Targeted regulatory reforms offer opportunity to boost climate finance flows 

Emerging markets and developing economies (EMDEs) are on the frontline of the global climate crisis – both in terms of exposure to its impacts and in their indispensable role in driving the transition to a net-zero future. Yet, these economies face a stark shortfall in the climate finance needed to achieve this transformation. 

Despite accounting for roughly 25% of global GDP, emerging markets and developing economies – with the exception of China – attract just 14% of total international climate finance. To stay on a net-zero path, they require an additional US$450–$550 billion annually in external investment by 2030, a 15- to 18-fold increase from current private flows which sit at just US$30 billion. 

Mobilising this scale of investment requires us to take a critical look at existing financial structures, particularly those where well-intentioned rules may inadvertently hinder the very transitions we most urgently need. Elements of the Basel III Framework exemplify this challenge. Designed in the aftermath of the 2007-2009 crisis and intended to safeguard financial stability, current interpretations unintentionally discourage lending to emerging markets and developing economies.  

Targeted clarifications and reforms to the Basel Framework could unlock significant volumes of private investment in high-impact, climate-aligned projects in emerging markets and developing economies, while ensuring the continued soundness of the global financial system. 

What are the barriers to climate finance in emerging markets and developing economies? 

Basel III rules, as currently interpreted, unintentionally discourage EMDE lending. This includes unnecessarily limiting the recognition of public risk mitigation tools (such as credit guarantees and co-lending structures) that reduce lending risks of multilateral development banks and development finance institutions. For example, unconditionality and timeliness requirements often render guarantees ineligible to lower the capital buffers held by banks — despite their demonstrated effectiveness in reducing real-world credit risk. In addition, current rules do not recognise the risk-reducing benefits of blended finance structures, and the Basel framework’s list of multilateral development banks eligible for favourable risk weights is static, excluding newer institutions with strong credit ratings and climate finance aligned mandates. 

Conservative risk weights of project finance to climate and infrastructure investment further undercut global climate finance flows to EMDEs. This is despite data demonstrating that project finance in EMDEs outperforms corporate loans, with higher recovery rates and default rates comparable to investment-grade corporates after five years. In addition, the Basel III rules do not recognise borrower-level mitigants (such as FX hedging and purchase agreements) and the internal ratings-based (IRB) maturity adjustment assumes linear risk growth over time when, in practice, project finance exhibits decreasing risk as projects stabilise and generate revenue.  

What is the impact of country risk calculations? 

While the Basel Framework does not explicitly assign capital charges based on country risk, it does so indirectly. This happens through country risk ceilings (the maximum credit rating that any entity within a country can receive) and risk-weight floors (a minimum percentage risk weight that regulators require banks to apply) for corporates or projects in lower-rated jurisdictions.  

ICC recommendations: what reforms should take place? 

Given the urgency of the financing challenge faced by many EMDEs we encourage policymakers to consider a two-step approach to macroprudential reform – starting with low-hanging fruits that could yield an immediate boost to climate finance flows, before considering broader structural reforms.  

Step 1: Technical adjustments and clarifications 

Small, targeted adjustments to the Basel Framework could unlock substantial additional investment – either by way of new guidance from the Basel Committee on Banking Supervision or, failing that, through coordinated action from national regulators.  

Such steps could include:  

1. Updating credit risk mitigation guidance to accommodate the real-world mechanics of MDB/DFI and private credit enhancement tools, including PRI. At a minimum, such guidance should allow guarantees or insurance to qualify if exclusions are: standard market practice (e.g. nuclear or war clauses); and statistically remote or immaterial to the exposure in question. 

2. Clarifying time limits for credit risk mitigants by recognising that contracts with defined arbitration periods (e.g. under 180 days) or subject to the established claims procedures of MDBs/DFIs can provide functionally timely payouts and should qualify for capital relief. 

3. Allowing the application of blended risk weights to exposures covered by partial guarantees to reflect the real risk reduction offered by these tools.  

4. Allowing for automatic recognition of credit enhancements provided by all MDBs/DFIs with credit ratings at or above AA-.  

5. Providing clear guidance on the treatment of borrower-level risk mitigants in project finance transactions (both during pre-operation and operational phases) – including interest rate or currency hedging, purchase agreements, reserve accounts and performance bonds.  

Step 2: Structural reforms  

Building on these initial measures, we recommend that Basel Committee is mandated to establish new work programmes to:   

1. Refine the treatment of project finance to reflect its proven performance based on available market data; introduce dynamic risk weights that adjust over a project’s lifecycle (particularly between pre-operation and operational phases); and consider recognising project finance as a distinct asset class within the prudential framework. 

2. Review Basel’s approach to country risk to better differentiate between sovereign and project-level risk. This should permit risk weight adjustments where exposures are highly secure or mitigated by credible guarantees/involve MDB participation.  

3. Consider the potential introduction of a scaling factor for high-quality, climate-related investments in EMDEs – similar to the existing Supporting Factor for Small and Medium-Sized Enterprises under Basel III or the Infrastructure Supporting Factor within the European Union’s Capital Requirements Regulation.  

4. Review potential modalities to recognise well-structured blended finance arrangements – notably those with public or concessional first-loss tranches – as eligible credit risk mitigation where they provide transparent and reliable risk absorption. 

ICC calls on governments and financial standard-setters to initiate a structured dialogue under the Baku to Belem Roadmap at COP30, with the engagement of the Basel Committee on Banking Supervision, and to explore targeted prudential adjustments that can be implemented in the near term.