A landmark report into the impact and future role of guarantees in development and climate finance has concluded that they can play a major role in mobilising public and private sector money – but they also come with risks attached and need careful handling.
The first comprehensive report of its kind, carried out by the European Network on Debt and Development (Eurodad) provides a detailed civil society analysis of guarantees in development and climate finance.
Described as “a still largely unexplored area”, the report – Guaranteeing the future? The role of guarantees in development and climate finance – said that whilst they were now becoming increasingly used as a way of reducing bad investment outcomes, they had also identified five interconnected risks associated with guarantees.
These included inflating and diverting scarce Official Development Assistance (ODA) budgets, promoting politically and economically costly policy reforms and questionable debt swaps. They also believed guarantees would create further Global South indebtedness and allow the Global North to duck its responsibilities by encouraging greater levels of private climate finance.
Providing an overview of the current landscape and the potential impact of more guarantees being issued for development and climate action, the report recognised that guarantees were becoming increasingly used as financial instruments in international development and climate finance.
It detailed the activities of three guarantee-issuing organisations: the World Bank Group’s Multilateral Investment Guarantee Agency (MIGA); the EU’s European Fund for Sustainable Development Plus (EFSD+); and the Swedish International Development Cooperation Agency (Sida).
Regarding the opportunities and risks that these instruments posed for development and climate justice, the Eurodad analysis concluded that the case still needed to be made. Greater transparency and evidence were required surrounding the precise nature and role of individual guarantees, in respect of their institutional mandate and long-term continuance in finance and development.
“This is key to ensuring that guarantees for development and climate do not divert attention from unmet commitments and undermine development and sustainability objectives,” the report stated.
What’s the rationale behind the use of guarantees?
The thinking behind guarantees is that they help attract private finance because they reduce investment risk, particularly on capital-intensive energy infrastructure projects. They are also seen as a way of minimising capital costs in sovereign borrowing.
But Eurodad cautioned that guarantees should be handled with care. “This is especially important in cases when it is not clear who bears the ultimate cost if, and when, guarantees are called upon,” the report noted. The authors also questioned, if the world became inundated with guarantees, what impact would this have on aid budgets, socioeconomic development and the climate justice agenda, seen as “critical for the Global South.”
Guarantees on the rise
The report noted that in February 2024, World Bank Group President, Ajay Banga, had set a goal of tripling annual guarantee issuance, to US$20 billion by 2030. A few months later, the World Bank Group – the world’s largest issuers of guarantees – launched a new “one-stop guarantee platform” at the MIGA, which promoted foreign direct investment into developing countries, by providing guarantees to investors and lenders.
MIGA’s Vice President for Operations, Junaid Kamal Ahamad, had described the rise of guarantees within his organisation as an ‘inflection point’, which would transform Multilateral Development Banks (MDBs) from lending institutions to leveraging institutions.
Nevertheless, in aggregate terms, although guarantees weren’t yet “a major instrument to mobilise private finance, they are becoming an increasingly attractive instrument of choice of many institutions and rich countries,” Eurodad observed.
The report highlighted recent examples of where guarantees have been brought into play. These included the Bridgetown Initiative, which contained a proposal for the IMF and MDBs to offer $100 billion a year in currency risk guarantees, MDB climate sovereign guarantees and EFSD+, where the use of guarantees had been expanded.
Furthermore, a change in ODA rules had now allowed rich countries to report the grant equivalent of guarantees in their statistics.
The report recognised that in conjunction with major developments such as the MDB reform agenda, there would probably be an acceleration of guarantees in development and climate as “yet another approach to de-risking private investment.”
But they noted that to date, guarantees had produced mixed results and questioned their use when it came to kickstarting private investment and producing tangible social outcomes.
Risk v Reward
Eurodad recognised that if guarantees were designed and deployed appropriately, there could be “a major opportunity for mobilising both public and private finance.” The report reckoned they could be a useful tool in lowering the interest rates on debt and reducing capital costs “for socially desirable projects that are expected to yield less profits than other competing opportunities.”
But, in terms of the future trajectory of guarantees, they warned of five key interconnected risks that might result.
- The real risk of inflating and diverting scarce ODA budgets
- Promoting politically and economically costly policy reforms through conditionalities
- Promoting questionable debt swaps
- Exacerbating Global South indebtedness
- Encouraging increased private climate, whilst evading the responsibility of the Global North
To fully understand the evolving role of guarantees, it was essential to look beyond a technocratic rationale and focus too closely on how much money was being mobilised, the report observed. Instead, it was important “to also contextualise the necessity to issue them and assess their long-term impact on development and climate policy.”
Regarding their future role, the report concluded that guarantees could become highly influential “in catalysing or accelerating private investment around the world.” But, first, questions still needed to be answered about “the precise role, nature and relevance of guarantees for sovereign Global South states and the socio-economic structural transformation of those countries.”
Call for guarantee schemes to de-risk the future
Separately, speaking at the Euro-Mediterranean Guarantee Network 5th Annual Conference “Expanding Financial Horizons: Mainstreaming Credit Guarantees for Mediterranean SMEs, Prof Rym Ayadi, the President of the Euro-Mediterranean Economist Association (EMEA), stressed that “guarantee schemes must not only de-risk finance but also de-risk the future – by equipping businesses, financial institutions and workers with the skills to navigate uncertainty and drive sustainable growth.”
Guaranteeing the future? The role of guarantees in development and climate finance – Eurodad
EMGN 5th Annual Conference Successfully Concludes in Rabat – EMEA
