Public financial institutions and climate change

The climate crisis is a result of market failure. Climate change caused by anthropogenic emissions is an externality that the market can not automatically correct without public agencies’ intervention. Public financial institutions (PFIs), owned or supported by governments with official missions to serve public policy objectives, play a key role in addressing such market failures. The government ownership and guarantee enable PFIs to facilitate capital for underfunded climate projects that private banks may find too costly. More importantly, PFIs’ involvement performs the de-risking role and makes certain climate projects financially attractive for private investors. Therefore, they help increase the total volume of available climate financing. We document that, despite their important role in climate finance provisions, PFIs’ climate finance allocation is highly skewed among countries and between mitigation and adaptation purposes. Most funds flow to large emitters for mitigation purposes, while limited adaptation finance does not necessarily reach the most vulnerable countries. We draw attention to the importance of considering the country’s climate priority and achieving a balance between mitigation and adaptation when PFIs allocate climate finance.