Introduction

The report identifies accessibility—not availability—of global savings as the central barrier to climate and SDG financing in emerging markets and developing economies (EMDEs). Although around US$30 trillion in annual global savings exists, capital flows mainly to high-income countries (HICs), leaving EMDEs with persistently higher borrowing costs. These costs constrain infrastructure and transition investment, including by institutions in the US and EU seeking exposure to EMDE opportunities. Mis-measured credit risk contributes significantly: UNDP estimates that a one-notch sovereign credit rating misalignment across 16 African countries in 2022 resulted in US$74 billion in lost investment and higher interest payments.

The cost of capital in EMDEs

Despite favourable fundamentals, EMDEs face substantially higher yields. India, with the lowest debt-to-GDP ratio among selected peers (82%) and 6.3% GDP growth in 2023, pays a 7.1% 10-year bond yield—300 basis points above Italy, the US and the UK, and 640 basis points above Japan. Countries such as Egypt (21.16%), Colombia (11.55%) and Pakistan (14.3%) face even higher yields.

Clean energy investments are disproportionately affected because financing determines most of the levelised cost of electricity (LCOE). Solar LCOE can be as low as US$0.035/kWh globally, yet EMDEs often face capital costs two to three times those in advanced economies. Africa’s power-sector cost of capital exceeded 18% in 2023 compared with under 5% in Europe and the US, limiting clean energy deployment.

The low credit ratings of EMDEs

Only 12 of 130 rated developing countries have investment-grade ratings. High-income countries dominate investment-grade classifications (74.6%), while only 18.5% of upper-middle-income, 4% of lower-middle-income and none of low-income countries meet this threshold.

Credit rating methodologies structurally favour GDP per capita and country size. Regression analysis shows GDP per capita is the decisive driver of ratings, with an LMIC at one-eighth of US GDP per capita losing about 38 rating points (around eight notches). Debt-to-GDP ratios are not statistically significant, while inflation and access to Federal Reserve swap lines play secondary roles. As a result, ratings often understate growth prospects and overstate risk.

The high growth potential of the EMDEs

Conditional convergence (“iron law”) implies EMDEs should grow faster than HICs. A country at half of US GDP per capita tends to grow 1.4 percentage points faster; at one-eighth, around 5.6% annually. Low-income countries could achieve about 7% per capita growth, with aggregate GDP growth higher due to population trends.

Returns on schooling often exceed 20% in low-income countries, and infrastructure investments also generate high productivity gains. Public investment needs can reach around 40% of GDP plus 10–20% via parastatals. Domestic revenue, typically about 20% of GDP, must rise to around 30%, making long-term external finance essential.

The high cost of capital impedes EMDE energy transformation

Decarbonisation technologies are capital intensive. High financing costs increase the LCOE of zero-carbon power, allowing fossil systems to remain cost-competitive. Long-lived assets require affordable long-term financing; without lower capital costs, EMDE energy transitions will lag.

Ten pathways to lower the cost of capital

The report proposes ten reforms:

• strengthen EMDE credit risk management;
• redesign credit rating methodologies to reflect long-term growth and reduce GDP-per-capita bias;
• reform the IMF–World Bank Debt Sustainability Framework to adopt 30–40-year horizons and support productive SDG investments;
• extend financing maturities to 30+ years;
• establish a global or regional lender of last resort;
• develop EMDE capital markets, including local-currency bond markets;
• enhance guarantees and preferred treatment for SDG and climate bonds;
• expand MDB and specialised fund financing with increased paid-in capital and streamlined processes;
• scale blended finance by addressing data gaps and risk misperceptions; and
• adjust investor risk assessments and prudential treatment to recognise de-risked assets and EMDE growth potential.

Outstanding issues

Climate and SDG finance must be treated as a unified agenda. Regional interconnection projects require tailored risk-sharing mechanisms. Long-term low-emission pathways provide investor clarity. Dedicated global levies—on emissions, aviation, shipping, financial transactions or extreme wealth—could support US$1 trillion annually in long-term lending. Broader considerations of finance justice underpin the need for proactive HIC support.