Introduction

Cities generate 70% of global carbon emissions and require a fivefold increase in climate finance to over USD 4.3 trillion per year by 2030 to achieve mitigation targets. Guarantees are financial instruments that transfer specific risks from investors to a guarantor, helping to unlock this finance. Studies indicate guarantees leveraged 26% of all mobilised private climate finance from 2018 to 2020. Data from multilateral development banks (MDBs) suggests guarantees mobilise around USD 1.50 per dollar, whereas loans crowd in just USD 0.30 of private investment per dollar.

Guarantee provider types and facilities

Guarantees typically involve three parties: the borrower, the lender, and the guaranteeing agency. The report identifies key guarantors in the urban climate finance ecosystem, including multilateral and bilateral development institutions, export credit agencies, domestic financial institutions, and national governments. 34 facilities were assessed as relevant to city climate investment.

Analysis of guarantee facilities

Almost all (94%) assessed facilities explicitly target sub-national or national governments and state-owned entities (SOEs). Furthermore, 94% target the private sector, and 77% target financial institutions. Portfolio structures are offered by 38% of facilities, while transaction-by-transaction coverage is offered by 27%. Partial credit guarantees are the most widely available offering, provided by 79% of facilities, followed by green guarantees (41%), political/regulatory risk (32%), equity (29%), and foreign exchange (18%) guarantees. Energy investments are covered by 88% of facilities, followed by transport (71%), buildings (62%), and water (62%). Regarding governance, 62% of facilities are publicly managed, 27% are public-private hybrids, and 12% are privately operated.

Increasing uptake of guarantees for urban climate finance in EMDEs

Barriers to uptake include a lack of appetite for sub-sovereign financing among providers and the limited scale and standardisation of urban infrastructure projects. All-in costs for guarantees range from 0.30% to 0.60% in OECD countries but are significantly higher in emerging markets and developing economies (EMDEs), ranging from 1.2% to 2.8%.

To address these barriers, guarantee providers should strengthen governance, adjust pricing to be more economically attractive, and prioritise pooled, sector-specific programmes to aggregate small city projects. CCFLA members and enablers should offer technical training to build capacity and leverage platforms for policy dialogue. Regional and cross-border facilities should be expanded to overcome sovereign rating ceilings and provide multi-risk coverage, including political, regulatory, and foreign exchange protections.

Conclusion

Well-structured guarantees can be catalytic for urban climate finance in EMDEs. They work best when paired with portfolio standardisation, disciplined pricing, and strong governance. While not a universal solution, guarantees can be deployed strategically to bridge the gap between supply and demand for climate-related infrastructure.