurance-related structures, resilience-linked instruments, availability payments and public-service contracts. Where benefits are public goods, public funding or instruments tied to public-sector credit will keep playing a central role.
Capital markets are usually how successful blended deals scale and repeat. Moody’s says pension funds and insurers typically need tradable instruments of sufficient size and liquidity that bilateral lending and small club deals do not always provide. Refinancing operating projects through bonds or securitisation can recycle capital, freeing development lenders’ balance sheets for earlier-stage risk, while labeled bond markets give investors an established route in. Deeper local-currency markets could ease foreign-exchange mismatches, which remain a significant constraint across many emerging markets.
Most mobilised private capital has gone to middle-income countries such as India, Brazil, China, Mexico and Türkiye, which pair large investment needs with established financial systems. Moody’s says blended finance works best where risks are high enough to deter commercial investors but specific enough to be structured and priced. It can still reach harder markets: the Multilateral Investment Guarantee Agency’s guarantee supported Globeleq Africa Holdings’ investment in a solar-plus-storage project in remote Mozambique.
Governance decides whether a deal can be repeated. Moody’s says credit enhancement can absorb defined risks within a transaction but cannot fully compensate for weak policymaking, regulation or contract enforcement. Sudden changes to renewable support schemes, foreign exchange restrictions, late state-owned off-take payments and weak contract enforcement can hit many projects at once. In weaker governance environments, investors may require larger guarantees, political risk insurance, offshore payment structures or liquidity support, which adds complexity and limits scalability. Moody’s lists political risk insurers among the mechanisms that can embed governance-enhancing features in a deal.
The limits of concessional help are visible in Indonesia, where the government cancelled the planned early retirement of the Cirebon-1 coal plant under the Asian Development Bank’s Energy Transition Mechanism in December 2025, citing technical and financial considerations. Moody’s says the case shows concessional finance may not overcome policy trade-offs, contractual obligations or misaligned incentives.
The report also warns against concessional support that does too much. Excessive reliance on first-loss capital can lower the private capital mobilised per dollar of public support, and subsidised junior tranches can distort pricing and discourage commercial investors.
Moody’s concludes that transaction-level risk mitigation has limits, and that sovereign and institutional governance ultimately determines whether protections stay credible under stress and whether successful deals can be repeated with less concessional support.
